Common Contracting Dilemmas in Purchased Services

In the past few years, significant attention has been directed at this area of spend labeled “Purchased Services”.  Although Purchased Services represents an area for significant potential savings, there are many predicaments that can be encountered. This blog series will outline the common Purchased Services contracting dilemmas and then we will cover the best ways they can be resolved.

For the most part, Med/Surg and commodity categories have been well managed by nearly all hospitals or they simply aren’t in business anymore.  As Medicare, Medicaid and third party insurers reimbursements continue to shrink, we have had to look at alternate areas of spend to drive cost reductions in order to maintain the small profit margins that exist in the healthcare provider world.  Purchased Services makes up a large chunk of a systems spend.  If a health system spends $200 million for medical supplies, they likely spend about $160 million on purchased services and for most health systems, it’s a fairly untapped area for cost savings initiatives.

While Medpricer’s average savings is 24%, if you apply a conservative average savings of 20% in the sample above, that would reduce costs by $42 million dollars a year.  Those health systems that figure out how to tackle this bucket of spend will reduce costs by a staggering amount and every dollar a health system saves is equal to 10 dollars in patient revenue.

Now that we understand why there is a focus on this mysterious area of spend, let’s first understand exactly what a purchased services category is.  There are a few synonyms for purchased services like support services or outsourced services.  Some can be clinical in nature and others can be more environmental, IT or even administrative.  Here’s are a few samples:

  • Answering/Call Center ServicesThinkstockPhotos-493633245_Janitorial.jpg
  • Dialysis Services
  • Elevator Maintenance
  • Endoscope Repair
  • Freight Management
  • Janitorial Services
  • Landscaping
  • Linen and Laundry
  • Managed Print Services
  • Parking/Shuttle/Valet Services
  • Pest Control
  • Reference Lab Testing
  • Snow Removal
  • Surgical Instrument Repair
  • Temporary Staffing
  • Transcription Services
  • Translation Services
  • Waste Management

You will certainly encounter challenges while trying to negotiate a Purchased Services category. Those of us who have attempted negotiating one of these contracts before, have probably come to realize just how different that process is compared to med/surg, physician preference items, capital and non-clinical commodities.  None of them are easy by any means, but there are some unique challenges that you will have to navigate.   Let’s take a look at what they are:

  1. DATA

In most cases spend data, as it relates to purchased services, is hard to get your hands on unless you request a report from your supplier.  Other things a health system buys are products or an item.  Those things are easily tracked in your MMIS systems because they have a part # or item code but services typically don’t live in a line item world.  You could, in theory, try to compare your contract statement of work with invoices but that will be a painstakingly long process and depending on the category, may not result in getting you all of the information you need to evaluate the current state.   Without good data, it will be difficult to understand where the spend is going and exactly what you are getting for that cost.

  1. DECENTRALIZATION

If you work in supply chain, you probably know what the term decentralization means as it relates to contracting.  If you don’t, it simply means that each department or individual hospital manages their own contracts and suppliers independently from the rest of the owned facilities.  Most health systems with multiple acute care sites have considered or already transitioned to centralized contracting efforts.  While this strategy is sound in aggregating volume when negotiating a contract and managing 1000’s of suppliers, it also presents challenges such the centralized organization may not fully understand the needs of the stakeholders and consolidation of all these needs for more efficient contracting can be difficult.

  1. STAKEHOLDERS & END USERS

Understandably, the individuals who have to interact with these service providers on a daily basis are very protective and can become nervous when contracting personnel start to look at a category that the end user works so closely with.  There is always a fear that the contracting team is going to do an RFP and simply award a new contract to the lowest bidder, resulting in poor services going forward.  Very few contracting teams I interact with have this mindset, but there is a perception that they do.  This is where most health systems stub their toes.

If you are working in a centralized environment, it is imperative that you build trust and a relationship with the end users of the services.  Ideally it is a coordinated effort to do so and one important aspect is communication from the c-suite to the department managers that these initiatives will be taking place and their cooperation is needed.  That alone won’t fix the perception that the contracting team is coming to take the stakeholders beloved supplier away and give the business to a low cost solution.  This needs to come from the contracting individuals directly and assuring the stakeholders that while saving money is a goal, it will not supersede their needs of a quality service provider.

  1. SUPPLIER PROBLEMS

The purchased services supplier pool is not peppered with fortune 500 companies.  The lack of national suppliers and suppliers that can cover large geographies, creates a void in Group Purchasing Organizations (GPO’s) contract portfolios leaving the health systems to fend for themselves when it comes to contracting for these categories. As a point of reference, an average GPO’s purchased services coverage will be about 50 categories or so.  Medpricer has uncovered 600+ categories in our analytics platform.

Politics will also come into play when looking at these purchased services suppliers.  Since most of the suppliers will be local or regionally owned and operated, it may be hard to move away from a supplier even if the costs suggest you do so.  Relationships will likely be a part of any initiative that you encounter and many health systems have wonderful programs to support MBE/MWBE (minority & women owned businesses) but you may find that those contracts are challenging to move away from should you find they are not as competitive as you would like.

Another way these suppliers can throw you curve balls is some may lack the sophistication that contracting professionals have grown accustomed to.  As an example, recently we were working on a window washing initiative and the owner of a company invited to bid didn’t even have an email address.  We take for granted how easy communication is via email, until it isn’t there.  So we had to help him set up a free email account just so he could get the required documents and communications throughout the RFP process.

In our last blog post, Common Dilemmas in Purchased Services, I shared the first four problems associated with negotiating Purchased Services spend. But, you guessed it, there are more! This post will share the next four. Purchases Services is an area that can potentially be an untapped source of savings in an organization, for good reason: There are many predicaments that are encountered that can prohibit progress. The good news is that there are ways these difficulties can be conquered. But first, before you can solve your problems, you have to know what they are. Read on to see if you identify with any or all of these issues.

5. How much should this service cost?

How do you know if the contracted price and service levels you currently have in place are competitive for your market? You don’t unless you have access to good benchmarking information. Benchmarking costs for a service that is affected by services levels, frequency, regional wages, size of the facility or environmental conditions is a very difficult thing to do.  There are some benchmarking solutions available for purchased services but if you look at the methodology used, you will see most of them are high level guestimates and therefore not able to address the unique factors that must be considered when benchmarking Purchased Services. In addition, these benchmarking solutions don’t have enough current transaction data to provide accurate comparisons and if used will not provide you with the information you need to get realistic savings opportunities.

6. Building the RFP and Sole- Sourcing

Building the RFP will provide a challenge in a lot of Purchased Services categories, especially if you don’t know the category well.  Part of the issue is that each facility may require a different type or level of services.  You can, in theory, try to standardize these services across your system but if you recall from the section earlier about the end users, you can imagine some wouldn’t be too happy if you were to alter their service levels to make your contracting efforts easier.  To further complicate this, it’s likely that you will have multiple incumbent suppliers which means multiple relationships at stake.  In other instances, you may have one sole provider for a service and if you are in a small market, you may need to search for others.  An RFI round will likely help you understand service capabilities and coverage prior to selecting your supplier pool for a full blown RFP.  Ideally you would want a sole sourcing opportunity, since they are typically sought after because aggregation of spend equals greater cost reductions while getting the added bonus of reducing the number of suppliers to manage overall. Making all of this happen is difficult if you don’t have a good handle on what you are spending, where and with whom and if you don’t have a streamlined negotiation process in place.

7. New Supplier Implementation

Getting through the RFP process can certainly take some time and if you stay with your incumbent supplier(s) at the end of the process, you will see light at the end of the tunnel.  However, if your RFP yields a supplier change, implementation of new services will most likely be challenging and time consuming.  The difficulty meter will be a factor applied if you have more than 1 or 2 hospitals that require the new implementation.  For systems that have more than 10 hospitals, implementation of a new supplier’s services can be extremely time consuming and for those cases you may want to consider adding a 3%-5% cost of change factor to proposals submitted by the non-incumbent participants, just to level set the final costs.

8. Did we actually get our savings?

Monitoring the contracts performance against what was expected is an area that even the most sophisticated health systems around the country miss.  Most health systems barely have enough resources to run a successful event beginning to end let alone track all of the ones that they put all of this effort into.  Let’s say a sourcing event has concluded, the supply chain department reports 27% savings up to the finance team.  The end of a successful event right?  Not always.  As mentioned earlier, this spend is really hard to track.  If the annual spend is large enough, you are probably doing quarterly business reviews with the awarded supplier(s) but that isn’t feasible for every category you are responsible for.  Often times when we look back at spend files a year or two after a sourcing event has concluded ,  savings realized are less than what was expected.  Many factors can cause this.  Finding this out three years later when the contract expires and you pull data to run this initiative again does you no good.  You can’t fix it then.  You needed real time visibility at your fingertips to spot check these things.