We’ve all seen the headlines: Hospital systems laying people off, cutting services, shutting their doors. This heightened desperation in healthcare is mainly driven by shrinking reimbursements.
This is because the private/payer mix has shifted. As baby boomers have started retiring in droves, the masses are moving toward a Medicare/Medicaid mix. As a result, the breakeven point associated with what hospitals can get reimbursed for has changed. This has created enormous operating margin pressure that is literally breaking healthcare providers. There are only four things that can be done in this environment to alleviate some of that pressure. Organizations can:
1) lower labor costs (layoffs);
2) reduce services;
3) cut their goods expenditure, which is where the focus has traditionally been; or
4) determine how to capture significant savings on existing operating costs.
This article examines the fourth, which offers savings with minimal pain and sacrifice.
Purchased services represent up to 40% of a hospital or health system’s supply chain costs and possibly the largest untapped opportunity to capture savings and boost operating margins, while saving jobs and preserving service delivery levels. Purchased services are those elements that are non-labor, non-goods based, and supplied by third parties. Examples include things like linens, valet parking, elevator repair, managed print services, lawyers, insurance, grounds keeping, food service, etc. There are more than 600 categories within purchased services.
The market is the benchmark
A critical tool for saving money in purchased services is benchmarking. Benchmarking is used to understand and compare performance against peers, and to identify and negotiate opportunities for savings.
However, in purchased services, benchmarking is complex. To be effective in evaluating purchased services, benchmarks must take into consideration qualitative and regional differences. Where a healthcare system can easily compare purchases of goods and devices, it is far more difficult to make a comparison on the price and delivery of a service. As a result these organizations are isolated to a “market of one,” so many don’t even bother to try to evaluate and compare the prices they pay for services. Even though it represents millions of dollars for a hospital’s bottom line, it is viewed to be a Pandora’s Box that organizations would rather neglect ... even when jobs and their very existence are on the line.
Traditionally, benchmarking has been used for goods. Those comparisons are straight forward. When you have part and identification numbers, you know you are comparing apples to apples. But purchased services doesn’t have this luxury. It’s a little more like comparing apples to lawyers.
Some organizations have tried to capture purchased services savings by using ratio benchmarks. These are typically used for products or goods. They are based on simple ratios related to volume, price and geography. While this is a better approach than neglecting the problem, ratio benchmarks provide no insight into the quality of a service and overlook many comparative details.
Precision benchmarking
So how do you find and obtain user-based data and price-based comparisons for non-comparable items? In different geographic locations? And how do you then judge quality?
The way around this, is to consider the nature of the category you are comparing, where it is delivered, and the Scope of Work or Service Level Agreement. Then compare it to a variety of suppliers like a private New York Stock Exchange for each contract. Using a live negotiation model, organizations can pull in an array of suppliers who understand the requirements and provide the appropriate non-price and price oriented bids. The more visual and open, the more it reflects the absolute best competitive offer, at that time, which by definition is the benchmark.
Known as precision benchmarking, this method effectively identifies and captures savings on purchased services by incorporating contracts as a basis for comparison and leverages details such as terms, unique conditions, geographic variations, frequency and price in making comparisons. By capturing such specific detail from a large national database of customers’ suppliers across the country, the comparisons are accurate, comprehensive and precise.
This approach empowers healthcare organizations with exact terms and prices they can expect based on their unique profile. It also arms them with a convincing argument and a bullet-proof rationale for negotiating better terms and savings. The end result is better-priced services and negotiations that are easier, and conclude much more quickly.
The tempting “easy button” solution of ratio benchmarking will provide directional information and may help deliver some savings. But to save real dollars, organizations need to use precision benchmarking to obtain the necessary information for negotiating the best possible price and value with vendors. Organizations that simply rely on ratio benchmarking, are not taking all factors into account. They could be sacrificing quality of service and leaving a lot of money on the table, or worse yet -- both.
Chris Gormley is CEO of Medpricer, which provides the only complete purchased services cost management solution that improves operating margins through superior visibility, savings, and control over unmanaged spending.
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