On the path to cost savings: Expert insights on purchased services and OR supply management

During the Association for Health Care Resources & Materials Management Supply Chain conference in San Diego (July 2019), two leaders from HealthTrust Purchasing Group’s inSight Advisory Solutions led a group of health system Supply Chain leaders in a discussion about their biggest challenges and opportunities. The group identified purchased services contracting and an increased role in managing supplies in clinical areas as the top two opportunities to improve financial performance. During this discussion and in a subsequent interview with Becker’s Hospital Review, insight Advisory Solutions’ Assistant Vice Presidents Andy Motz and Drew Preslar detailed the driving forces behind challenges in purchased services and OR supply expense management and outlined steps health system leaders can take to address the issues.

Purchased services: Why is it difficult to identify cost savings?

Purchased services span a wide range of health system functions from landscaping and building maintenance to lab services, pharmacy and more. In many cases, these contracts contain hidden costs that represent significant savings opportunities.

During the executive roundtable conversation, three common obstacles emerged as the primary barriers to reducing the costs of purchased services: data access and analysis, inadequate resources, and decentralized contracting.

According to Mr. Motz, “When organizations begin identifying potential cost savings, one of the biggest barriers is accessing the data related to purchased services. They must review their accounts payable information to understand what vendors they are using in different categories, as well as how much spending occurs in each category.”

However, even when a health system has adequately captured the data necessary to identify savings in purchased services, they still sometimes struggle to dissect the data in a way that reveals savings. This has been the experience for the strategic sourcing manager of a large health system based on the West Coast who participated in the discussion.

“It can be difficult to categorize all your purchased or support services within your own database,” he said. “Categorization is our number one challenge.”

A lack of human resources can also make it difficult to identify potential cost savings related to purchased services. “The contracting department may have staff dedicated to purchased services. However, health systems have a wide variety of contracts related to facilities, clinical and more. One or two people aren’t enough to cover that. Teams can easily get overwhelmed,” Mr. Preslar said.

Another major issue is decentralized contracting of purchased services. A hospital operations director may negotiate for environmental services or landscaping, while another individual in another area of the organization is negotiating for the same services. Each person may keep the contracts in their own office, so the facility or the IDN doesn’t have visibility into all the vendors with whom they do business.

Quick savings can often be obtained by focusing on services where multiple contracts are in place at the hospital level. If an integrated delivery network with multiple facilities consolidates those contracts, for example, the savings can be significant. During the discussion, the vice president of supply chain and pharmacy for a 30-hospital health system based in the South said he believed some of the biggest opportunities for achieving purchased services savings rested in smaller contracts. “Most people are focused on the big contracts,” he said. “But I actually think there’s a lot of savings opportunities in small vendor contracts, such as contracts with companies for services like cutting the grass and removing snow.”

Centralized contracts: The key to reducing the cost of purchased services

One of the best ways to lower the cost of purchased services is to have the supply chain department handle all contracts. Supply chain teams have the experience needed to negotiate contracts, drive costs down and get the best quality service.

“Leaders starting with the CFO or COO must reinforce the message throughout the organization that all contracts need to be centralized,” Mr. Motz said. “Communication from the top can prevent individual department directors from signing contract documents.”

There must be constant reminders that contracts should not be signed at the local level. If health systems are accustomed to working as a cohesive unit, that message will usually be accepted with relative ease. Some IDNs, however, operate as an umbrella corporation and each individual hospital has autonomy. “In these cases, when the central organization tries to assert more control over contracts, there may be pushback,” Mr. Motz said. “You have to manage that change and keep your eyes on it.”

inSight Advisory Services recently worked with a health system with over one hundred hospitals. “The organization had purchased services contracts at the local level that the leaders weren’t aware of,” Mr. Preslar said. “The major barriers were getting their arms around the data, understanding what was in scope, and determining how to go out to bid.”

The organization decided to focus on three contract categories. The inSight Advisory Services team helped get the health system’s data under control. They collected and synthesized the information into a manageable form and then ran an RFP (request for proposal) process. Three inSight Advisory Services team members worked on the project for close to nine months.

“We helped the organization by adding resources to ensure that they focused on their initiative and kept to their timelines,” Mr. Preslar said. The results have been impressive. Across the three contract categories, the organization has saved $4 million. An elevator maintenance initiative alone generated close to $1 million in annual savings.

The key to reducing supply waste in the OR? Physician engagement and data

Partnering with purchasing groups can help put health systems on the path toward supply standardization. However, standardization is just a part of the expense management formula. Waste from expired and unused products impacts everyone but is often difficult to identify. There is perhaps no other area in a hospital riper for improved efficiency when it comes to managing waste than the operating room.

In its work with numerous IDNs, inSight Advisory Services has seen organizations use several best practices to build consensus with physicians and improve supply efficiency in the OR:

• Base the conversation on data. As scientists, physicians prefer to make data-based decisions. An effective approach is to gather metrics such as how many items are opened in the OR but not used, or how often products are used but not identified on the surgeon’s preference cards. Bringing physicians together to review case data can be a good way to increase physician engagement.
• Meet with surgeons one-on-one to review preference cards. For example, one hospital inSight Advisory Services worked with had three physicians performing the same heart surgery, but their preference cards looked completely different from one another. In some cases, physicians don’t even know what’s on their preference cards. Key inquiries to make when reviewing preference cards with surgeons include whether any products can be eliminated, as well as whether it’s necessary to open every product prior to a procedure. In some cases, it’s possible to use a secondary “hold table” in the OR with unopened products that may or may not be used for a patient.
• Don’t overlook physician onboarding opportunities. When new physicians join a hospital, very few health systems involve supply chain in the onboarding process. If surgeons are accustomed to using particular products at their former employer, the organization may suddenly receive unexpected requests for off-contract products. This issue can be addressed by facilitating conversations between supply chain leaders and newly employed physicians.
• Consider appointing a “physician operations executive” or POE. One organization that inSight Advisory Services works with deployed a POE at each facility. This individual works in tandem with the COO. POEs have financial responsibility for the operation of their hospitals and can encourage physicians to eliminate wasteful practices.

When IDNs build relationships with physicians and they are provided leadership opportunities, physicians see that they have a vested interest in the overall organizational objectives of cost containment and savings. Health systems that cultivate physician champions often see great results when working to address OR waste.

Conclusion

Purchasing groups can help health systems uncover data that can determine the root causes of OR inefficiency. This information can help consultants identify cost savings opportunities. They can also coach management teams about how to have productive conversations with physicians. “They need the data to substantiate the waste they’re seeing, so they can tell the doctors, ‘Here’s where the opportunity is and here’s where we need some help.’ Ultimately, if the hospital isn’t profitable, the doctors may not have a place to practice,” Mr. Motz said.

For purchased services contracting and managing supplies in clinical areas, finding cost savings requires a multi-faceted approach. Centralized contracting, physician engagement and adequate resources are all important. An essential first step, however, is good data to support these activities. “Data integrity is the key. If you can’t track it, analyze it, or measure it, it’s impossible to act on it,” Mr. Preslar said.