TAKING CONTROL OF YOUR

PURCHASED SERVICESWestern States Healthcare Materials Management Association2014

Agenda

• What is a Purchased Service?

• Purchased Services Challenges

• Purchased Services Opportunities

• Factors Causing Growth in Purchased Services

• The Future of Purchased Services

• The Value Analysis Approach

• Case Studies

What is a Purchased Service?

Procedure

Function

Operation

Job

Task

Purchased Services Challenges

increase in spend services

lack of visibility & executive sponsorship

lack of broad category expertise

decentralized decision making and purchasing

lack of infrastructure to

control and manage

contracts

no benchmarking data available

regional variations

Poll Question

What is your biggest challenge?– Contracts and departments are disconnected

– No central reporting, process or transparency

– Lack of benchmarks and/or expertise in many areas

– Processes vary by service, department, etc.

Purchased Service Opportunities

BEFORE AFTER

4% 7%Operating Margin

Purchased Services20% 17%

Labor, Supplies andOther Non-purchasedServices OperatingExpenses

76% 76%

• Best practice organizations spend 8% to 25% less on purchased services than average performers.

• The average hospital can quickly realize 3% or more sustainable improvements in their operating margin by applying best practices. Savings drop immediately to the bottom line.

• Organizations spending $30 to $40 million on purchased services could see cost reductions of $4.5 to $6 million.

Poll Question

How much do you spend on purchased services each year?

– Less than $1 million

– $1 million to $10 million

– $10 million to $25 million

– $25 million to $50 million

– More than $50 million

Factors Causing Growth in Purchased Services

Specialization Innovation Core Competency

Patient Satisfaction Reduced Costs

Critical services, such as Virtual ICU, offer immediate access to highly skilled experts at a time where there is a national shortage of intensivists and skilled critical care nurses.

New services like Image Guided Neurosurgery are offering the provider access to cutting edge technology without requiring an up-front capital investment.

Outsourcing a clinical service, such as cataract, to a third party gives hospitals the opportunity to focus on achieving their strategic initiatives like cancer care, surgical towers, a bariatric center or ambulatory surgery center.

Improving patient satisfaction is often a motivator for outsourcing services, such as translation, because communication is improved and streamlined between patients, staff and physicians.

Infrastructure costs, such as IT, can be time consuming and costly which makes outsourcing an attractive choice. Lower labor costs, call and overtime reduction.

The Future of Purchased Services

• It’s easier to get the wins here than in supplies

• It’s billed monthly, so the savings are immediate

• The scope is always changing for the services

• Control what you can control: your costs, not your reimbursements

The Value Analysis Approach

ASSESS REVIEW FINALIZE MEASURE

ENLIST AN EXECUTIVE CHAMPION• This can be anyone from the VP-level in Supply Chain to the CFO or CEO directly. • Enlist a task force and key stakeholders around purchased services.• Prioritize, categorize and create a single point of focus for purchased services contracting

and sourcing.

ARM YOURSELF WITH DATA• Learn market highlights, industry best practices by category, pricing metrics, competitive

vendor directory and key performance indicators.• Create a knowledge library to include RFPs, SOWs, SLAs, sample contracts, price

benchmarks and more.

FOLLOW THE PLAN• Continue to monitor both the performance and billing of the service under the terms of the

contracts against your expectations and utilization.

Case Study: TranscriptionMULTI-FACILITY SYSTEM IN THE

MIDWEST

• $200 million annual purchased services spend

• Centralizing purchased services is a key strategic priority

• Historically relied on a contingency consulting firm to support their efforts

• Vendor was the incumbent and integrated into system EMR platform.• Corporate offices wanted to add new modules and centralize facility-level

contracts.• A consulting firm reviewed the new proposal and corrected only

grammatical errors, which offered no additional insight.• Vendor later offered a price reduction.

• TAT & Error Rates: There were no penalties defined for errors or failure to meet TAT guidelines.

• Price benchmarking: Rates offered by the vendor were not competitive. • Transcription volume: Increases in volume were not reflected in price. In

most cases when a volume increases, you should see a unit price reduction. • Contract length: We recommend contracts no longer than three years with

annual reviews and opportunities for adjustments.• Special concession: It is important to look for small concessions that are

unique to your situation and can allow you to make price reductions.

SCENARIO

CONTRACT REVIEW INSIGHT

Case Study: Transcription

• Achieved 28% cost reduction based on current annual transcription services spend of $2.5 million.

• Domestic vs. global transcription: Offshore transcription was dropped for domestic transcription.

• Price benchmarking: Vendor rates for transcription services were above industry accepted rates.

• Transcription volume: Pricing was adjusted to account for an increase in volume.

• Contract length: Contract length reduced from a seven-year agreement to a three-year with annual reviews.

• Contract language: Penalties for error rates were inserted into the agreement along with defined dispute resolution (extremely important for offshore transcription services). A 98% accuracy guarantee along with penalties when SLA not met was also added. $667,8

92 cost reduction

over the committed three-year

period

Type of Service Vendor Rate Target RateDomestic Transcription Services 0.00256 0.00253

Domestic Transcription Services with Speech Recognition 0.00227 0.00221

Global Transcription Services with ASR 0.00206 0.00190

Price Benchmarking

MULTI-FACILITY SYSTEM IN THE

MIDWEST

• $200 million annual purchased services spend

• Centralizing purchased services is a key strategic priority

• Historically relied on a contingency consulting firm to support their efforts

CONTRACT REVIEW RESULTS

Case Study: ElevatorsMULTI-FACILITY SYSTEM IN THE

NORTHWEST

• Renewal of elevator contract

• Service support declining over time

• Historically relied on staff to negotiate purchase services

• Corporate offices wanted to vet pricing and contract terms. • Vendor submitted contract renewal. The hospital had no way to compare

proposal to the vendor’s other contracts.• Sister facility’s elevator proposal offered more coverage for lower pricing

with competitive vendor.

• Contract language: The contract had no penalty for downtime, lacked a termination clause and renewal language was not defined in the agreement.

• Quality benchmarking: Lacked a checklist to determine the quality of service being provided and measure it against other vendors.

• Price benchmarking: Unclear if pricing was competitive for other contracts of similar coverage, type and quantity.

SCENARIO

CONTRACT REVIEW INSIGHT

Case Study: Elevators

• Achieved 45% reduction cost. • Contract language: Termination and annual industry standard cap

language was able to be added to the contract along with a vendor responsiveness clause.

• Quality benchmarking: Provided benchmarks to help the hospital better measure their quality of service.

• Number of call-backs or unscheduled service outages• Response time• Guaranteed up-time• Hours of service• Cost of afterhours repair• Parts availability and costs, etc.

• Price benchmarking: Monthly payment was negotiated from the original contract price of $3,990 per month to $1,936 per month for the same level of coverage.

$160,000

cost reduction over the

committed three-year

period

CONTRACT REVIEW RESULTSMULTI-FACILITY SYSTEM IN THE

NORTHWEST

• Renewal of elevator contract

• Service support declining over time

• Historically relied on staff to negotiate purchase services