Monitoring Purchased Services Expenses - Part 1: Understanding the Road Blocks, Red Flags and Pitfalls
Unlike with tracking expenses for products and capital within a health system, purchased services are difficult to quantify. Purchased services have no item number, are primarily fulfilled by local vendors, and are purchased off-PO 75-85% of the time. These factors make purchased services a complex area in which to manage budgets, to track expenses, and to implement compliance without the proper tools and best practices.
If purchased services expenses are not monitored regularly, there is no guarantee health systems will see the savings that were planned for following a rigorous vendor negotiation. This can be defeating for those who spent the time and energy finding a better deal and can ultimately be bad for business when expected savings are missing on the bottom line at year end.
Continual monitoring is the only way to ensure actual spend aligns with savings expectations. Purchased services expense tracking and monitoring is an ongoing process with plenty of pitfalls and common missteps. However, purchased services professionals can make the monitoring process more manageable and productive by knowing the pitfalls to look out for and by following the industry best practices (see blog: Monitoring Purchased Services Expenses. Part 2: Best Practices and How to Get Started).
Monitoring Realized Savings Pitfall #1:
Though tightly managed with all other areas within a hospital (med/surg, capital, etc.), purchasing without a purchase order (or “off-PO”) is extremely common when it comes to purchased services. This is a dangerous practice that contributes to multiple pitfalls for monitoring expense and savings such as:
- Not using a purchase order can create an environment that is prime for rogue spending – that is using a vendor who is not the preferred, contracted vendor.
- When purchasing off-PO, there is a lack of accountability for the buyer and the vendor. This can lead to problems if things go wrong when services do not meet expectations or needs. Without a purchase order, there is no record of who within the health system requested the services or why. Without a point of contact, there’s little to no accountability which makes compliance efforts and follow up very time consuming and difficult for the purchased services professionals who work to reign in rogue spending.
- When purchasing off-PO, there is no approval process for the level of utilization. Whereas, when the proper channels are gone through, and the preferred vendor is used for a service, utilization benchmarks and unique needs of the hospital have been reviewed and a standard level of utilization has been set in the vendor agreement.
Many buyers may choose to forego using a purchase order because they already have a relationship with sellers. After all, most purchased services vendors are local vendors rather than national so a close, existing relationship is feasible. Other times buyers disregard purchase orders because they don’t want more paperwork to process. Though transactions with local vendors may appear to be a simple and straightforward, due to the complexity of many health systems, a missing purchase order causes unnecessary communication challenges.
A purchase order details the specifics of the health organization’s request. If the hospital receives services, but the vendor does not comply with specific needs of the hospital, fixing the issue can be a hassle for both parties when the purchase order is missing. A purchase order can be used for accountability with the service provider if there’s an error, disruption, or other problem with the service.
Monitoring Realized Savings Pitfall #2:
As purchased services expenses are heavily affected by utilization, setting a savings goal at the beginning of the year can be sabotaged if utilization increases unexpectedly. While there can be many reasons for an increase in the utilization of a services provider, for example clean up from storm damage, unseasonable snowfall, etc., there are also occasions in which utilization spikes unnecessarily and without justification.
Once an unexpected increase is detected, purchased services professionals are often burdened with the tedious task of tracking down what facility the spend came from. They must then find the specific department, and finally contact the person who made the purchase decision. With limited information and cryptic cost center and GL numbers, these efforts can feel more like forensic detective work rather than finding savings in purchased services. Also, without regularly monitoring, a spike in utilization may go undetected for months which compounds the lost savings.
Communication challenges also arise upon payment. An invoice will be received regardless of a missing purchase order. Accounts payable is forced to pay the invoice though there is no purchase order to confirm that the charges are correct and that the correct services were rendered. This can lead to overpaying on unwarranted fees and/or paying incorrect rates. Without a purchase order there is no confirmation of correct charges for the correct services rendered, and there is no accountability leading to yet another pitfall for savings monitoring and communication difficulties.
Lastly, lack of vendor communication is rampant within purchased services. Though there may be an existing relationship with the vendor (as vendors are often local vendors), the level of relationship does not compare to other areas within a hospital. Physician preference suppliers, for example, may have a representative working side by side healthcare workers. This is something that does not happen with most purchased services suppliers.
Purchased services vendor communication and accountability trails far behind other areas within a health system. Additionally, health systems must attempt to maintain relationships with an average of 1,505 vendors for purchased services. This is a staggering amount especially compared to other areas in a health system:
Monitoring Realized Savings Pitfall #3:
Purchased Services Spending is Done at the Department Level
Purchased services is again a unique area within a hospital because unlike other budget areas, purchase decisions can be made at the department level. While this may be perceived as a positive by those within each department doing the purchasing - perhaps they believe they know their needs the best and that making the purchase decision themselves can seem to speed up their access to services. On the contrary, purchasing at the department level creates a huge administrative, accountability, and compliance problem for the health system at large. Purchasing at the department level circumvents vendor compliance efforts and disregards negotiation efforts made by domain experts like purchased services professionals and many times hired consultants.
Savings project owners can do more to prevent unnecessary department level spending during the procurement cycle of a new vendor or service. Engaging all stakeholders for a particular service is a key step in the procurement cycle to not only ensure the best vendor is chosen but also to help ensure compliance after the contract is signed. Stakeholders need to be engaged at every level from the executive level to the department level. When departments are given the platform and opportunity to express their specific needs within a service category, they will feel less inclined to purchase off contract and will more likely trust the preferred vendor.
As you can see, purchased services is a complex area in which to manage budgets, to track expenses, and to implement compliance. Purchased services professionals have a steep road ahead of them filled with pitfalls when monitoring and tracking savings projects. These stumbling blocks to savings are unique to purchased services, requiring a unique set of best practices and tools.
Continual monitoring is the only way to ensure actual spend aligns with savings expectations. Understanding the pitfalls is the first step, read part 2 of this blog series to learn best practices for monitoring purchased services expenses and for information on how to get started.
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