This article was written by Lisa Miller.
Analysis of purchased services spend – also referred to as outsourced services – is becoming more prevalent in healthcare. With the potential for significant margin improvement in this area, your plan for cost savings opportunities starts here.
The focus on purchased services spend
I believe this emerging focus on purchased services is for two reasons:
- It is such a large area of spend for hospitals with few cost management strategies in place. Yet we frequently see that over 30% of all purchased services invoices are priced incorrectly from the agreed contract terms, are not on contract, or have excessive extra fees.
- Second, we are seeing physician preference item cost reduction fatigue. I agree that repeatedly looking for cost savings in the same places certainly gets exhausting and, eventually, becomes unproductive.
I’m not suggesting that hospitals should disregard close analysis of their supply costs. I believe, however, that your time and effort will produce far greater cost savings results when your hospital has a well-crafted plan for reducing your purchased services spend.
Cost savings opportunities in your purchased services
Some hospitals begin with the categories of purchased services they are most comfortable and familiar with. The most common areas include linen, dietary, food services, environmental services, biomedical engineering, blood services and distribution services. These offer excellent opportunities to analyze cost savings opportunities and reconcile your past invoices to see if you are paying the contract pricing agreed with your vendor.
In our experience at VIE Healthcare®, contract compliance in hospital purchased services spend is one of three major problems which we will explore in upcoming blogs.
As we move out of these common areas into newer or unexplored categories, opportunities to identify cost savings grow significantly. Below, I have outlined my recommended strategies.
Start with high level data for direction
Here is what you will need to begin:
- Request a 12-month accounts payable for all paid receipts – high level: vendor name and total 12-month previous spend.
- Request a 24-month accounts payable for all paid receipts – high level: vendor name and total 24-month previous spend.
- Pay attention to the paid receipts file by vendor for the last 6 months. With a 12-month accounts payable spend report, you will be able to see all of your annual vendor spend.
This is a great start—and enables you to review high spend purchased services and vendors that you may have never seen before.
What this data won’t give you, however, are the line item details. And ultimately that is what you will need to drive cost savings.
Here is a good matrix for you to begin with:
* 1-2 large outsourced hospitality agreements
* 1-2 revenue cycle agreements
* 2-3 IT agreements
* 2-3 clinical agreements
* 1-2 support service agreements
* 1-2 finance agreements
* 1-2 legal, marketing or real estate agreements
Contract and invoices – your roadmap to success
At this stage, you have chosen a diverse selection of 7-10 purchased services vendors and categories. Now is the time where we roll up our sleeves and do the heavy lifting work.
For this stage, you will need:
- Every agreement in place for each of the vendors (and in some cases, you may have several vendors for each category).
- A copy of 1 month of invoices for each vendor—this is a critical step in this process.
Understanding where you are
- Financial areas to review in your agreement.
- Contract extraction: An easy and automated way to extract the financial details out of your agreement.
- Invoice extraction: How do you obtain the invoice line item details into a usable format? VIE Healthcare’s automated, patented technology, Invoice ROI™ can perform this data extraction and analysis for you.
- Transfer the invoice data in this format to an excel spreadsheet.
Additional points to consider
- Pricing analysis: How do you benchmark?
- Internal: Reducing pricing to the best internal price is an easy and low effort (ie, minimal cost results) option.
- External: Utilize reliable benchmarking services other than your GPO which are available, for example, VIE Healthcare’s purchased services line item benchmarking analysis. RFPs sometimes aren’t enough. You need an experienced benchmarking provider with a large source of data points.
- Reimbursement analysis: Revenue to expense analysis with clinical purchased services. This is an absolute necessity to understand your true costs as compared to your service line revenue.
- Setting new pricing standards: Think differently, exceed benchmarking “norms.”
- Vendor negotiations: Have a strategy (the vendors have one).
5 steps to reduce your purchased services spend
VIE Healthcare® can help your hospital to reduce your purchased services spend through the following 5 steps
Step 1: Automate line item reconciliation of your invoice transactional details to your contract using Invoice ROI™.
Step 2: Identify cost reduction opportunities through price and total cost benchmarking.
Step 3: Conduct extensive contract reviews to fully understand financial and operational costs.
Step 4: Provide you with data driven analytics and historical spend analysis from the invoice details.
Step 5: Assess the performance of services provided to ensure value promised and paid for is being delivered.
Following these steps offers a firm foundation to start your plan for cost savings opportunities in your purchased services spend.
Learn more about VIE Healthcare’s six categories of purchased services spend.
Schedule a call with Lisa Miller to discuss the next level of purchased services cost savings for your hospital.