Optimizing Purchased Services: The Next Frontier of Supply Chain Opportunity

Purchased services make up a sizeable portion of a health system’s operating and supply chain expenses, yet until recently, this area of supply chain has been one of the most overlooked opportunities for improving an organization’s bottom line. 

Healthcare leaders are wise to turn attention to this area, especially given that its share of supply chain expense is growing. As the largest non-labor expense category in most health systems, purchased services can significantly impact hospital margins. That’s why efforts to optimize purchased services spending are on the uptick. But supply chain leaders often lack the resources and insight to address and improve this area of spend—and all too often, it goes unchecked.

Purchased services typically speak to the contracted or outsourced vendors a hospital or health system may use. Common areas include clinical engineering, food and nutrition services, patient transport, environmental services, IT solutions and facilities management.

Having a better understanding of each of the costs related to each of these areas is key to improving a healthcare organization’s financial health. However, a strategy should consider much more than simply identifying a lower cost. 

Achieving long-term value requires an approach that improves operational efficiency and procurement management while optimizing purchasing power through greater collaboration and communication across the procurement management process. A mature and effective approach to controlling purchased services costs applies the following principles.

Visibility across expenses

In a large health system, purchased services categories may run in the hundreds. It’s not uncommon for supply chain and financial executives to lack insight into the vast array of contracts across departments. Getting ahead of the purchased services cost curve requires a bird’s eye view of all vendors and the expenses associated with them. Healthcare organizations will have to dig deep across departments to uncover what is out there. It’s important that supply chain managers step up as leaders who engage department leadership and clinicians. 

Due to the intensity of this process, the business case for outsourcing this kind of in-depth analysis is often an easy one to make, especially since the return on investment can be significant. A true expense analysis will help health systems determine whether the quality of a vendor’s service or product is in line with the cost. A commitment to ongoing analyses ensures that vendor performance is measured regularly to determine whether a healthcare organization is getting the best bang for their buck. 

Eliminates unnecessary variation 

Once a health system has visibility into all purchased services, it is not uncommon to find duplications in vendors. Too much variation in purchased services will ultimately drive up costs and can impact the patient experience. That’s why it’s important for supply chain professionals to take the lead in having tough conversations around purchased services standardization. Achieving a market standard of clinical and economic value means changing mindsets around individual preference. 

For example, hospitals across a mid- to large-sized health system may contract with different patient transport companies. Contracts will undoubtably vary in terms of cost, and healthcare organizations lose their ability to negotiate from a volume perspective when more than one vendor is in the picture. Collective purchasing power with a single vendor puts a health system in the driver’s seat from a value perspective. A standardized approach also streamlines management of that purchased service and ensures a consistent patient experience. 

A value chain analysis can help supply chain leaders determine how to reduce variation. When conducted effectively, this serves as a means of evaluating the activities in an organization’s value chain to understand where opportunities for improvement lie. This data-driven approach roots out waste and uncovers opportunities. Healthcare organizations can gather a variety of data to evaluate vendors such as financial performance, initiative success rates, patient outcomes/satisfaction, utilization management and waste reduction.

Prioritizes patient care, outcomes and experience

Operational margin— is one of the biggest financial challenges for today’s healthcare executives. While reducing costs is an important component of a mature purchased services strategies, clinical quality and patient experience must remain key components of choice in vendors. For example, key factors for evaluating services in hospitality might include the ability to improve patient satisfaction while also providing services in more efficient and effective ways.

This approach—which prioritizes curated service selection, standardization and working with reputable supplier partners—is built on strong, transparent relationships with suppliers that are willing to share goals and collaborate for the best outcomes. Rather than focusing on individual vendor relationships, this model naturally narrows the playing field of vendors by intensifying partnerships with organizations that provide the highest value to hospitals and their patients.

It’s important to note that local relationships are often an important factor in purchased services choices. It’s a nuance that most traditional GPO contracts overlook in terms of the big-picture perspective of local autonomy and optimization.

Exploring the next frontier of purchased services management

As health system leaders look for ways to improve margin, purchased services optimization is a significant opportunity. By taking a mature approach that factors in the above three components, healthcare organizations can generate sustainable return on investment.