From a supply chain perspective, the premise behind “purchased services” can be plopped into any of three buckets: The good, the bad and the ugly.
But this trendy term represents no spaghetti western.
The good: Varying purchased services are centralized under Supply Chain’s control, management or oversight in that the contractual dollar volume representing all purchased services is accounted to Supply Chain, thereby increasing its share of the expense pool. By shifting some staff-oriented functions to outsourced expertise (even if the staff themselves convert to 1099 status or a vendor contractually “acquires” them), the healthcare organization can decrease labor costs (e.g., eliminating benefits, etc.) and shift them to contracted services in another accounting bucket, which also may be centralized in Supply Chain. This likely would increase Supply Chain’s stature and status within the C-suite.
The bad: With Supply Chain in charge of a much larger percentage of the expense stream, the Amazing Spider-Man tenet takes effect. Adapting Spidey’s famous, “With great power comes great responsibility,” in a business realm, the tenet becomes, “With great expense pool comes great accountability and scrutiny.” Who yearns for that kind of daily pressure but a relatively small number of enterprising entrepreneurial types? Of course, the flip side can be a challenge, too. If varying purchased services are decentralized and distributed throughout the contracting departments instead of centralized under Supply Chain’s control, management or oversight, then this may weaken Supply Chain’s influence, reputation and visibility. For a considerable segment of healthcare supply chain managers, this may offer a welcome sigh of relief, by and large, to fly under the radar.
The ugly: All told, either the good or the bad perspectives surrounding purchased services under Supply Chain’s purview leads to one ultimate destination: Deeper and more dedicated scrutiny of Supply Chain activities, outcomes and performance. Forward thinkers and top practitioners may see that as a positive development; the rest view it as a negative one, a hassle and a pallet-load of daily pressure.
So how should purchased services be viewed?
For more information on purchased services, visit HPN’s online archive. See “Making sense of a moonshot mindset,” February 2016, HPN, https://cdn.hpnonline.com/inside/2016-02/1602-PS-PurchasedServices.html and see “New name for familiar contracting category?” January 2011 HPN, https://cdn.hpnonline.com/inside/2011-01/1101-PS-PurchSvc.html.
Should it just be classified as a contemporary and fancier name for “outsourcing,” which was an oh-so-late 20th century controversy? Or is it a “bookable” and more clever classification for “miscellaneous?” You know, the bucket, file or list of stuff that can’t be placed elsewhere?
For a number of years now, experts, observers and pundits have forecast that “supply chain” will overtake labor as the No. 1 expense category in an organization after languishing for decades as No. 2 behind labor. But that only works if purchased services, which arguably can be another name for outsourced expertise and labor, falls under Supply Chain’s oversight. Purchased services may encompass managed contracts for billing coders, locum tenens, maintenance and repair, sterile processing and other third-party clinical, financial and operational services.
But is it much ado about nothing more than an accounting shell game?
Clarifying blurred lines
In short, follow the report, Miller insists.
“The greatest misunderstanding comes from the root cause of purchased services spend, and that is supply chain can’t run a line-item report of every purchased services spend for their hospital,” Miller told HPN. “The entire purchased services spend is embedded in the invoices. If you were to run a 12-month report for your supply item spend, you would see data — from physician preference items to exam gloves to syringes — by line-item detail, by month, over a 12-month period. However, if you ran that same 12-month report for your purchased services spend, you would only see the total invoice amount with a monthly total of spend for each purchased services category and no other data points that would include the line-item details that is rolled into the total invoice amount. In order for a hospital to have a true detailed understanding of their line-item pricing and line-item utilization, they would need to go manually to the invoices to see the details, and then if they wanted to analyze the specific purchased services spend, they would need to input those line-item invoice details into a spreadsheet manually.”
The C-suite does not realize the enormity of the challenge that the invoice line-item details are not accessible in their organization’s materials management information system, Miller argues.
“To add to this challenge, the department leaders are receiving their purchased services invoices each month and are responsible for approving the invoice accuracy to the agreement terms, and in some cases this could mean hundreds of pages of invoices and thousands of line items they have to review manually,” she continued. “In most organizations, Supply Chain is not responsible for the management and invoice accuracy of the purchased services spend. Supply Chain may be involved in the contract negotiations and cost savings initiatives, but the ongoing monthly management to ensure contract compliance and spend management is performed by the departments.”
The manual process of trying to identify purchased services expense management and reduction opportunities complicates progress to the point of “hospitals thinking they are achieving maximum savings when there is more waiting to be achieved,” she added.
“Even when hospitals utilize categorization tools and technologies to gain insight into their purchased services spend and to competitively bid some purchased services, these strategies fall short of best practice because they don’t give Supply Chain and the C-Suite automation and access to every purchased services invoice line-item details into their solution,” Miller continued. “Any manual aspect of a technology will leave room for significant error and missed opportunities. Simply spot-checking purchased services invoices is an underperforming tactic.”
“Historically, it’s been difficult for providers to wrap their arms around total purchased services spend because different groups within a healthcare organization have been responsible for acquiring outsourced services most relevant to them,” Little said. “While Supply Chain may manage several of the contracts, legal departments may contract for external counsel, IT departments may contract for technology vendors, and marketing teams may contract with PR firms and change management consultants.
Little points to decentralization problems within internal areas as well.
“There is also often a lack of centralization on both the value analysis and contracting processes in the purchased services areas,” he said. “In some cases, the value analysis process may be non-existent. This leads to low visibility into the spend across purchased service categories, loose management of the lifecycle of the contracts and no control over the process.
Little contends the C-suite needs to be more engaged in this emerging process.
“Some of these services have a large tie-in to the patient and affect outcomes, satisfaction and even acquisition, meaning the C-suite should not only be involved, they should be concerned,” he warned.
“Supply Chain professionals and the C-suite often have difficulty getting their heads wrapped around their entire services spend because the process is so fragmented,” he said. “Departments select vendors they are used to working with and may not consider that contracts should be required to hold vendors accountable for service levels and liabilities.
“Contracting should be centralized and overseen by Supply Chain professionals with expertise in negotiating price, terms and conditions,” he emphasized. “Also, when vendor selection is de-centralized, individual departments may use different vendors for the same service. If you ask a CFO which vendor is used for a particular service, they may name one vendor, but if you take a deeper dive into their accounts payable spend, multiple vendors tend to appear within the same category. This is the direct result of individual departments not communicating with each other on the services they procure.”
“This makes sustaining a consistent cost reduction process very difficult,” Heckler said. “There is rarely a ‘one throat to choke’ for all purchased services, which means there will be finger-pointing across the organization when it’s budget season. Also, many hospital directors from non-clinical departments are accustomed to making their own vendor and procurement decisions. That’s why executive support for moving services contracting to the Supply Chain is crucial to success.”
Data analysis can be a problem, too, according to Motz.
“Another factor contributing to missed opportunities in purchased services is that expenses are often managed by looking back at previous months or years and gauging whether costs are holding steady,” he noted. “No real analysis is done to determine if hospitals are paying the right price from the beginning.”
Heckler concurs: “Tracking cost savings for services is much more challenging than tracking savings of supplies since comparing products with manufacturer item codes is more tangible,” he noted. “Therefore, your team might not get as much credit for their hard work because it takes longer to see the savings realized unless you have strong metrics from the beginning.”
“In order to discover margin improvement opportunities through purchased services, Supply Chain must be able to clearly define the business requirements of the services that the health system needs, and how these needs should be prioritized in relation to available resources,” Gormley noted. “This requires an investment in the supply chain — everything from personnel to infrastructure — from the C-suite.”
Heckler blames the “lack of visibility into the entire scope of the purchased services category” for misunderstanding the category. He challenges healthcare executives to check their general ledgers to prove it.
“Basically, Supply Chain professionals rarely know how big of a category it really is,” Heckler said. “This goes for the C-suite, too. Purchased services has been a catch-all, generic GL category for decades, so it’s completely mismanaged internally. If you are a hospital executive reading this, an easy test to identify if purchased services are being mismanaged in your organization is to see if you have a GL account called ‘Other Purchased Services,’ ‘Service Contracts’ or ‘Professional Fees.’ If so, this means there’s no way to know what is going in there. It’s tough to expect your team to run an RFP to reduce costs in something generic like Professional Fees. If they’re not using Valify or something similar, they will need to hire a consultant and spend more professional fees just to understand what is in their profession fees GL account.”
Rooted in data
Because of slimming reimbursements and market pressures providers view purchased services savings with new potential, according to Gormley. But they need to rely on the right data and strategy to succeed, he added.
“The first step in managing a smart sourcing strategy requires that sourcing teams have insight into how competitive their purchased services contracts are,” Gormley advised. “By understanding what’s standard across various purchased services categories, they can begin to manage expectations on what a reasonable contract looks like in terms of rates and service level terms. From there, they can illuminate opportunities and report to their C-suite colleagues to determine the best plan of action and management.
“In addition to obtainable data metrics, it is essential to create a strategic and standardized approach to purchased service improvement via governance and stakeholder committees that can balance clinical needs with favorable financial outcomes. Data transparency is the necessary foundation for committees to become successful and to empower supply chains to implement transformative sourcing strategies.”
Premier’s Little links purchased services progression to that of several other areas: Value analysis and workforce reduction.
“Over the course of the last few decades, hospitals have targeted expense reduction in products and supplies, and this has led to the prioritization of value analysis teams that weigh both cost and clinical efficacy and outcomes,” Little noted. “Likewise, providers have tackled workforce costs through efficiency and utilization modeling to better understand and properly allocate their resources. Now hospitals are moving that focus and mindset toward purchased services because data shows us that tackling purchased services can easily yield between 5 percent and 15 percent in savings, with some categories yielding 30 percent or more — and this is indispensable in today’s reimbursement climate.”
Little calls for a holistic strategy that focuses on purchased services across an entire enterprise.
“This is best achieved with a spend management platform that offers robust data and insight into which vendors are on contract across the organization, their rates, and the services they provide,” he said. “It’s most advantageous to consolidate all insights into one platform as we’ve seen that disparate systems make it challenging to identify how much is being spent on services across an integrated delivery network. Often, this exercise reveals greater opportunity to track and measure spend, set competitive rates, and manage savings targets and contract compliance. The C-suite should be hand-in-hand with Supply Chain in sponsoring purchased services optimization as the C-suite can provide direction about which opportunity areas are open to negotiation.”
Unfortunately, however, the purchased services category tends to include “a large area of traditionally unmanaged ‘rogue’ spend,” Little continued.
“Part of what makes standardizing purchased services spend tricky is that these services are often customized to each department’s or facility’s needs, so Supply Chain can’t easily assign an arbitrary number of what a specific service should cost entity-wide,” he indicated. “To that end, many of the decisions in these areas should be elevated to the C-suite where a data-driven, best-practice decision can be made as the potential impact to the organization is huge. This helps to remove some of the emotion from the decisions and keeps the higher focus on the patients and financial health of the hospital.”
VIE’s Miller targets two major challenges that need to be overcome for healthcare organizations to realize considerable savings and high performance from purchased services programs.
“One is that all purchased spend needs to be under financial control, and the second is that there needs be a fully automated process to access and analyze every purchased services line item spend on a monthly basis,” Miller noted. “The good news is that hospitals are dedicating more resources to strategically sourcing some categories of their purchased services spend. However, this is only a fraction of the entire purchased services spend and only the front end of the management process — the contracting.”
The lack of a disciplined approach to purchased services only leads to missed opportunities, Miller emphasizes.
“Cost management should be a strategic pillar for Supply Chain and the C suite,” she noted. “Otherwise, if protecting the valued cost savings which have achieved isn’t a priority, then the costs creep back, and worse yet, they increase.”
Valify’s Heckler believes that Supply Chain and the C-suite need to make purchased services expense management as much of a priority as they do with physician preference item products and services.
“That means they need to invest in technology to understand where the opportunities are and most likely need to hire or assign someone to be responsible for the entire purchased services spend category,” he noted. “There are huge savings opportunities in standardizing your contracting process to one department. The Supply Chain department will then use the subject matter experts (SMEs) from the departments as needed in the same way they would use clinical experts for input in most medical and PPI product categories.”
Heckler finds that many Supply Chain leaders handle contracting for many of the larger purchased service categories that are “easy to understand,” such as medical gas and EVS distribution. But most categories require a completely different skill set or a unique process that is far removed from traditional materials management projects, he added.
He also sees that some departments that fall under the definition of purchased services (e.g., IT, HR, etc.) will self-contract for their needs or simply tell the Supply Chain department which vendor to put on contract. “This self-contracting process has led to massive amounts of waste, emotional attachments to vendors and long-term/no-bid contracts,” he warned. “This is not an efficient way to manage a high-performing organization.”
Dedicated leadership needed
Miller recommends centralizing the entire purchased services category under a single leader who reports directly to the C-suite.
“This leader would be responsible for all purchased services spend and to work collaboratively with Supply Chain, Finance, AP and the departments in the hospital for cost savings initiatives and the on-going cost management,” Miller continued. “They would have a purchased services cost savings and cost management roadmap. Their role would be to identify cost savings, remove silos and sensitive areas of spend and ensure all spend is competitively benchmarked and analyzed for opportunities and no stone is left unturned for review and oversight. They would also be responsible for monthly invoice reconciliation to the agreements and supporting department leaders so these leaders can focus on strategically operating their departments and meeting their budget expectations.”
HealthTrust’s Motz agrees that centralizing purchased services management remains the lynchpin to cost savings and management.
“This doesn’t take the decision-making and vendor selection out of the hands of the key stakeholders, but ensures all departments across the facility are aware of which vendors are being considered and chosen,” Motz said. “A successful purchased services strategy begins with reviewing all of a facility’s accounts payable spend. You must go beyond reviewing PO spend only since many services are not requested via purchase orders. A technology tool such as Valify is a valuable asset in gaining a comprehensive view of a health system’s purchased services spend. Valify categorizes purchased services into 1,200 individual categories.”
Motz recommends honing the product and service categories and vendors as starting points.
“After categorizing vendors and reviewing top areas of spend, develop a pipeline of initiatives and focus on five to seven categories at a time,” he said. “It is critical to engage stakeholders in each department for input on vendor selection and understand the specific service levels they require. Ask questions such as, ‘Why are you outsourcing to this particular vendor?’ ‘What are the critical performance indicators you are measuring with the current vendor?’ And ‘How would you rate the quality of the service they provide?’”
Once Supply Chain interviews stakeholders and reviews existing contracts, then it should identify at least three vendors to include in a Request for Proposal (RFP) process or direct contract negotiations, according to Motz.
“This will help you better understand the market,” he continued. “Speaking from the perspective of HealthTrust, be sure to identify what vendors are available through the contract portfolio. You can leverage pre-determined service-level requirements and other associated terms. When reviewing RFP responses, you should consider more than just the best proposed cost supplier. A successful long-term relationship often comes from the supplier that demonstrates a willingness and ability to be a partner and will support you through continuous improvement efforts.”
