The key to successful purchased services contracting can be summed up in two simple words: Think. Strategically.
“I talk with healthcare executives all across the country every day, and almost all of them say that they don’t have the resources to focus on purchased services,” says Chris Heckler, president and CEO of Valify, a purchased services analytics firm. “When you ask these executives how they identify what categories to work on, they typically use a reactive work plan, where they conduct an RFP whenever a contract is going to expire. That is not strategically managing your business.
“They need to use a proactive approach where they use data to identify the largest spend categories and then extend all of the vendor agreements in that category to be coterminous. Once that’s completed, then they can go out to the market and get the best savings opportunity available because they are bringing more volume and compliance to the vendors.”
The opportunity
About 35 percent of a hospital’s non-labor spend falls under purchased services, says Heckler. “Some might think this is high, but when you include insurance and financing fees, the number can actually greatly exceed this. Since purchased services touches every department in a hospital, the decentralized nature makes the savings opportunity huge.”
Yet many providers may not see the forest for the trees. That is to say, they lack visibility and understanding of the size of the opportunity, says Heckler.
“If they understood the savings opportunities that they are missing, they would dedicate more resources to this area. When we provide a CFO the visibility into all of the vendors they’re using in a category across all of their facilities, their total spend for a category, and how they compare to their peers across the industry, they can quickly see the savings opportunities and execute accordingly.”
The lack of industry benchmarks is another impediment to strategically managing purchased services, he says. “Hospitals have historically had to hire expensive consultants to complete a purchased services assessment in order to find savings opportunities. This took months to complete, it disrupted the workforce with onsite interviews, and they would end up with a hard copy document that may or may not be executed on.”
Attacking the problem
Purchased services typically touch multiple departments in the hospital, so the provider can work on several categories simultaneously, says Heckler. Three promising areas of opportunity are IT hardware and related service contracts, temporary staffing, and advertising.
“These three always have big savings opportunities, because they don’t typically go through supply chain’s structured procurement process. The decision-makers in these areas are also primarily concerned about the quality and urgency of their need. It’s hard to make strategic decisions in a short amount of time.”
Best-in-class hospitals use a value analysis approach – with someone from the department sitting on the value analysis committee – to purchased-services decision-making, says Heckler. “It is a great way to keep the departments happy and increase their commitment, because they get to have a say in the entire process. This is their world, and they won’t like part of it being taken away. So being able to explain that they are going to be involved in the process will help eliminate any pushback.”
The supply chain executive may not be an expert on the service in question, but his or her team should play a key role in the process. Supply chain “simply gathers the relevant information for that category (such as specs, quality, service levels, etc.) from their expert and then uses their standardized contracting process to check the market, conduct the RFP and negotiate the contract,” says Heckler. “In this way, he or she makes sure that any compliance or contract language updates are being used on all agreements, which, of course, lowers their liability exposure.”
Drawing up the contract
Because purchased services categories are so diverse and touch every department in a hospital, there is no way a single key performance indicator, or KPI, makes sense for all categories, says Heckler. Valify provides clients with an automated source for benchmarking the performance of a purchased services category. “We do not give [clients] the price they should pay for the service,” he says. “We compare their performance across six key performance indicators, which are used by experts across the healthcare industry.
“This is very powerful information to have at your fingertips in order to quickly find massive performance disparities across each location within an IDN or across all of our clients. For example, you could compare the price per square foot you are paying to heat and cool one of your facilities in Florida against all of your hospitals in that state. This is a relevant metric to quickly identify if the hospital should look into renegotiating its contracts or bring in a utility monitoring vendor to help.”
In their contracts, IDNs should always include a “termination with convenience” clause, says Heckler. Such clauses allow the hospital to terminate for any reason, as long as the vendor receives an agreed-upon notice. It usually also includes a reasonable payout to the vendor for work performed in good faith as of the date of the termination.
Performance guarantees
Another “must” in any purchased services agreement is the performance guarantee. “If you are outsourcing a service, you made that decision for a reason,” says Heckler. “Typically, it was a financial decision, but it can be a quality decision, too. You need to put guarantees in the agreement that your costs won’t go over X amount per month, or your HCAHPS [patient satisfaction] scores won’t go below a certain number, or must reach a certain number. Things that are vital to the relationship need to be in the contract, and the vendor gets penalized for under-performance.”
And the penalties must be formidable.
“The threat of losing the contract is no longer a good enough stick, because the vendors know that it takes a lot of time to unwind an outsource agreement, and that they can typically apologize and do something to make the provider happy and forget about the problem.” But the threat of a big penalty “will force the vendor to proactively monitor the conditions of the relationship and mitigate issues before they happen.”
Monitoring the vendor’s performance after the contract has been signed is essential, says Heckler.
“Everyone is so busy, that they typically move on to the next fire they have to put out, and they might not look back at this category for six months or longer,” he says. “If something is out of whack or a facility never implemented the new agreement, your expected savings will be completely off. This can ruin budgets and goals.” Valify offers an automated performance tracking tool, which generates monthly alerts if the vendors are not performing as expected. “This eliminates the surprises that often happen after completing a big project.”
Supply chain executives should be alert to “internal roadblocks” that can delay implementation of a new contract, particularly one with a new service vendor, says Heckler.
“Changing purchased services vendors can be an emotional process, depending on the category because [hospital department heads] have worked with their vendor for years and know their contact well. So, in a large IDN, it is very easy for a department head at one facility to avoid converting to the new vendor by any means necessary. They might not return phone calls, emails, etc. It might take months for the newly signed vendor to get hold of them. The longer they can delay the conversion, the more money their friend makes and less disruption their department has to go through.
“But they are just delaying the inevitable, and it doesn’t look good to management.”
AmSurg Corp., Ambulatory Services Division
Nashville, Tenn.
Todd Hamilton, vice president supply chain
Purchased service: Medical waste removal
The situation: Approximately two and a half years ago, AmSurg – which today is a majority owner of more than 250 ambulatory surgery centers – recognized an opportunity to improve the terms and conditions, and lower the costs, associated with medical waste removal. Because the company grows by acquisition, it had inherited many disparate medical-waste contracts, each with its own set of terms and conditions, as well as price. For years, these contracts self-renewed at higher rates.
The approach: Working with Parallon, Hamilton and his team examined the terms and conditions of each contract, worked to standardize them, and made all contracts coterminous with each other, so that all expired on the same date. The approach gave AmSurg leverage to negotiate a systemwide contract with more favorable terms and pricing.
The outcome: Between 15 and 30 percent savings in the medical waste category.
Keys to success: When multiple facilities are involved, make all medical waste contracts coterminous, so they expire at the same time. Even if the initial cost savings aren’t huge, doing so gives the provider more control over cost increases and renewal terms
Sisters of Charity Health System
Cleveland, Ohio
Andy Motz, chief procurement officer
Purchased service: Transcription services
The situation: The health system’s chief procurement officer has procurement oversight of four hospitals – two in Ohio, two in Columbia, S.C. Two different vendors were providing transcription services for three of the hospitals; the fourth hospital had an in-house transcription operation.
The approach: After having changed GPOs in October 2013, Motz asked HealthTrust’s ServiceTrust team to help assess several purchased services, including transcription, blood utilization, elevator services and clinical engineering. In December 2013, Motz’s team issued an RFP for transcription services to five vendors (including both incumbents at the three hospitals outsourcing the service.)
The outcome: Contract with vendor was signed spring 2014, with annual savings close to 20 percent. Service levels (e.g., turnaround time) have improved as well.
Keys to success:
- Profile potential vendors carefully prior to issuing the RFP. In this case, Motz and his team made sure that each vendor was capable of servicing all of the health system’s facilities, which are separated by 800 miles.
- Present potential vendors with meaningful, accurate information (in this case, annual utilization of transcription services).
Lesson learned: Collaboration among all stakeholders, including IT, is key from the start, in order to ensure a swift and effective conversion.
Midtown Medical Center
Columbus Regional Health
Columbus, Ga.
Doug Colburn, vice president of operations
Purchased service: Linen services
The situation: Approximately a year and a half ago, Columbus Regional began tackling approximately 25 purchased services categories with the assistance of ServiceTrust, the purchased services sourcing arm of HealthTrust. The one that represented the greatest opportunity for savings was linen services. Columbus Regional had operated its own linen service prior to outsourcing it in 2010. That contract stood in place for five years when Colburn issued an RFP to the incumbent vendor and four others.
The approach: An RFP was issued to the incumbent vendor and four others
The outcome: A new contract was signed May 2015, with an annual savings of 30 percent.
Keys to success:
- Conduct site visits to all vendors participating in the RFP. (In Columbus Regional’s case, the supply chain team was accompanied by directors of environmental services and linen services, and linen manager.)
- Get help when/where you need it. Columbus Regional had analytics and contracting assistance from ServiceTrust’s linen-services specialists.
- Ask and you may receive. Issue RFPs for purchased services every three to five years, regardless of how fair a price or how good a service you think you’re getting. You might be surprised at the amount of money you can save simply by testing the waters.