Real Bottom-Line Savings: Why Hospitals Should Re-Evaluate Purchased Services


Purchased services agreements present an area of potential savings for operational budgets if hospitals have the tools to control and reprioritize their purchased services spending.

In a webinar hosted by Becker's Hospital Review on Jan. 16, hospital contracting experts shared their facilities' best practices and success stories of reducing operational costs by examining their purchased services contracts. Beverly Schierer, vice president of research and analysis of MD Buyline;, Laurie Clayton, regional director of contracting of St. Joseph Health's Northern California Region in Santa Rosa, and Cris O'Neal-Gavin, system contract manager of purchased services of St. Louis, Mo.-based SSM Health Care, spoke about their experiences reorganizing their purchased services spending agreements.

The magnitude of purchased services
Purchased services account for more than $1 billion in spending across the healthcare industry every year, said Ms. Schierer, adding that they make up almost a quarter of a hospital's operating budget.

The sheer enormity of purchased services costs makes managing purchased services a burden, but it also presents hospitals with an opportunity to cut operating budget spending by up to 30 percent.

Ms. Schierer outlined four main challenges to managing purchasing services. As previously mentioned, purchased services bring huge costs, and the number of dollars involved can be overwhelming. Ms. Schierer also said the data surrounding purchased services is difficult to gather and comprehensively analyze. "Pulling all that data together doesn't give you the full story," she said. "It needs to be married to contract terms and conditions to see if there are any variances in billing."

Similarly, a lack of benchmarking makes it difficult for hospitals to compare their services to ensure they are receiving the highest quality services at the lowest prices.

"Having a reliable source for data that is actionable can be difficult," Ms. Schierer said. "All things need to be considered. Just because the price is competitive for one key metric, it doesn't necessarily mean you have a good price. All the fees in the agreement have to be reviewed."

Finally, regional variation can lead to contracting inconsistencies across hospitals.

St. Joseph's management strategy
Both St. Joseph and SSM implemented programs to centralize and manage their supplied purchasing contracts.

"I used the biggest bang for your big tricks," said Ms. Clayton of St. Joseph. "[Examining the] largest impact with shortest turnaround time is where we started."

St. Joseph was working on centralizing its purchased services contracts to streamline efficiency and confirm all contracts were properly authorized. Its centralization process included a CEO- or CFO-only signature authorization to ensure all contracts have been vetted, only allowing contract-approved purchased services dollars in department budgets and a management system to house, track and locate executive documents, Ms. Clayton said.

"We now have a centralized purchased services management to cover the region," she said. "We use best practices and financially supported business decisions….and to sum it up, we have achieved multimillion dollars of cost savings as well as less tangible reductions in risk and [increased] customer satisfaction with our program."

A response to increased demand
"Purchased services became an area of opportunity to reduce costs as a result of many challenges upon us, including reimbursement reduction and expected declines in patient admission that is anticipated from healthcare reform," said Ms. O'Neal-Gavin of SSM.

Ms. O'Neal-Gavin said the decision-making process at SSM used to be highly decentralized, leading to complications and inefficiencies in managing their purchased services accounts. She shared the most and least effective practices in SSM's centralization process.

Ms. O'Neal-Gavin said transparency and sincerity with suppliers and stakeholders are key elements to emphasizing a need for fair and standardized change.

"We learned incumbent suppliers with longstanding relationships in our organization didn't think they were a credible threat to the status quo, and therefore they have prolonged the negotiation process by not starting their most aggressive bid offer," she said. "We have found it very important to emphasize to suppliers that the process is not business casual. The new direction is to seek suppliers that have a national capability, can aggregate our volume and support our goals to standardize and maintain cost reduction while maintaining quality."

When working with regional stakeholders, Ms. O'Neal-Gavin said SSM clearly communicated the overall picture to illustrate how they fit into a larger puzzle by showing stakeholders the relationship between their specific categories and how they affect the system as a whole.

Conversely, working so directly with established suppliers can present issues when restructuring purchased services arrangements.

"Continuing business as usual has not worked," Ms. O'Neal-Gavin said. "Incumbent suppliers who have had a longstanding relationship at times can be very unwilling to concede or request a price point in line with the market when our benchmark intelligence has revealed that current pricing is not in line."

A necessary change
Hospitals are changing the way they look at their purchased services agreements, and Ms. Schierer said this type of change may become increasingly necessary.

"The status quo is no longer an option when it comes to purchased service management," Ms. Schierer said. "But the good news is when we're talking about purchased services savings, it falls straight to the bottom line.

"Taking control of your purchased services is not easy, but it can be done with a tool set that uses industry best practices."

If you'd like to view a full recording of the webinar, please contact MD buyline at

Download a copy of the presentation by clicking here.

More Articles on Becker's Webinars:

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The Two-Midnight Rule: What Hospitals and Health Systems Need to Know About Compliance
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