Inflation and Purchased Services

Why inflationary challenges have been particularly challenging in purchased services categories.

October 2022 – The Journal of Healthcare Contracting

Stronger consumer demand coupled with global supply chain and workforce challenges are driving inflation across every sector of the U.S. economy, including healthcare, said Mickey Meehan, chief operating officer, Conductiv® and Chaun Powell, group vice president, Remitra. And while the U.S. has been seeing and living with higher costs from the gas pump to the grocery store, there has been less discussion about inflation in the services sector.

Part of the reason for that may be due to the complexities and variabilities of purchased services and the invoicing of those services. For example, at one large IDN, the chief supply chain officer shared with Meehan and Powell that departments and hospitals nationally lack the sophistication to accurately predict the expense of a service based on complexities of the contracts, which can be 70 pages long and filled with holiday, weekend and surge pricing models. “Add to that inflationary up-charging, and it becomes increasingly apparent that technology-based solutions are more critical today than ever before,” they said.

This time last year, services inflation sat at 3%. This year in the U.S., services inflation has increased – albeit slightly – from 6.22% in June to 6.25% in July, and its share of overall inflation also increased, Meehan and Powell noted.

Today, hospital expenses continue to climb while margins shrink – the median change in margin declined 49.3% from June 2021. “This makes inflation particularly challenging to tackle in healthcare,” they said. “Broader economy-wide inflation has serious implications for providers that must absorb added costs out of existing budgets, which are already strained as a result of lost elective procedure revenue, and record-high outlays to attract and retain labor.”

What’s more, as expenses are rising, hospital payments aren’t keeping pace. CMS has adjusted the IPPS payment rate upward 4.3%, but the truth remains the update falls woefully short of reflecting the rising labor costs that hospitals have experienced since the onset of the pandemic, Meehan and Powell said. “This inadequate payment bump will only exacerbate the intense financial pressures on hospitals.” 

The following are more insights on which services sectors have been hardest hit, and some possible solutions for supply chain teams to implement.

Categories that have seen the largest cost increase

When comparing third-party services to products, the total cost of the service is heavily influenced by the cost of labor, Meehan and Powell said. “In the current environment of competition for all labor types, organizations are factoring in higher wages to help attract and retain talent on top of higher prices for their business, such
as fuel costs.”

Based on these factors, some services categories in healthcare experiencing cost increases include:

  • Staffing
  • Construction
  • Waste Management
  • Blood Products
  • Courier Services
  • Food Services
  • Environmental Services
  • Third-Party Logistics

It’s not just purchased services

Labor costs are having an impact on other parts of the healthcare supply chain as well, Meehan and Powell said. “This is especially true in accounts payable (AP), where manual-based financial processes have led to wasted time and money for both providers and suppliers. In fact, nearly $40 billion in healthcare waste and inefficiencies is tied to invoicing errors alone.”  

A place to cut waste

One big opportunity to cut down on waste and create efficiencies is AP automation, they said. “With AP automation, providers can not only gain opportunities to strategically redeploy their labor force, but also gain better control over cash flow and the ability to unlock working capital for investing in future growth opportunities.”

The importance of a healthy market

Purchased services can account for up to 36% of hospitals’ annual indirect operating expenses. “Enterprise-wide success is increasingly reliant on purchased services and a healthy market can help generate operational efficiencies and improved outcomes for providers, including significant cost savings,” Meehan and Powell said.

This also extends to supply chain back-office operations, which is an area often overlooked by healthcare leaders as a significant opportunity to save on costs. “We estimate that as many as 70% of all invoices in healthcare are paper-based, and 68% of all healthcare purchasing is still done manually via paper checks. Across the healthcare industry, these transactions can add as much as $18 billion to $22 billion in unnecessary annual expenses.” AP automation can solve this by taking paper out of the equation and replacing it with a data- and technology-driven workflow.

Best practices to drive savings

“As the healthcare industry continues to transition into post-pandemic reality, finding new ways to increase efficiencies and reduce costs in purchased services – and in supply chain operations overall – is paramount,” Meehan and Powell said. They shared several ways healthcare providers can tackle the rising costs of services and drive savings:

“Leveraging the aggregate purchasing power of a GPO and contracts with firm, fixed pricing can help keep inflation at bay and reduce risk. Hospitals and health systems we’ve worked with have saved as much as 31% (weighted average) across purchased services categories during the pandemic and through a combination of GPO/local services-specific contracts.”

“Investing locally and building more strategic, collaborative relationships with diverse suppliers to drive competitive pricing and terms.”

“Using technology to tap into analytics, benchmarks and powerful insights to source competitive contracts and measure purchased services usage and spend. Technology can enable providers to automate RFPs, to compare prices, and to manage service targets – a strong means to counter inflation.”

“Looking beyond purchased services, technology can be used to analyze total supply spend, transform AP processes and find savings opportunities all in one place. By moving to an automated purchasing and payment solution, one health system we work with was able to recognize more than $1.8 million in savings in fewer than three years. Another was able to recoup $7 million in overpayments due to invoicing errors.”

safe online pharmacy for viagra cheap kamagra oral jelly online