While traditional health system cost containment strategies have thoroughly targeted areas such as labor and materials costs, the same sort of rigor has largely not been applied to an area ripe for cost savings — purchased services.
Marketplace intelligence compiled by the cost management platform Medpricer suggests American hospitals overspend an estimated $39 billion annually on purchased services. Recently, Medpricer CEO Chris Gormley spoke with Becker's about his organization, cost containment strategies in healthcare and vendor relationships.
Question: What are some of the most valuable cost containment strategies in healthcare?
Chris Gormley: A valuable and overlooked cost containment strategy is controlling third party services costs or purchased services especially in an environment of value-based payments and movement to outpatient care.
Historically, healthcare providers focus on reducing labor, materials costs and improving utilization of both. However, purchased services represent 18-20 percent of operating costs and are often not measured, tracked or actively managed. Representing both clinical and non-clinical areas, purchased services include, for example, all the costs paid to third parties to clean and maintain facilities and equipment, reference labs, renal care, IT services, marketing costs. Today, stakeholders make their own buying decisions in these areas and manage their own contracts. The discipline that has gone into labor and materials cost containment is missing. Medpricer statistics show that unmanaged annual purchased services cost inflation is typically 30-40 percent above materials and labor inflation rates.
By applying a center-led cost containment strategy for purchased services, we've found savings emerge rapidly without many of the political issues associated with direct labor cost containment and physician preference items. A successful strategy for purchased services should include real-time spend and quality measurement, purchased services benchmarking, price control, utilization control, supplier performance monitoring and invoice to payables matching.
Q: What's the most important thing providers should consider when establishing vendor relationships?
CG: Mutual transparency is the most important thing providers should consider when establishing vendor relationships. The number one need that vendors cite to Medpricer is greater transparency into relationships and status with their healthcare provider customers in a growing and demanding marketplace. Meanwhile healthcare providers desire visibility into whether suppliers perform against commitments, that they are getting the best commercial terms in the market and receiving most innovative solutions. Unfortunately, mutual transparency is not easily achieved and must be consciously established when setting up vendor relationships. Consider key performance indicator measurement systems, automated communication methods across different functions (such as clinical, finance, supply chain) and the use of neutral third-party systems to identify imminent risks and to verify claims.
Q: What makes your organization's mission unique?
CG: Medpricer's mission is to empower supply chain organizations with technology to optimize their own talent to control purchased services costs, quality and risk. We uniquely achieve this through applying a proprietary lifecycle approach to analyzing, monitoring, and vetting suppliers. By leveraging the latest in artificial intelligence, we offer a platform that delivers improved capabilities and efficiencies – enabling just one person to reduce costs and manage supplier performance. With the predictive and prescriptive technology built into our mSource® software, healthcare providers can spend less time on managing stakeholder and negotiation logistics and focus a more concerted effort on nurturing supplier relationships and achieving long-term savings.
If you're interested in learning more about Medpricer, download their whitepaper here.