Practical Ways To Reduce Purchased Services Costs
This article was written by Lisa Miller.
Reduce purchased services costs
Rising costs are prompting healthcare providers to revisit their labor and non-labor expenses. Learn how to identify ways to reduce purchased services costs.
Hospitals are facing increased public scrutiny in light of skyrocketing healthcare costs. While many point fingers at rising prescription medication and emergency room costs, purchased services are also implicated in hospital overspending. Substantiating this fact is a recent statistic revealing that hospitals overspend by as much as $39 billion yearly on purchased services.
The question is: How can hospitals reduce purchased services costs and improve the quality of patient care?
What Are Purchased Services?
Before offering solutions for purchased services overspending, a description of what these services entail is essential. Typically, purchased services are defined as any service outsourced to a third party. These services are grouped into the following categories:
1. Facility Support
This category comprises food, laundry, utilities, and environmental services (EVS). While these services are non-clinical in nature, they are still crucial to the hospital’s daily operations. Cleanliness, lighting, noise levels, and food quality play a vital role in patient recovery and staff efficiency.
2. Financial Services
Banking, revenue cycle management, and most consulting services fall under the financial services umbrella. Significant activities within these areas include reporting, budgeting, capital management, and operational analysis.
3. IT and Telecom
The installation and maintenance of hospital-wide IT infrastructure, as well as wireless telecommunications equipment, are often outsourced. Hospitals rely on real-time data for patient care, thus making IT services a top priority.
Not only is property insurance necessary but your healthcare facility will also need general malpractice and liability insurance.
5. Clinical Services
Many clinical services, including those for diagnostic tests and procedures, anesthesia, radiology, dialysis, and laboratory, are often outsourced.
6. Human Resources
Functions such as payroll, recruitment, and insurance benefit oversight are commonly outsourced to third parties.
7. Ancillary Services
This category often includes document management, courier, and freight management services.
Outsourcing Pros and Cons
In past years, hospitals outsourced many of the above services because they realized significant benefits in doing so. Outsourcing resulted in:
- Reduced administrative costs
- Increased profitability
- Greater focus on patient care
- Decreased hiring and training costs
- Access to a broader talent pool
Before long, however, challenges arose that negatively impacted operational efficiency.
- Service quality not meeting expectations
When onboarding third parties, performance standards failed to meet expectations. While differences in expectations were eventually resolved, additional time was needed to ensure this.
- Decreased control
A third party added another layer of complexity. For managers, there was little to no visibility or control over outsourced processes. This often resulted in unexpected and costly interruptions to services. Additionally, expired contracts left a gap in services that negatively impacted the patient experience.
- Third-party cybersecurity issues
Since hospitals often outsourced IT and computer operations, this made them more vulnerable to data breaches. Cybercrimes involving healthcare data carry an average cost of $6.45 million, outpacing all other industries.
How Hospitals Overspend on Purchased Services
Overspending on purchased services has recently come to light as hospitals struggle with evolving government regulations, fragile pharmaceutical supply chains, and rising prescription drug costs.
Traditionally, hospitals focused on reducing supply costs. These costs alone are estimated at $150 billion, which is almost equal to or slightly less than purchased services spending.
There are several reasons why hospitals haven’t made any attempts to reduce purchased service costs in the past.
A primary reason is that hospitals must first identify the areas in which they are over-or -under-spending. These benchmarks aren’t easily determined and require a team of experts to monitor over time.
Such a project can be overwhelming since the services vary widely in cost and are dependent on the requirements of the facility. The wide range of areas to track, from food and housekeeping to clinical services, makes accountability a challenge.
The wide range of areas to track, from food and housekeeping to clinical services, makes accountability a challenge. Click To Tweet
Purchased Services Misconceptions
Several misconceptions fuel excessive overspending on purchased services. Some of these common misunderstandings are described below.
- Our hospital does not use any purchased services.
Any contracted outsourced service that isn’t done by in-house staff is a purchased service. Inefficient management of these services can result in financial losses.
- The department heads are managing the purchased services efficiently.
Although they are subject-matter experts, department heads can’t manage this function independently and must work cooperatively with the supply chain department.
Supply chain personnel have contract experience who can help ensure that services are agreed upon at a reasonable cost.
- The group purchasing organization (GPO) and service providers already give the best contracts and pricing.
The GPO or vendor may not always necessarily provide the required level of services needed.
While the GPO or an existing provider can be the right starting place, alternative solutions from third parties should be researched.
- Competitive bidding is too time-consuming and difficult.
Online resources, including RFP systems, can help hospitals obtain information from service providers, including key performance indicators, benchmarks, and other information. These drastically shorten the competitive bid process.
- In-house staff contracting experts can execute purchased service contracts.
Contract negotiators with the skill set and expertise to successfully execute a cost-effective deal with vendors are necessary.
However, most hospitals don’t employ this type of personnel in-house. So, they must recruit a third-party consultant. Experts must be knowledgeable in the service complexities, requirements for service delivery, key benchmarks, and the hospital’s needs for the service.
Steps to Implementing Cost Savings Initiatives
The good news is that hospitals can successfully target and implement a cost-savings initiative for purchased services. Jan Van Londen of the Healthcare Financial Management Association describes six steps to implementing cost savings on purchased services. These actions can result in hospitals saving 10-15% on purchased services.
The project is conducted by a team ideally led by management personnel from finance, facilities, program management, or decision support. The team carefully evaluates the pros and cons of potential solutions under the direction of the executive team leader.
1. Assess total annual expenditures by vendor and category
Data pertaining to all accounts payable, purchase order files, contracts expiring within the next nine months, and new service/ technology requests should be examined.
Evaluation of spending by the purchased service category and subcategory will uncover opportunities for vendor consolidations. Prioritizing the services based on cost, contract ending dates, and the number of vendors in each category is a part of this assessment.
2. Define the business case for the opportunity
The reasons for any opportunity to become an initiative are defined, including an estimate of financial benefits. This includes pricing, standardized contract expectations along with service and supplies, and the potential outcome.
One-time cost estimates such as equipment purchases, construction, training and ongoing costs including labor and licensing fees are weighed.
3. Obtain full executive support
A committee of senior leaders led by a CFO assists in setting cost savings goals. The committee also helps resolve obstacles, including technical issues, stakeholder resistance, or vendor objections.
4. Form workgroups to address services
Members of workgroups with experience and knowledge in the respective service areas can more effectively work towards the goals of the initiatives. Additionally, this optimizes the opportunities for successful negotiations with service vendors.
5. Measure results periodically
Tracking savings and utilization at set intervals is critical to ensuring that the initiatives continue to provide cost reductions.
Ongoing Vendor Services Cost Containment Measures
According to VIE Consulting CEO, Lisa Miller, tracking a hospital’s purchase services expenditure is a tedious undertaking since the supply chain can’t produce reports detailing this information. Instead, the hospital must manually go through invoices to uncover these details and input them into a spreadsheet for further analysis.
With potentially hundreds of pages of invoices containing thousands of line items, purchased services expense management and cost reduction opportunities aren’t easily identified.
Experts concur that decentralization and fragmentation is the root cause of overspending on contracted services. Individual departments are selecting their own vendors without implementing any value analysis.
Since purchased services represent a significant cost for hospitals, it’s crucial that they institute a set of best practices to ensure costs are in line with the contracted services.
1. As invoices arrive from vendors, a master location should be established within the accounts payable system for easy access to contracts for on-demand review.
2. Keep a PDF file of the vendor’s executed agreement and request pricing tables and other calculations from the vendor in Excel or CSV format. This allows staff to input billing data for comparison with the vendor’s billing.
3. Recruit a third-party contractor to regularly audit agreements and invoices for problem identification.
In any case, periodic review of vendor agreements and invoices can help hospital management stay on top of costs and avoid wasteful spending.
Case Studies in Service Cost Reduction
Researching and refining service contracts for clinical equipment paid off for one hospital in Western Illinois, which carried a $2.5 million price tag.
The team consisting of the purchasing director, Biomed director, and decision-support manager found solutions that saved the hospital $900,000 annually. This was accomplished simply by paying for actual labor and materials used rather than full-service contracts that were never fully utilized.
In an example involving banking services, a Wisconsin hospital system reduced the credit card fees it incurred from three different banks. The team, which consisted of finance and business office personnel, thoroughly reviewed merchant statements and bank processing fees.
A competitive bid process was executed and two banks with the lowest fees were selected, resulting in a savings of $85,000. Additionally, high-volume credit transactions were changed to ACH direct deposits that brought in another $105,000 in savings.
VIE Healthcare Consulting Can Help You Implement an Effective Purchased Services Cost Reduction Strategy
Reducing excess spending on purchased services can present a challenge to hospital administrators. This is due to the lack of data analysis, inadequate tracking resources, and the number of contracts involved.
However, with proper planning, teamwork, and experienced personnel to negotiate suitable contracts, costs can be identified and lowered for many, if not all, service agreements.
VIE Healthcare Consulting assists health care systems in eliminating excess costs and can accelerate cost savings initiatives. Contact us for more information on how we can assist your hospital with purchased services cost reduction.
If you’d like to explore how VIE Healthcare can help your healthcare organization with achieving immediate cost savings, schedule a call with Lisa Miller.