Purchased Services Cost Management Is Key to Financial Predictability


This article was written by Rich Dormer.
Healthcare executives are constantly seeking financial predictability and certainty before making important decisions to ensure better quality patient care and future sustainability of their organizations. Purchased services are key to that financial certainty.
These decisions encompass critical areas such as:

  • Investments in new services and technologies.
  • Improvements in their physical infrastructure.
  • Expansions into new ventures.
  • Hiring of talent.

Each decision is made within the context of the short and long-term strategic and cultural impact it will have on your organization, but all have a monetary commitment and impact at their core. This is why the reduction in purchased services spend is the key for hospital leaders.
Cost reduction initiatives are more relevant today than ever before because every single dollar a hospital saves goes right to its bottom line.
Cost reduction initiatives are more relevant today than ever before because every single dollar a hospital saves goes right to its bottom line. Click To Tweet
The truth of the matter is that many hospitals operate with only a 2% profit margin.

For instance, $1 million in cost savings would equate to generating $50 million in new revenues.  
While organizations will still look to generate new revenues, the focus on identifying and achieving impactful cost savings without negatively impacting the delivery of care is critically important.
As healthcare margin improvement experts VIE Healthcare® Consulting targets purchased services spend to identify the most impactful cost reduction.
Here’s why.
The cost-saving potential in purchased services spend
Purchased services are any services that are outsourced, ie, not performed in-house by your organization. Typically, they account for 45% to 55% of your hospital’s total non-labor spend.
To put it in perspective, a typical 3,000-bed health system with $4.8 billion in operating expenses will have $2.3 billion in labor costs. Of the remaining $2.5 billion, approximately $1.25 billion of annual costs would be in purchased services.
In order to identify opportunities to find pricing discrepancies, determine the utilization trends, and extract unnecessary costs, an expert would need to obtain and analyze line item pricing and compare that to the contracts.
In theory, this might sound straightforward, but it is an inherent problem with purchased services due to the attention to detail and resources required.
Since 1999, VIE Healthcare® has been successful in helping our clients to identify and secure millions of dollars in savings within their purchased services spend.
Asking the right questions
For your team working on purchased services initiatives, we recommend asking the following questions:

  • “Are all of the services being invoiced on the current contract and are they at the correct price?”
  • “Do we have 12 to 18 months of line-item details to ensure we are capturing all cost reduction opportunities?”

At VIE Healthcare® we have known the answer to both of those questions for some time.
There is a limit to what you can accomplish without having the line item details.
Most supply chain and finance leaders know this, but we still see many hospitals and healthcare systems only use category spend and contract reviews to negotiate purchased services.
Why do this knowing that the right price is not being paid and millions of dollars are left on the table? And, what’s preventing your hospital from identifying the savings in your purchased services spend?
In our experience, these are the key issues:

  • Line item details of your purchased services spend are hidden in your invoices. The only way to extract them would be to commit internal or external resources to manually input the line item details into Excel.
  • Many vendors have so many line-items and items that are non-catalog services that healthcare organizations are unable to enter them into any materials management system and therefore can’t pull them into a report. It takes time, resources, and discipline to systematically map out and review a large invoice set.

Remember, purchased services could represent more than half of your organization’s non-labor spend yet there is no visibility into the actual costs. The previous example would mean that leadership at the 3,000-bed health system would have no line-item details into approximately $1.25 billion of annual spend!
Purchased services could represent more than half of your hospital’s non-labor spend yet there is no visibility into the actual costs. Click To Tweet

  • With limited time and resources, however, supply chain and finance departments use the tools available in the market place, negotiate what they can to the best of their ability, and then move one to the next initiative.

While they hope for the best, they know deep down that they are overpaying on purchased services
Their hope has now been answered!
Invoice ROI™ from VIE Healthcare®
A few years ago, we developed our patented technology to help ourselves and our clients automate the manual invoice process. We call it Invoice ROI™:

  • Reconciliation
  • Optimization
  • Intelligence

With Invoice ROI™ from VIE Healthcare®, our clients now have the ability to view all of the line-item spend on their purchased services on a monthly basis in real-time and can be confident that they are not paying above their contractually agreed rates.
What a novel idea!
Since 1999, VIE Healthcare ® has excelled in the field of hospital margin improvement and we are passionate about delivering maximum cost savings and revenue gains to our clients.
We are pioneers in the reduction of purchased services spend and with Invoice ROI™, we are now able to provide our proven automated process wrapped up in a technology, enabling our clients to achieve the financial impact they need. In turn, this data helps you make the important decisions for your organization with some predictability and certainty.
Visit our Invoice ROI™ page to learn more about it or email me at [email protected].
I look forward to helping you and your team with their 2019 cost reduction initiatives!
For a complimentary consultation, call our office today at 1-888-484-3332, Ext 500 or email us at [email protected].

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