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TAKING CONTROL
OF YOUR
PURCHASED
SERVICES
Western States Healthcare Materials
Management Association
2014
Agenda
• What is a Purchased Service?
• Purchased Services Challenges
• Purchased Services Opportunities
• Factors Causing Growth in Purchased Services
• The Future of Purchased Services
• The Value Analysis Approach
• Case Studies
What is a Purchased Service?
Procedure
Task
Function
Job
Operation
Purchased Services Challenges
lack of infrastructure
to control and manage
contracts
decentralized decision
making and purchasing
no benchmarking data
available
increase
in spend services
lack of broad
category expertise
lack of visibility &
executive sponsorship
regional variations
Poll Question
What is your biggest challenge?
– Contracts and departments are disconnected
– No central reporting, process or transparency
– Lack of benchmarks and/or expertise in many areas
– Processes vary by service, department, etc.
Purchased Service Opportunities
4%
7%
Operating Margin
20%
76%
BEFORE
17%
76%
AFTER
•
Best practice organizations spend
8% to 25% less on purchased
services than average performers.
•
The average hospital can quickly
realize 3% or more sustainable
improvements in their operating
margin by applying best practices.
Savings drop immediately to the
bottom line.
•
Organizations spending $30 to $40
million on purchased services
could see cost reductions of $4.5
to $6 million.
Purchased Services
Labor, Supplies and
Other Non-purchased
Services Operating
Expenses
Poll Question
How much do you spend on purchased services each year?
– Less than $1 million
– $1 million to $10 million
– $10 million to $25 million
– $25 million to $50 million
– More than $50 million
Factors Causing Growth in
Purchased Services
Specialization
Innovation
Critical services, such as Virtual
ICU, offer immediate access to
highly skilled experts at a time
where there is a national shortage
of intensivists and skilled critical
care nurses.
Core Competency
New services like Image Guided
Neurosurgery are offering the
provider access to cutting edge
technology without requiring an
up-front capital investment.
Patient Satisfaction
Improving patient satisfaction is
often a motivator for outsourcing
services, such as translation,
because communication is
improved and streamlined
between patients, staff and
physicians.
Outsourcing a clinical service, such
as cataract, to a third party gives
hospitals the opportunity to focus
on achieving their strategic
initiatives like cancer care,
surgical towers, a bariatric center
or ambulatory surgery center.
Reduced Costs
Infrastructure costs, such as IT, can
be time consuming and costly
which makes outsourcing an
attractive choice. Lower labor
costs, call and overtime reduction.
The Future of Purchased Services
• It’s easier to get the wins here than in supplies
• It’s billed monthly, so the savings are immediate
• The scope is always changing for the services
• Control what you can control: your costs, not your reimbursements
The Value Analysis Approach
ASSESS
REVIEW
FINALIZE
MEASURE
ENLIST AN EXECUTIVE CHAMPION
• This can be anyone from the VP-level in Supply Chain to the CFO or CEO directly.
• Enlist a task force and key stakeholders around purchased services.
• Prioritize, categorize and create a single point of focus for purchased services contracting
and sourcing.
ARM YOURSELF WITH DATA
• Learn market highlights, industry best practices by category, pricing metrics, competitive
vendor directory and key performance indicators.
• Create a knowledge library to include RFPs, SOWs, SLAs, sample contracts, price
benchmarks and more.
FOLLOW THE PLAN
• Continue to monitor both the performance and billing of the service under the terms of the
contracts against your expectations and utilization.
Case Study: Transcription
MULTI-FACILITY
SYSTEM IN THE
MIDWEST
• $200 million annual
purchased services spend
• Centralizing purchased
services is a key strategic
priority
• Historically relied on a
contingency consulting firm
to support their efforts
SCENARIO
• Vendor was the incumbent and integrated into system EMR platform.
• Corporate offices wanted to add new modules and centralize facility-level
contracts.
• A consulting firm reviewed the new proposal and corrected only
grammatical errors, which offered no additional insight.
• Vendor later offered a price reduction.
CONTRACT REVIEW INSIGHT
• TAT & Error Rates: There were no penalties defined for errors or failure to
meet TAT guidelines.
• Price benchmarking: Rates offered by the vendor were not competitive.
• Transcription volume: Increases in volume were not reflected in price. In
most cases when a volume increases, you should see a unit price reduction.
• Contract length: We recommend contracts no longer than three years with
annual reviews and opportunities for adjustments.
• Special concession: It is important to look for small concessions that are
unique to your situation and can allow you to make price reductions.
Case Study: Transcription
MULTI-FACILITY
SYSTEM IN THE
MIDWEST
• $200 million annual
purchased services spend
• Centralizing purchased
services is a key strategic
priority
• Historically relied on a
contingency consulting firm
to support their efforts
$667,892
cost reduction over
the committed
three-year period
CONTRACT REVIEW RESULTS
• Achieved 28% cost reduction based on current annual transcription
services spend of $2.5 million.
• Domestic vs. global transcription: Offshore transcription was dropped for
domestic transcription.
• Price benchmarking: Vendor rates for transcription services were above
industry accepted rates.
• Transcription volume: Pricing was adjusted to account for an increase in
volume.
• Contract length: Contract length reduced from a seven-year agreement to a
three-year with annual reviews.
• Contract language: Penalties for error rates were inserted into the
agreement along with defined dispute resolution (extremely important for
offshore transcription services). A 98% accuracy guarantee along with
penalties when SLA not met was also added.
Price Benchmarking
Type of Service
Vendor Rate
Target Rate
Domestic Transcription Services
0.00256
0.00253
Domestic Transcription Services with Speech Recognition
0.00227
0.00221
Global Transcription Services with ASR
0.00206
0.00190
Case Study: Elevators
MULTI-FACILITY
SYSTEM IN THE
NORTHWEST
• Renewal of elevator contract
• Service support declining
over time
SCENARIO
• Corporate offices wanted to vet pricing and contract terms.
• Vendor submitted contract renewal. The hospital had no way to compare
proposal to the vendor’s other contracts.
• Sister facility’s elevator proposal offered more coverage for lower pricing
with competitive vendor.
• Historically relied on staff to
negotiate purchase services
CONTRACT REVIEW INSIGHT
• Contract language: The contract had no penalty for downtime, lacked a
termination clause and renewal language was not defined in the agreement.
• Quality benchmarking: Lacked a checklist to determine the quality of
service being provided and measure it against other vendors.
• Price benchmarking: Unclear if pricing was competitive for other contracts
of similar coverage, type and quantity.
Case Study: Elevators
MULTI-FACILITY
SYSTEM IN THE
NORTHWEST
• Renewal of elevator contract
• Service support declining
over time
• Historically relied on staff to
negotiate purchase services
$160,000
cost reduction over
the committed
three-year period
CONTRACT REVIEW RESULTS
• Achieved 45% reduction cost.
• Contract language: Termination and annual industry standard cap
language was able to be added to the contract along with a vendor
responsiveness clause.
• Quality benchmarking: Provided benchmarks to help the hospital better
measure their quality of service.
• Number of call-backs or unscheduled service outages
• Response time
• Guaranteed up-time
• Hours of service
• Cost of afterhours repair
• Parts availability and costs, etc.
• Price benchmarking: Monthly payment was negotiated from the original
contract price of $3,990 per month to $1,936 per month for the same level of
coverage.