You Have to Be Strategic to Save Big with Purchased Service Expenses

Robert W. Yokl, Sr. VP, Operations, SVAH Solutions

For many years, purchased service expenses has been the forgotten brother/sister of the healthcare supply chain non-salary expenses. Yes, they were always there, but they were handled by their subject matter experts and departmental stakeholders. The mindset was that the stakeholders knew the services better than anyone else, so we let them negotiate the contracts year after year and it sort of worked, to a point. This was great 10-20 years ago, but with purchased service costs representing 30-45% of non-salary expenses at healthcare organizations today, we need to think differently to obtain dramatically new big savings results. Why? Because there are new and better ways to strategically attack these major expenses and reduce costs while maintaining and/or improving quality of services offered.

Time for Supply Chain to Take Charge of Purchased Services

To be strategic about your purchased services you first must be organized to save big. This is not just gathering up all the contracts into one repository, though that should be a given. This is about taking responsibility for all purchased service contracts and that should be the job of Supply Chain. They are the chief sourcing agents for healthcare organizations and can apply supply chain best practices and value analysis methods to these purchased service contracts. Start to assign purchased service contracts to your contract managers or hire new contract managers to take on this new workload. They will pay for themselves with new big savings.

Know Where You Stand on Purchased Services Before, During, and After the Contract is Signed

In order to know where you stand with purchased services, you need reporting to tell you where you need to focus your efforts. To do this, you need to answer important questions on an ongoing basis. Where are your costs increasing dramatically year over year? What categories are running over cohort or historical key performance indicators? How much savings can you realistically achieve in the next fiscal year? Did the contracts you implemented really save you money, and if so, how much?

To be able to answer these questions, you need to have a database of purchased services from your accounting general ledger listings and accounts payable. These new systems can be home-grown or purchased in the marketplace, but they are necessary to give you the edge on the who, what, when, where, and why for purchased service expenses. Otherwise, you are just throwing darts into the wind to see if any savings will stick. Plus, these systems will give you leverage on customers, stakeholders, and internal experts who may give you pushback just to avoid changing what they had put in place previously.

GPOs Drive Savings in Supplies and They Are Doing the Same in Purchased Service Contracting

In years past, Group Purchasing Organizations (GPOs) used to have some purchased service contracts, but they were not very beneficial. This left supply chain leaders questioning even using GPO contracts as they felt they could do better negotiating themselves. Finally, the GPOs realized that this was a big area of savings that they could offer to their customers. Today, most Group Purchasing Organizations and now the regional cooperatives are making purchased service contracts better. Look to your GPOs (national and regional) whenever possible for contracts to save you more; there are some nice gems in those contracts. I especially like the new regional GPOs, as a good amount of these contracts have a local/regional aspect to them, and they can handle those details in a customized way for their members.

Savings Beyond Price in Purchased Services is Very Real

Even though we are big proponents of GPOs and their contracting, that does not mean there are not huge savings beyond contract price – because there are. Don’t just implement a new contract with new pricing. Go beyond pricing and look at the features and service elements that are being provided. Are you using all the features of this service and is your vendor following the service requirements inside the contract as well?

Purchased services, representing a third of our non-salary budget, are too big not to put on the full court press like we do with all our supply areas. With a little time, effort, systems, and training for your supply chain team, you can start to roll out major purchased services savings rather quickly. It’s time to set up a formal purchased services program at your organization. Set up that value analysis team, give them good training, support them with supply chain personnel, and most importantly, supply them with good data/reports which is the evidence of purchased services. The time is now to save big!