Purchased Services Are An Untapped Cost Savings Opportunity
By Chris Heckler, CEO, Valify
Laundry, food, marketing, telecom, and the hundreds of other purchased services that health systems spend billions of dollars on each year rarely get as much attention as medical/surgical and physician-preference supplies when it comes to evaluating savings opportunities. One reason for this could be services are not quite as glamorous as total joints, innovative imaging solutions, and the latest drug-eluting stents. While managing both types of expenses is important, purchased services is an area where hospitals can do more to significantly — and immediately — start improving their bottom line.
As some healthcare organizations may not realize, purchased services can comprise up to 45 percent of their non-labor budget. Using cutting-edge analytic tools, hospitals can begin to harness the data behind this significant budget segment to identify their spending, benchmark performance, and illuminate a multitude of savings opportunities. The result can be millions of dollars of savings per year, and it doesn’t have to take months to manually review the data or bog down clinical staff with new product trials that might save just a few percentage points.
Once there is a better understanding of purchased services spend, hospitals can immediately begin making informed decisions that will impact their bottom line. This article is the first in a three-part series in which we will discuss the new standard of purchased services spend management. In this article, we will define purchased services and explore how to streamline purchased services spend management efforts. The second article will discuss the data and technology required to identify savings opportunities, and a third will describe tips for securing more favorable vendor contracts.
Defining Purchased Services
Almost every area of hospital and health system spend is tightly monitored and controlled by widely implemented IT tools, distributors, and companies — such as group purchasing organizations (GPOs) — that help organizations control costs of medical supplies, pharmaceuticals, and capital equipment.
Until recently, purchased services did not have access to area specific tools or assistance for streamlining the purchasing process. This is partly due to lack of a standard definition for purchased services across the industry. A good guideline to use when defining purchased services is: any service contracted, purchased or outsourced to a third party. It includes but is not limited to all products related to IT, telecom, printing, mailing, cleaning, and food because these areas are not typically managed through standard supply chain processes.
In fact, a comprehensive list could include more than 1,200 unique services, each of which would hopefully have a contract attached. There are seven primary buckets into which purchased services are typically categorized, including:
- Facility support services: food services, laundry, utilities, EVS
- Financial services: banking/financing, revenue cycle,
most consulting services - IT & telecom: hardware, software, wireless
- Insurance: life, disability, malpractice
- Clinical services: reference lab, dialysis, imaging
- HR services: staffing, benefits, education
- Ancillary: document management, courier, freight management
The Dangers Of Decentralized And Unstandardized Purchased Services Data
Standardizing the definition of purchased services is the first step for hospitals to begin appropriately capturing and consolidating data across the organization to accurately monitor spending and identify savings opportunities. Alternatively, the high variability in definitions and management practices across facilities related to purchased services commonly leads to duplicate vendors, overutilization of services, and vendors delivering services without a contract — all of which can end up unnecessarily costing hospitals.
To detect these irregularities, organizations need IT tools specifically designed for this governance mission. The widely-spread practice of analyzing data using spreadsheets is quickly becoming an outdated practice. This manual process is highly time consuming and often requires the additional expense of contracting specialists to transfer information from one or many sources into a single document each month. Manually analyzing spreadsheets creates room for error such as miscalculations or skipped steps which impacts the reliability of the dataset. Additionally, generic reporting software and off-the-shelf business intelligence solutions do not accurately categorize vendors and work using a garbage in, garbage out process.
Despite millions of dollars of savings opportunities available in purchased services, only recently have dedicated solutions emerged to confront this large segment of healthcare spending management. Leading IT platforms specifically focused on purchased services are delivering not only real-time data with full visibility and reliability but also actionable intelligence that was previously unavailable with outdated tools and methods.
The new era of dedicated purchased services IT tools will provide hospitals unique insights into their system’s data to accurately and timely visualize spending trends; organize and categorize vendors system-wide; identify vendor consolidation opportunities and areas for improvement; benchmark spending against similar systems; monitor vendor performance; and eliminate scope creep. What was once difficult-to-find information is now clearly and quickly streamlined. This empowers healthcare organizations to build savings projects, track vendor performance to ensure compliance with contract terms and utilize advisory services for further analysis.
About The Author
Chris Heckler is the CEO of Valify, the leading web-based solution that allows healthcare organizations to quickly identify, benchmark, and track savings in purchased services, mitigate financial risk and reduce the overall cost of operations.