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The Biggest Myths About Hospital Purchased Services

Posted by Chris Heckler on Apr 7, 2015 8:00:00 AM
Chris Heckler

You might be surprised to hear that hospital purchased services categories are still not getting much attention in some organizations across the country. In fact, people often have misconceptions about what exactly hospital purchased services are and how much they are spending on them. Therefore, we decided to help clear up the confusion.

First, if you work at a hospital and have any involvement in contracting or have a large savings goal, you are misinformed if you are not focusing on your purchased services categories. The primary reason is that purchased services makes up at least 35% of your non-labor spend*. It is your largest savings opportunity by far unless you are planning on firing your employees to make your budget this year.

misconceptions hospital purchased services

Here are the biggest myths about purchased services and their respective truths:

"We Don’t Outsource Departmental Services"

Many people assume that the hospital they work for doesn’t use purchased services because they simply don’t understand what truly falls under purchased services. The truth is every hospital is “outsourcing” many services. After all, purchased services are any services contracted for and performed by a third party, other than delivering medical products to the facility. They include any service carried out by anyone other than the hospital’s in-house staff. 

At Valify, we break up these services into seven main categories:

  1. Financial & Administrative
  2. Facility Support
  3. HR
  4. Insurance
  5. Clinical
  6. Ancillary
  7. IT & Telecom

Furthermore, we do not consider the following to fall under purchased services:

  1. Construction
  2. Pharmaceuticals
  3. Medical & Surgical Distribution
  4. Pharmacy Distribution
  5. Lab Distribution

In other words, you don’t have to be outsourcing a department to have a purchased services spend. Categories like utilities, equipment rental, insurance, and IT/telecom have a lot of savings opportunities just waiting to be uncovered.

"Our Departments Effectively Manage Purchased Services on Their Own"

In order to purchase the right services at the right price, department heads should work together with the supply chain department. Yes, department heads are experts when it comes to the purchased services that fall under their respective departments, but they can benefit from the contracting expertise of supply chain professionals.

If a formal review process is not in place for purchased services, contracts may be renewed automatically with price increases unbeknownst to the hospital, or contracts may be approved without review simply for fear of losing a particular service. If both supply chain professionals and department heads work together to establish a formal review process and consider industry-pricing benchmarks (like hospitals do for clinical products in their value analysis teams), you will keep the department heads happy while also realizing the greatest possible savings for the organization.

"Our Supply Chain Team is Well-Versed on All Contracts"

Once again, the more informed people involved in a purchased services review, the better. Hospitals should use service area experts (like department heads) to compile a needs assessment, execute a contract, and manage the project on a continual basis. These service area experts, in addition to having great negotiating skills and contracting expertise, should understand:

  • The hospital’s needs for the given service
  • The individual complexities of the service
  • Requirements for service delivery
  • Key benchmarks to include in the service-level agreement

This is where third party tools and services are an incredibly useful and cost effective option if staffing in-house experts simply isn’t in your budget.

"We Already Get the Best Prices from Our Current Vendors & GPO"

Please don’t tell me (or your CFO) that you are using a vendor because you have for the past 20 years and they’ve treated you fair. Why do you think they can afford to take you to lunch or drinks every time they meet with you? Because they have slightly increased pricing or services over the term of the agreement, which we call scope creep. Basically, don’t stick with your long-standing vendors just because you’ve been with them for so long and/or have established relationships with them. Instead, consider all of your available options.

We’ve discussed this in previous posts: it is very difficult for your national GPO to contract for your specific needs in purchased services. This is primarily due to the fact that there are local/regional vendors that can’t get a national contract with a GPO, and a national contract can’t possibly have competitive pricing at your local level and for your specific needs. Some of the GPOs do a better job than others, but even if they have a vendor on contract for a specific purchased service, you will still most likely have to negotiate your pricing and service level terms.

I recommend identifying all of the vendors you are currently using in a specific purchased services contract, then extend these agreements to have a coterminous end date. This way, you can aggregate the volume to get the best pricing on the new agreement. This might be with your current long-standing vendor, your GPOs contracted vendor, or someone new. It really doesn’t matter, as long as you are getting the best overall savings and service levels.

"Preparing an RFP for Purchased Services is Too Difficult"

A lot of healthcare professionals believe bidding a purchased services category is too challenging and time consuming, so they sign evergreen agreements or just continuously extend them. This is understandable because of the massive amount of work and pressure these executives are under every day.  

However, there are new resources that can help alleviate constraints you may associate with the competitive bidding process. For example, purchased services intelligence platforms can provide complete visibility into your purchased services spend, identify savings opportunities, and track realized savings. In other words, this technology will arm you with the data that you need to complete an RFP, negotiate a competitive contract, and track the spend moving forward to make sure you are actually realizing the savings offered in the RFP.

Why put so much pressure on your team when you can empower them with the tools they need to exceed at their jobs?

CONCLUSION

As more hospitals look for ways to reduce costs, purchased services is now the go-to area to evaluate and find savings. The first step is to understand your organization’s total spend within purchased services categories. Once you have this, you can quickly identify waste and prioritize your team’s work plan to maximize their savings impact. With the help of new purchased services tools on the market, this is no longer a multi-month engagement that you need to hire a consultant to manage. You can have this information at your fingertips within just a few days. Sounds nice, right?

*We can back up this percentage with over $16,000,000,000 in categorized spend data in the Valify tool. 

Healthcare Purchased Services Contracting Tip Sheet - Free Download

Topics: Purchased Services

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