Make or Buy

IDNs focus on healthcare and leave other services to the experts.

“Outsourcing services is not a luxury for IDNs,” says Tom Strudl, director of resource control, Nebraska Medical Center (Omaha, Neb.). It’s a smart business move. “Anyone can make anything [he] wants.” The primary reason to outsource services, such as food service, biomedical, dietary and environmental, is to free up a hospital to focus its capital resources on patient care, he adds.

“We can take freed up [funds] and invest them in CTs, MRIs and other new technology that can impact patient care,” Strudl continues. “We don’t necessarily have to own [outsourced] processes. There are others with core competencies, who can manage them better.” Nebraska Medical Center began outsourcing environmental and food services more than 20 years ago. Soon afterwards, the IDN outsourced biomedical repair and supply distribution, and it recently added linen services.

“For the most part, we use different vendors for each of these areas,” says Strudl, who is involved in contracting for outsourced services, as well as monitoring vendors’ ongoing performance. “We’re careful about who we work with, and we [consider] the relationship we put our employees in,” he adds. “Usually, the [company whose services we engage] takes on the hospital employees. Often, the employees are better off with the expert vendor.”

Practical approach
Historically, IDNs have felt a responsibility or obligation to be self-sufficient, notes Dan McDow, COO, Iowa Health System Contracting Services, LLC (Des Moines, Iowa). “[Hospitals] have been community-driven, with the mindset that they must do everything themselves,” he says. But, this perspective has given way to a much more practical approach.

When McDow joined Iowa Health System in 2000, he worked exclusively in contracting, helping the IDN reduce supply costs across its 17 hospitals. Today, he works with Owens & Minor to manage Iowa Health System’s dedicated distribution center; he works with ARAMARK Corp. to manage the health system’s laundry plant; and with Xerox Printshop to provide guidance on overall management strategy of document services.

In addition, McDow is helping launch a fleet management program, in which a service provider will assume responsibility for purchasing, titling and maintaining the health system’s vehicles. And, he is helping the IDN evaluate whether it makes sense to outsource clinical services down the road. His philosophy is simple: There are good companies out there that provide services and do it well. Iowa Health System contracts with them, and in the process, manages its assets and fixed costs.

“I think [hospital executives] are getting wiser,” says Michael Caruso, director of supply chain management, University of Texas Health Center at Tyler (Tyler, Texas), one of six hospitals in the UTHC health system. “They are asking, ‘What are our goals?’ and then determining the cost-effectiveness of [outsourcing services].”

Caruso oversees negotiations at UTHC-Tyler for four service areas: housekeeping, biomedical engineering, physical plant maintenance and food service. When he joined the IDN in 1997, he brought with him a background in implementing housekeeping programs in hospitals. “Having [an understanding of] the vendor’s perspective has given us direction in negotiating and managing our contracts,” he says.

The expert negotiator
As supply chain management directors become increasingly experienced at contracting for outsourced services, they also grow savvier at leveraging these contracts and monitoring services for the greatest return on investment. For instance, at one time, each of the 17 hospitals in Iowa Health System purchased services from different vendors. Today, all of the hospitals use the same contract with ARAMARK, enabling the IDN to leverage the cost of laundry services, explains McDow. Similarly, University of Texas Health Center has begun using one company’s services for biomedical engineering, housekeeping, food service and physical plant maintenance. “Bundling services helps us get a volume price break,” says Caruso.

As with the medical equipment and supplies for which they contract, supply chain executives don’t need to be experts in order to arrive at the best deal. “You don’t have to be an expert [in each of these areas],” says Caruso. “It’s more important to surround yourself with good people who have an understanding of the different processes. This helps you become sharper at handling different types of contracts.”

Caruso relies on his colleagues at University of Texas Health Center to “do their research” and reach out to one another when necessary, he explains. In addition, the health system has a purchasing council, which meets monthly to discuss issues or concerns. “All six of our hospitals work independently, but we still meet to discuss purchasing,” he says.

At Iowa Health System, McDow draws on his “core negotiation skills” to manage contracts for outsourced services. “It is similar to negotiating for, say, drug-eluting stents,” he explains. “I can’t put a stent in a patient, but I can contract for them.” And, it helps to have a legal department, he adds. “We are contracting with World Energy for natural gas and to [manage] a reverse auction for us.” When it comes to the ins and outs of the North American Energy Standards Board, McDow is grateful to follow his legal department’s lead.

Measuring performance
Supply chain experts agree that when the health system is clear on its service expectations up front, the vendor is more likely to meet those expectations. But, it remains the responsibility of supply chain management to monitor contracts and measure performance levels. At Nebraska Medical Center, Strudl evaluates a number of criteria to determine if the outsourced vendor is delivering the service he expects:

  • Availability of products at point-of-use
  • Compliance with hospital technology
  • Price changes (Is the health system paying what it thinks it should?)
  • Expenses (Are they going up or down?)
  • Compliance with bed turnaround.

The return on investment from outsourced services, such as supply distribution, has been clear to Strudl: “Our organization operated below its flex budget in each of the last three years,” he says. “We freed up $5.2 million in inventory. And, our charge capture improved, reflecting $500,000 to our bottom line due to automation.”

“Now, all of our supply chain is automated,” he adds. “Supplies are not touched by human hands until the order is ready for pickup at the warehouse. There is no counting by hand anymore.”

Strudl says outsourcing has also helped his IDN improve its compliance with GPO contracts. “We have increased the number of contracts we access by 19 percent,” he points out.

At University of Texas Health Center, Caruso monitors monthly expenses vs. budgets. If the health system and the outsourced company agree that a program (e.g., biomedical engineering) can be run for less money, Caruso monitors whether the goal is met. “We also [pay attention to] inventory, comparing the cost of our inventory today vs. last year,” he continues.

In addition to monitoring how well outsourced companies have helped the IDN standardize, or how thoroughly they are training hospital staff, Caruso pays close attention to the particulars of each contract for outsourced services. For instance, if the food service provider purchases larger quantities of chicken from a national vendor, can it get a bigger price break?

Caruso considers his GPO to be a provider of outsourced services as well. “We definitely use GPO outsourcing,” he points out. “By looking at our GPO’s contracts, I can free up my staff, [because] the price is already established.”

McDow relies on such tools as employee/customer surveys to gauge the success of programs, such as food service, and ties fees to results. “With the Owens & Minor [outsourced distribution center], we tie increases to timely delivery dates and service — really anything we can quantify,” he says.

“Our board of directors expects us to produce a business plan showing the return on investment [for outsourced services],” he continues. So, when Iowa Health System believed it could save money by building its gas sterilization kits on site at its distribution center, the IDN did its homework, then outsourced the expertise needed. McDow estimates a savings of $2.8 million over a five-year period.

Experts tend to agree that outsourcing facilitates hospitals’ efforts to standardize. “Outsourcing is a catalyst for standardization,” says McDow. “Our relationship with ARAMARK is a prime example,” he adds, referring to his IDN’s opportunity to standardize on linens.

“You can pretty much [negotiate into the contract] what you want,” adds Caruso, who believes outsourcing makes it much easier to standardize. “If you want more standardization, you can get it.” But, it requires a lot of communication from the start to negotiate a contract that works for both parties, he points out. “It takes open communication, and both parties need to be flexible and understand that [no contract] is perfect,” he says.

“Outsourcing is only as good as the people who manage the process,” he continues. “If the hospital doesn’t spell out what it is looking for, the [outsourced] company will fail miserably. And when that happens, the hospital can’t point fingers.” Rather, both parties must share the responsibility, he notes. Perhaps the IDN didn’t make something clear. If so, it is up to the IDN to steer the vendor back on track.

“It must be a two-way street [in order to] see the fruits of our labor,” he adds.

About the Author

Laura Thill

Laura Thill is a contributing editor for The Journal of Healthcare Contracting.