Ace in the hole or race to a goal?

Dec. 21, 2020
Supply Chain ponders the promise, reward from purchased services

Imagine the following scenario: As healthcare continues to navigate, meander and languish through the pandemic, Supply Chain faces C-suite requirements to cut a minimum of 30 percent of its operational costs by mid-year. Squeezing contract pricing won’t even put a dent in the hard-dollar savings the team needs to book. Those within the department feel that much of the identifiable fat has been stripped to the bone so that only meat seemingly remains.

Seeing how Surgical Services embraced service line management (SLM) in the previous year, cutting services that either were not profitable or that consumed too many resources, the Supply Chain leader applies the SLM framework to the department’s functions and turns to purchased services as a viable option.

The next monumental hurdle? Deciding which functions to flip externally to a contracted third party from having his or her own internal team tackling them.

Regardless of facility type, size or location, Supply Chain leaders may choose from a litany of prospects within their realm alone, hinging on their long-term goals. Supply Chain also may advise the C-suite to consider other areas as well where they may only have dotted-line influence or oversight.

The overarching strategy proffered by purchased services experts? Gather and analyze your data, evaluate third-party references and think holistically rather than incrementally.

Start by asking the right fundamental questions about your organization, according to Blaine Douglas, Managing Principal, Vizient.

“Regardless of a hospital system’s size, location and facility type, before tackling new savings initiatives, it is important to delve into your spend analytics, understand your data and prioritize your approach based on what the data is telling you,” Douglas indicated. “Where do the opportunities exist? Do you possess the expertise internally to drive satisfactory results or do you need help in certain categories? Are your purchased services contracts procured through a centralized process? Have you leveraged standardization across your system to the extent possible? Have you taken a lean approach to the number of vendors you utilize across a category?”

Then delve a bit more deeply.

“Once meaningful purchasing processes are put in place that leverage best practices and reflect your system’s culture, it is time to look deeper into your operation,” Douglas continued. “Based on historical success, Vizient has identified some top areas to look into, including food and nutrition services, health care technology management, human resources benefits, pharmacy benefit management and information technology. Typically, these are high-spend areas with a five-percent-to-30-percent savings opportunity within these categories. Any savings strategy developed should align with your system’s values and streamlined purchasing process to ensure that captured savings is long-standing.”

Taking the plunge

Jeffrey Ashkenase, MPA, Group Vice President, End-to-End Supply Chain, Nexera (a Premier company) asserts that third-party contracts for large operational areas can offer the best possible transparency, cost structure and quality. In fact, the three areas Ashkenase recommends purchased services to “support significant multi-year savings” includes supply chain, environmental and facilities services and information technology (IT).

While he doesn’t consider this “true outsourcing,” Ashkenase further urges providers to leverage an E-Payables vendor, such as AMEX, for example, to support discounts on vendor purchases, improved cash flow and revenue enhancement on existing volumes.

“Today, however, we’re advising providers to think broadly and holistically review spend categories ─ employing data-driven technology to benchmark against peers and identify the greatest areas of opportunity,” he noted. “By tracking and measuring spend by category, supplier and facility, an integrated spend management platform helps providers overcome the siloed nature of various contract, set and manage specific savings targets and oversee contract compliance once new agreements take effect.”

When evaluating purchased services opportunities, providers should concentrate on four key questions, according to Ashkenase.

Is the service “core” to your mission and competitive position?

Can you perform the service at a lower cost and/or higher quality than a third-party vendor?

Can your organization keep up with technical requirements, labor laws, personnel sourcing or operational improvements at the same level as vendors that have potentially larger scale and investments?

What is the opportunity cost of insourcing versus outsourcing? In other words, what else could you be doing with the funds, talent and attention that you are devoting to operating and managing an in-house operation?

Angie Haggard, COO, Ron Denton & Associates LLC (RDA) claims health systems can identify several areas that consistently generate hard-dollar savings, but those areas require collaboration and willingness to challenge the status quo objectively. Granted, savings may not be the overriding goal, she added. “Quality and patient satisfaction scores must also be weighed into the decision to outsource or insource as well as the long-term strategic and community impact,” she noted. “Most of the time, the quality and patient satisfaction gain outweigh the benefit of the cost reduction.”  

Haggard pinpoints four primary targets for purchased service consideration, along with three additional prospects.

•Dietary/Food: Most organizations already have this as a purchased service, however, they are not managing the relationship, so there are opportunities for enhancement,” she indicated. Utilizing a purchased service for dietary/food will provide a foundation for continual improvement and enhancements in the type of food, food quality and efficient methods for preparing food onsite.  It can also provide a revenue generating opportunities via coffee shops on-campus (without the burden of managing the detail daily operations).

• Environmental Services/Linen: This is an area that can have a significant impact on an organization’s quality and patient satisfaction scores, she noted. Utilizing a purchased service company to manage EVS/linen benefits hospitals with streamlined processes, a consistent training program for its employees and utilization ideas that could financially benefit the hospital.

• Copiers/Printers: Utilizing a team of experts that stay up to date on the latest/greatest copier/printer technology can benefit an organization, she insisted. Similar to the other two top categories, this is historically already a purchased service. However, we consistently find that the contract is not managed, nor are there quarterly business reviews conducted with the supplier.

• IT: There are multiple categories within this department to evaluate (e.g., hardware, software, telecom, cyber security, etc.). There is so much competition in this field, evaluating providers for various IT services can result in large dollar savings for a health system. In addition, evaluating lease versus buy options for employee laptops/tech is important.

Freight/Shipping, Invoice Audit Services and Laboratory remain candidates, too, she added.

Two executives at TractManager, which announced in November it was being acquired by symplr, point to three areas that may be low-hanging fruit. They are staffing/recruiting, revenue cycle management and vending services, according to Michael Costantini, Vice President of Sales, and Eric Slimp, Purchased Services Director.

• Staffing/Recruiting: Recruiting for healthcare, both clinical and non-clinical requires a degree of expertise and network of connections to properly source and vet qualified candidates, Costantini and Slimp agreed. If you have recruiters on staff, you are likely paying them commissions and salaries, but third-party recruiters commonly work on commissions alone.

• Revenue Cycle Management (RCM): Outsourcing some or all the revenue cycle management function almost always results in a savings, they indicated. This can be anything from Billing & Collections to Claims Management or Medical Coding. This is due to the complexity of the billing processes and processes for securing reimbursement that a health system simply cannot staff the expertise required to perform end-to-end RCM processes at scale.

• Vending Services: This is one that is often overlooked because it doesn’t show up as a high spend, both insist. Why? That is because vending services should be a profit center rather than an expense. Companies like Coca-Cola and Pepsi will pay incentives and commissions to the hospital while providing the products and vending machines at no direct cost to the hospital so that they can secure exclusive rights to sell their products in a health system, they added.

“The typical process for identifying high-impact purchased services involves identifying categories of high spend and forming initiatives around those purchased services,” Slimp said. “Although vending is a purchased service, the spend is offset by the revenue that is generated. The vendors charge for the products and services, but they ‘credit’ the hospital for their commissions on anything they sell. Therefore, it will not show up as a high-spend category even if it is an area of opportunity.”

Expanding the base

But Costantini acknowledges Supply Chain’s limited influence – if any – over these areas.

“Supply chain has an indirect influence on these categories, but ultimate influence is driven by the primary decision makers in those departments,” he said. “Food Services is driven by Support Services, typically [led] by a Dietary Director or [Vice President]. Revenue Cycle Management is driven by the Finance/Accounting group, typically [led] by the CFO. Staffing by HR Services and depending upon department, driven by the HR Director, CIO, CMO and CNO depending upon area of staffing.

“Traditionally, the department heads drive control, but the pandemic has aligned hospitals, and aligned the C-suite organizationally around profitability of the hospital,” he continued. “The focus [is] to drive EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization], especially since the downturn of elective surgeries. Purchased Services is the last bastion of significant savings [and] is providing increased influence toward Supply Chain to drive savings.”

Weighing purchased services is like balancing scales, observes Fred Crans, Healthcare Business Development Executive, St. Onge Co.

“The premise behind purchased services is that an expert in a given area will do a better job and do it more cost-effectively than an amateur,” Crans told Healthcare Purchasing News. “Healthcare organizations are experts in rendering care, not in providing support services. There are scores of services that can be bought instead of made.” Crans lists such examples as elevator maintenance, biomedical service, transport services, copy and print management, record retention and storage, waste management of all types, legal services, translation services and transcription services.

“The three that I think would win anywhere, anytime and in any size organization are Environmental Services, Food Services and Laundry/Linen Management,” he continued. “The large management companies are simply too experienced compared to self-ops. They have people, processes, technologies, data, aggregate purchasing capabilities and a willingness to go ‘at risk’ to guarantee savings. Laundry/Linen Management is extremely capital intense, and while some organizations have – and are – building their own operations, most realize very quickly that the numbers they ran in the planning process do not hold up in real life.”

Against the backdrop of the pandemic makes for an intriguing time to consider purchased services as an opportunity, advises Barbara Strain, CVAHP, a veteran value management consultant with years of experience in hospital and healthcare systems.

 “Holistically, it’s a good time for every health system to take stock of 2020 to determine what worked well and why,” Strain insisted. “Did you miss the voices of staff you may have furloughed?  What operational departments were not heavily relied on or what layer of administration seemed frivolous in hindsight?  Could you have used outside help to fill in the gaps where needed and felt empowered to stop their services when they were not?”

Strain encourages health systems to consider “trimming the fat” that may exist in non-core business services such as Food, Environmental Housekeeping, Courier, Valet, IT or PC maintenance, Waste Management, Sharps Disposal, Recycling, Security, Parking Lot/Garage Management, Shuttles and others.

Accentuate the positive

Purchased Services
Pick List

Supply Chain executives and observers generally agree on the following as 30 notable functions for outsourcing to a third party as a purchased service.

  • Biomedical Engineering
  • Contract Management/Optimization and Spend Analytics
  • Copy and Print Management
  • Courier
  • Dietary/Food and Nutrition Services
  • Elevator Maintenance
  • Environmental Services
  • Equipment Distribution
  • Freight/Shipping
  • Garage/Parking Lot Management
  • Healthcare Technology Management
  • Human Resources Benefits
  • Information Technology
  • Invoice Audit Services
  • Laboratory
  • Laundry and Linen Management
  • Legal Services
  • Mail Services
  • Pharmacy Benefit Management
  • Record Retention and Storage
  • Recruiting and Staffing
  • Recycling
  • Revenue Cycle Management
  • Security
  • Transcription Services
  • Translation Services
  • Transport Services
  • Valet Services
  • Vending Services
  • Waste Management

RDA’s Haggard cautions against spreading the stereotypical stigma typically associated with purchased services.

“Some view outsourcing or purchased services as negative,” she said. “However, that is not always the case. Most of the healthcare functions that are outsourced require on-site resources that live locally. The only difference in outsourcing versus insourcing for these functions is the outsourced team gets their check from another company (aka purchased services). However, they are working side-by-side the hospital employees. In addition, outsourcing doesn’t have to be 100 percent outsourcing of a department or function. It could also include outsourcing expertise or getting a [subject matter expert’s] input on a specific project or initiative. Outsourcing or transitioning to a purchased service should be selective and should be viewed as a way for healthcare facilities to focus on their core competency – taking care of patients.” 

When an organization identifies services that are not part of their area of expertise, thereby making them viable candidates for purchased service consideration, challenges can emerge, according to Haggard.

“It’s hard to have an unbiased view when you have been at one or two organizations your entire career,” she said. “Sometimes you need an outside perspective to gain insights into best practices and a different way of thinking.”

Supply Chain easily can determine what the organization values, Haggard hints.

“A good way to evaluate what should be transitioned to a purchased service is to look at your organization’s website,” she said. “What is showcased on the website as the predominant service? Taking care of patients…The most innovative IT company…Full-service dietary/EVS/linen company…Supply Chain Optimization company?

“If your organization’s website doesn’t list your function or service in your department as being the best in the industry or providing that function or service to others as a revenue source, a purchased service should be considered – even if it is only in the sense of getting outside expertise/support,” Haggard continued. “The intent is not to have all functions/roles in a hospital that are not patient care-focused transitioned to a purchased service, however. If a function/service is not part of the organization’s strategic plan, outside expertise and/or a purchased service should be evaluated.”

By and large, purchased services can benefit healthcare operations in two ways, Haggard advises. Skills and specialization represent the first.

“The companies that provide these services do nothing else but these services, so it is their core competency,” she said. “They lead their industry in creating and defining best practices. They research and identify how to continually improve the services they provide. If they do not excel in their service, they would cease to exist. Therefore, they are motivated and aligned to excel in their field and continually differentiate themselves from their competition.” 

Aligned incentives represent the second.

“The purchased service company can be held accountable for their performance via service level [key performance indicators] and financial incentives for exceeding measurable goals,” she said. “In addition, a purchased service typically results in additional value-adds that the healthcare system would not have achieved on its own – i.e., training, SME support, innovation, etc. These value-adds could be incorporated into the contract, which would not be available with an employer/employee relationship.”   

Keeping ops close

A strategy worth embracing stems from Strain’s personal experience.

“The best executive decision-making structure I worked within was to make sure there were no more than three levels before you connect to the top of the organization,” she recalled. “The closer to the work the better the communication, buy-in, loyalty, trust and productivity. This means you are working at the core of your business and not creating so many layers that when faced with a short- or long- lived emergency, you don’t have to look far to get into meaningful action mode. Those organizations that rolled up their sleeves, knew what to do and took early action are functioning better today and may not go back to ‘business as usual.’”

That’s why Strain believes it makes so much sense to shift non-core competency business needs out to purchased services.

“As a previous director of supply chain operations it became clear that unless we hired professional drivers, leased, purchased and maintained our own fleet of trucks, assured regulations were followed and licensing fees and liability and other insurance premiums were up to date, then we needed to outsource these services,” she said. “This can be to and from warehouses to various entities in and out of your system, experience in logistics with dropping off trailers, exchanging cabs, drivers, hauling equipment, etc. Leave it to the experts and take these expenses off the organization books. Operating costs at a purchased service level are easier to manage than what to do when the truck you need is stuck with a load on the road to your critical care hospital, and you don’t have a back-up.”

All too often Supply Chain is asked to manage a variety of ancillary departments, including mail services, linen services, equipment distribution and copy services, to name a few, according to Strain. All can be outsourced to a purchased service for one clear benefit, she suggests.

“It keeps your core supply chain to become more fully clinically integrated managing patient care needs,” she noted. “This may allow Supply Chain to do custom stocking projects for niche clinical care areas, streamline real time inventory management and storage solutions while understanding the diversity of each service type that would raise clinicians, technicians and physicians to reach levels allowing them to function at the top of their licenses.” 

Strain suggests three primary factors when transferring control to a third party offering purchased services.

1. Do your homework contacting user references, both those who converted from one service to the one you are considering, and if you can find those willing to talk to you, those who converted away from the one you are considering.

2. Develop contracts with clear expectations of both parties. If it’s not documented it’s not important and include clear remediation and out clauses.

3. Monitor performance based on mutually agreed upon metrics and hold regular check-ins and business meetings to assure all is on track. hpn

About the Author

Rick Dana Barlow | Senior Editor

Rick Dana Barlow is Senior Editor for Healthcare Purchasing News, an Endeavor Business Media publication. He can be reached at [email protected].