Four simple steps for reducing third-party service costs

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In the age of near-constant mergers and acquisitions, health systems are taking on tremendous costs in the form of third-party — or purchased — services.

When a hospital or health system acquires a private practice, it inherits all of that practice’s contracted purchased services, including IT and telecom, clinical services, security, maintenance and more.

When hospitals, and especially health systems merge, the purchased services problem gets compounded as the newly merged system takes on all existing service contracts from all practices affiliated with the previous organizations.

Third-party services can represent as much as 20% of your organization’s annual spend.

While purchased services are crucial to operations, they’re not always top-of-mind when evaluating costs and budgets. After all, if a system is working well, it’s typically overlooked. But when you consider that third-party services can represent between 15-20% of an organization’s annual spend, it becomes obvious that these are opportunities in disguise.

Purchased services are often an untapped source of savings across the supply chain, and they present unparalleled opportunities for standardization of processes and technology.

Here’s a simple four-step process to successfully lower your organization’s purchased services costs while improving care delivery.

Gather the data

For many healthcare organizations, simply gaining visibility on third-party contracts and costs can be challenging. More often than not, these contracts are managed by various people throughout the organization.

Start gathering the data by making a list of all third-party vendors used throughout your organization and their associated stakeholders. It’s important to speak with every stakeholder on your list and review each vendor’s contract.

There are a few key things to look for in your service contracts:

  • What’s my rate?
  • What are the scaling terms?
  • Is there an auto-renewal in place? If so, when?
  • What are the termination clauses?

The next hurdle is collecting all financial data for your vendors. Check with your accounts payable department and take a look at your purchased orders. But unfortunately, purchased orders won’t tell the whole story. Many third-party vendors have variable costs that make it difficult to get an accurate account for how much they’re really costing you. Your general ledger will help you uncover variable costs.

Use your general ledger to help you uncover your vendors’ variable costs.

You may find that the individual cost of many of your third-party vendors is relatively small, but when you aggregate your spend, the numbers start telling a larger story. Place vendors into categories to get a more accurate picture of how much your organization is truly spending.

Gain executive buy-in

Armed with your data, it’s time to earn your executives’ buy-in.

Engaging them early in the conversation is a great way to build the case for moving forward with this project and understanding the shifts in your organization’s culture that might result from a new strategy.

Speaking with your executives can help you understand the “sacred cows” in your organization, those vendors that are above reproach for some members of the health system.

With this in mind, you can navigate the surmountable road blocks and build the business case to make changes.

Analyze performance

Analyzing the performance of your organization’s purchased services has three main parts:

  • Comparing spend
  • Assessing utilization
  • Evaluating the quality and efficacy

Some vendors charge hidden or variable fees, so looking at one month’s service charges could be misleading. Look at each vendor’s historical spend, trends and variability. Then, consider your regional benchmarks: What prices are other vendors in your area offering for a similar service?

Another important aspect to consider is utilization. Here are some basic questions that can help you begin to assess your organization’s utilization:

  • Who is actually using each vendor?
  • How are they using it?
  • Could the service be used more efficiently?

Finally, do some digging to find out your staff’s level of satisfaction with your third-party vendors.

  • What kinds of outcomes are you paying for?
  • Are stakeholders happy with the performance?
  • What kinds of performance metrics can the vendor provide?
  • Does the vendor make your staff’s job easier?

Evaluate standardization options

Completing the first three steps will give you a firm grasp of what types of services you’re paying for, how they’re being used throughout your organization and your staff’s openness to try new solutions.

When considering replacing a multitude of similar vendors with a single standardized solution, make sure that your new vendor does the following:

  • Addresses all stakeholder needs and goals
  • Has a positive impact on your organization’s overall spend
  • Plays a role in your organization’s strategic objectives

At the end of your evaluation, you should be prepared to make specific vendor recommendations based on your analysis and your organization’s strategic imperatives.

Third-party vendors are essential to hospital or health system operations and shouldn’t be overlooked when evaluating spend. When your organization undergoes a merger or acquisition, it’s even more important to gain the visibility you need to help the new organization operate more efficiently.

Learn about how Piedmont standardized its after hours answering service across more than 170 physician practices, reducing its costs by 21%.

Mark Ferraro is Consulting Director of Purchased Services at Vizient, Inc. Mark brings more than 14 years of experience in the healthcare industry. Prior to joining Vizient, Mark was the Executive Vice President for a national Hospital Physical Inventory company. He has also held positions as a Senior Consultant in Purchased Services for MedAssets and a Purchased Services Consultant for Owens and Minor. Mark received his bachelor’s degree in History and Political Science from Longwood University in Farmville, Virginia and his Master of Science degree in Business Administration from Strayer University in Richmond, Virginia. Mark is also a member of The Association for Healthcare Resource & Materials Management (AHRMM), Virginia Association for Healthcare Resource & Materials Management (VAHRMM) and The Healthcare Financial Management Association (HFMA.)

Vizient, Inc., the largest member-driven health care performance improvement company in the nation, provides innovative data-driven solutions, expertise and collaborative opportunities that lead to improved patient outcomes and lower costs. Vizient’s diverse membership base includes academic medical centers, pediatric facilities, community hospitals, integrated health delivery networks and non-acute health care providers and represents approximately $100 billion in annual purchasing volume.

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