The task of reducing expenses within purchased services used to begin with providers flexing a strong contract negotiation strategy or red-lining their budgets, something akin to looking for pennies in the couch. Today, however, forward-thinking organizations are taking a different approach, opting to exploit purchased services as a key element of their larger margin management journeys. This may involve employing data-driven technology to assimilate purchased-services spend and looking beyond the traditional definitions of on contract to enhance the bottom line. Taking these actions allows a healthcare organization to receive optimal ROI from its vendors, which serve the healthcare provider in its mission to improve patient and community health.
Purchased services are those provided by a third-party vendor to accomplish routine, continuing and necessary clinical and non-clinical functions and can include things like revenue cycle management, marketing, lab testing and environmental services. Research suggests that purchased services account for up to 30% of a typical healthcare provider’s non-labor expense.
“In today’s reimbursement landscape, providers are naturally exploring new revenue-generating streams, such as retail ventures and value-based arrangements in the supply chain, but we find that they’re overlooking opportunities within the day-to-day world of purchased services,” explains Tim Berkey, vice president of non-labor expense reduction at Premier Inc.
California-based Adventist Health can attest to how the industry’s approach to purchased services has pivoted in the last two years to simultaneously reinforce revenue generation and cost savings. Premier began working with Adventist Health in January 2018 to help the health system achieve cost reduction through non-labor expenses.
“We recognize that sustained operational success in today’s environment will require initiatives that not only generate cost savings, but also increase revenue as well, and Premier has been a key partner in helping us accomplish this,” says Chip Dickinson, vice president of business solutions at Adventist Health. “In addition to making recommendations on preferred partners with which to contract, Premier has helped our team navigate and solidify best practices in contract negotiations, initiative implementation and, most importantly, realization tracking.”
Zeroing in on purchased services spend
Purchased services represent a total addressable acute care market of approximately $160 billion and understanding spend trends in this area is essential to generating a successful total cost management strategy. Historically, different groups within a healthcare organization have been responsible for acquiring outsourced services most relevant to them. Legal departments contract for external counsel; IT departments contract for technology products and solutions; and facilities management teams hire building and property management providers, among other examples.
For a bird’s-eye view on purchased services spend across the entity, organizations need a spend management platform that allows them to integrate all services that are on contract. The platform’s comprehensive insights provide organizations with the powerful ability to credibly analyze, benchmark and source competitive contracts among a large majority of their service providers. By tracking and measuring spend by category, supplier and facility, a spend management platform helps providers overcome the siloed nature of various contracts. Even more important, the technology can set and manage specific savings targets and oversee contract compliance once new agreements take effect.
Four ways to further sharpen your purchased services portfolio
Understanding which services across a healthcare system are contracted externally will help operators wade through multiple vendor opportunities and optimize contracts. While this is part of the puzzle of improving operating margin in purchased services, there are other ways to lower spend and augment these agreements that often are overlooked. Targeting the following “unusual suspects” can help providers optimize their agreements and tap new sources of revenue.
Unclaimed funds. States manage an unclaimed funds reporting system that individuals and businesses can use to determine if they have unrecovered funds. Unrecovered funds can be overcharges, taxes or other monies that the state has unsuccessfully attempted to send to the hospital or an individual. Sometimes, the money has simply been sitting in escrow; other times, there’s been an address change or confusion on the state’s end regarding who the recipient at the organization should be.
“Researching these potential opportunities is a little like mining for gold in the Wild West,” Berkey says. “Sometimes, you find a $5,000 nugget. Other times, it’s a $50,000 nugget.”
Hospitals can begin the process to determine if they are owed funds by visiting the U.S. government’s funds website at usa. gov/unclaimed-money and searching for their specific state.
Silver recovery from X-ray film. “Document storage for medical files is a routine purchased service,” says Berkey. “The way a CFO may think about radiology film is, ‘how much am I spending on my film storage with the document management vendor?’ You certainly don’t want to pay for document storage that’s unnecessarily high, but the same CFO may not realize that the organization could have potential liquidity sitting in storage.”
Many medical records, such as X-rays and mammograms, have retention dates of 7 to 10 years, and once that time passes, hospitals are free to coordinate with their document storage vendors to pull the files for destruction. Organizations unwittingly may be sitting on a gold mine — of silver. Once a file passes its retention date, hospitals can hire niche extraction vendors to collect radiology film, process X-rays and recover the silver from within them. These companies weigh the extracted silver, a nonrenewable resource and then provide a check back to the hospital before selling the silver on the market.
Even though the digital medium has been in use in imaging for many years, it is not unusual to find organizations that have tried to avoid record-removal charges by simply keeping old films in storage, indefinitely. At the high end, an integrated delivery network (IDN) may receive $400,000 to $500,000 if they have been storing older films for many years.
Waste management. A waste management company will commonly charge a few hundred dollars every time its truck pulls onto a hospital’s property to haul a waste container offsite. It’s up to the provider to optimize these waste pickups by ensuring the trash container is full. Most waste compactors have a pressure gauge, so Berkey recommends scrapping a scheduled daily or weekly waste haul. Instead, a team member should monitor the pressure gauge daily and call the waste company when the gauge hits yellow. By the time the gauge hits red, the company is often there to haul the container away. Eliminating haul-outs for a half-full container could save an extra $10,000 per year.
Marketing and advertising. Many organizations have historically shied away from reducing expenses in marketing and advertising. The concern is: What if fewer ads limit brand exposure and result in fewer elective procedures and revenue? Newer vendor capabilities, however, allow organizations to take a more creative approach to marketing and advertising margin enhancement. For example, a marketing team can divert a portion of its current spend from marketing agencies toward a vendor that geo-targets ads at patients and tracks the effectiveness of the advertising through clicks and, ultimately, appointments booked. Distributed marketing efforts like this allow an IDN to improve its patient outreach and conversion, thereby increasing revenue, in some cases, significantly.
“This type of platform is integral for providers as they can produce greater revenue without making adjustments to their current marketing budgets,” says Berkey. “These efforts allow a provider to test and adapt its marketing messages and the services it advertises based on those that are resonating with patient searches.” This kind of platform typically also offers business intelligence, so providers can measure the downstream effect of the marketing efforts and whether the advertisements are yielding unique patients. It’s also a great way to increase admissions in elective procedures.
Boosting financial and operational health
Increasingly, providers are realizing the value of both technology that comprehensively organizes enterprisewide purchased services and the more nuanced opportunities that can quietly generate revenue. Together, these strategies allow providers to effectively address cost and efficiency in purchased services.
As health systems grow, seek partnership opportunities and accelerate their movement into risk-based payment models, it is critical that they employ solutions that will reduce administrative complexity while enabling ingenuity. Premier’s cost transformation experts and enabling solutions are helping healthcare organizations improve margins across the board.
Large-scale cost transformation is not easy in healthcare. However, with the right partner, organizations can realize meaningful change. Premier Inc. is working with hospitals and health systems to streamline purchased services spend and improve margins throughout the enterprise.