Healthcare spending in the United States is the stuff of legend—a massive expenditure that only grows bigger each and every year. According to the National Health Expenditure Accounts (NHEA), U.S. healthcare spending rose 4.3% in 2016 to $3.3 trillion or $10,348 per person. These figures represent a 17.9% share of Gross Domestic Product. While this money does go to securing some truly great healthcare, there is also much waste hidden in these annual numbers. A report by the National Academy of Medicine estimates that the nation’s healthcare system wastes $765 billion annually, with $210 billion spent on unnecessary or overpriced care. One way health system leaders can drive leaner operations and reduce wasteful spending is through the use of purchase orders (POs).
If you’re responsible for leading a healthcare system, you already know that numerous vendors are required to ensure operations run smoothly. There are the various medical device suppliers physicians depend on for treating patients, janitorial services that keep facilities clean, landscapers that maintain an immaculate exterior, cafeteria services that make sure people are fed, and many other contractors who contribute to a functioning hospital.
In today’s evolving and uncertain healthcare landscape, hospital administrators are continually searching for ways to reduce costs and meet annual savings goals. Purchased services categories remain a significant budget area full of opportunity for reducing expenses. Dollars spent on services performed by outside suppliers account for up to 45% of a provider’s non-labor budget. Proactive management of service categories will uncover that providers unnecessarily pay for duplicative services, incur hidden fees and penalties, and wrestle with rogue spending with non-contracted suppliers.
Managing purchased services is no easy task. Utilizing an average of 1,505 suppliers to perform services spanning an average of 383 categories, requires diligent oversight and management. Even the most seasoned purchased services professional is challenged in mastering the nuances with each service category while simultaneously managing the strategic sourcing process for the constant churn of contracts. Still, veterans in this space have invested years of dedication, acute attention to detail, and have even experienced trial and error spanning a variety of service categories. Collectively, experts across healthcare have accumulated knowledge and experience related to category-specific best practices.
Topics: Valify Expert Network
To ensure there’s no disruption to patient care or billable services, covering open, or even absent, healthcare positions is critical. According to Select International, a position vacancy for one physician can translate to an annual loss of $250,000 to $1.4 million. Cost efficient staffing strategies must be in place to keep services and revenue flowing. In our previous post, we discussed the opportunities for cost-containment in staffing. This post, however, will focus on a specific part of staffing--locum tenens.
A report by Kaufman, Hall & Associates revealed that the number of hospital mergers and acquisitions increased 55%, from 66 announced in 2010, to 102 in 2016. Last year also saw a flurry of mergers nationwide, from Kansas to New Jersey, with healthcare systems around the country consolidating in order to maintain their financial viability in an era of legislative uncertainty and marketplace volatility. Both independent and newly acquired hospitals are actively seeking areas for cost-containment to strengthen their bottom lines. One way to do this is by taking a scalpel to purchased services. Here we’ll discuss specifically the category of staffing.
Purchased services represents up to 45% of the non-labor expense budget within a health system. As more executives look to purchased services categories for potential expense reduction, 2018 is an important year, and Valify has several important innovations planned to assist clients in controlling and reducing purchased services expense in the year ahead:
Topics: Purchased Services
In part one of this two-part series, we stated that continual monitoring is the only way to ensure actual spend aligns with budgeting expectations. We discussed at length the many red flags, pitfalls, and common missteps on the path to successful and regular monitoring.
Though the process of tracking and monitoring expenses to find realized savings is difficult – perhaps more difficult for purchased services than for any other area within a hospital – below are best practices that have been proven effective.
In part two of this series, we discuss the top best practices and tips to make monitoring expenses easier, faster, and more successful.
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).
From standard purchased services categories like laundry and linen or HVAC services to seasonal/geographic driven categories such as snow plow services, there are hundreds of categories and thousands of vendors that hospitals and health systems utilize daily. Every hospital and health system is different and has unique needs based on their location and the patients they serve. Aligning these particular needs with the unique factors that pertain to each purchased services category is challenging, and most of the work that is done during the RFP process can be daunting as well.
Depending on the complexity of the category, an RFP cycle can take four to six months from start to finish and require a time commitment of 5-20% from each sourcing professional during the bidding event (Robert J. Engel. Strategic Sourcing: A Step-By-Step Practical Model, The Procurement Centre). Insight from Valify’s database shows, a typical health system’s purchased services spend is spread out, on average, across 383 individual categories (some have spend across as many has 734 categories). These figures directly correlate to the number of vendors a health care provider has on contract.
It’s fair to say that sourcing professionals spend a significant amount of time working on RFPs – including conducting research specific to each category, defining award criteria, managing vendor communications, evaluating responses, analyzing impacts, and negotiating final terms. While each of these aspects could benefit from process improvement measures, our purchased services experts have put together a list of the top three tips for accelerating the RFP process while achieving better results.
Healthcare purchased services have come a long way in the three years since we founded Valify. In that time, purchased services has transformed from a misunderstood budget area to a top financial savings opportunity and priority for healthcare organizations nationwide.