5 Overlooked Costs of Ignoring Your Purchased Services

Robert T. Yokl, President, SVAH Solutions

Purchased services, or the contracting for tasks, work, or services provided by an outside contractor (e.g., copier repairs, window washing), is one of the most ignored categories of savings opportunities for healthcare organizations in the 21st century.

The cause for this malady is that purchased services’ specifications, bidding/negotiations (if any), and final purchasing decisions, for the most part, are decentralized at most hospitals, systems, and IDNs. These multimillion-dollar aggregated contracts are usually the province of your department heads, division managers, and their administrators, not your professional and experienced supply chain staff.

For these reasons, there are five overlooked costs of ignoring purchased services at your hospital, system, or IDN that you need to know about:

1. Legal Liability: The typical purchased service contract’s length is one to three years; therefore, there is a legal cost (e.g., contracts signed that aren’t legally binding, automatic renewal clauses, no arbitration article, etc.) if your purchased services’ contracts aren’t reviewed by your healthcare organization’s legal counsel. How many times are purchased service contracts reviewed at your hospital, system, or IDN?

2. Loss of Control: Since most purchased service contracts aren’t centralized in one location, your department heads maintain these contracts in their department. At most healthcare organizations, they don’t even know that they exist.

3. Not Bidding: It is rare to see a department head bid a purchased service contract under their control, so you are paying whatever the market will bear.

4. Standardization: It isn’t unusual for us to uncover identical purchased service contracts being employed for the same service (e.g., elevator maintenance, reference labs, trash removal, etc.) at the same hospital, system, or IDN.

5. Benchmarking: It would be an exception to find a department head who benchmarked their purchased service contracts annually to determine if they were within acceptable limits. Is this happening at your organization?

Annual purchased service contract costs are equal to or greater than supply costs at the average hospital. This means that a typical hospital has five, eight, ten million or more in purchased service contracts that need to be measured, managed, and controlled. Otherwise, your direct and indirect costs for this category of purchase will always be beyond acceptable limits.