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.
One of the biggest difficulties healthcare purchased services professionals face is trying to negotiate more favorable vendor contracts for their hospital or health system. With hundreds of vendors spread across numerous departments and facilities, it is nearly impossible -- without the right data analytics platform -- to have enough time and information to build a persuasive case.
Valify’s new Market Share feature, recently released in December 2016 enables healthcare organizations to analyze market share among their purchased services vendors while accessing Valify’s exclusive database of hundreds of active healthcare organizations for deeper insight.
The new feature helps support organizations with securing more favorable contract terms with their vendors by understanding how much of the market each vendor holds in their industry and how many dollars peer healthcare organizations spend with them.
Visualizing purchased services spending is essential for controlling costs at any hospital or health system. After all, purchased services comprise 45 percent of a hospital’s non-labor budget. The ability to drill down on spending across a well-organized hierarchy of more than 1,200 potential purchased services categories provides an even more precise picture of how dollars are being spent. Spending data alone, however, offers only directional insights.
As hospital executives focus on surviving major industry changes such as new payment models and shrinking reimbursements, the cost reduction spotlight seems to be focused more on M&A activity and labor reductions rather than purchased services. This is despite the potential to achieve significant savings without disrupting patient care.
Topics: Purchased Services