How Healthcare Providers Can Tackle the Rising Costs of Services

Key takeaways:

• In addition to the rising costs of goods, inflation in the U.S. services sector has picked up.
• Premier is enabling a healthy and competitive market for healthcare purchased services – and continues to pursue strategies to drive savings and offset rising costs.

For more on this topic:

• Order our new book – Significant Figures: A Practical Guide to Unprecedented Cost Savings in Purchased Services.
• See how providers and suppliers are turning to accounts payable (AP) automation to improve invoicing accuracy, find savings, and optimize labor and efficiencies.

Stronger consumer demand coupled with global supply chain and workforce challenges continue to drive inflation across every sector of the U.S. economy, including healthcare.

U.S. inflation grew to a new 41-year high as prices rose 9.1% in June 2022 from a year ago, with surging food, gas and energy prices all contributing to the increase. Price pressures are expected to persist into 2023, and providers need strategies to drive financial recovery now and looking ahead.

While our nation has been seeing and living with higher costs of goods from the gas pump to the grocery store, so far, we’ve heard less about inflation in the services sector – an area that can account for up to 36% of hospitals’ annual indirect operating expenses.

Services Recovery Drives Higher Prices

Alongside COVID-related shutdowns, stoppages and the “Great Resignation,” the services sector – within healthcare and overall – has been hit particularly hard over the course of the pandemic.

More recently, however, consumers and organizations have been shifting spending back toward services as we adjust to life with COVID-19, and services inflation has picked up.

Inflation for "core" services has accelerated for eight months straight, and their share of overall inflation has also increased. Services inflation in the U.S. averaged 4.4% from 1950 until early 2022 and has increased to 6.2% in June 2022.

When comparing third-party services to products, the total cost of the service is heavily influenced by the cost of labor. In the current environment of competition for all labor types, organizations are factoring in higher wages to help attract and retain talent on top of higher prices for their business, such as fuel costs.

Based on these factors, some services categories in healthcare experiencing cost increases, include:

• Staffing
• Construction
• Waste Management
• Blood Products
• Courier Services

And while inflation affects all industries across our economy, the problem is particularly challenging in healthcare.

Today, hospital expenses continue to climb while margins shrink – the median change in operating margin declined 38.1% in April 2022 and 76% year-over-year.

Broader economy-wide inflation has serious implications for providers who must absorb added costs out of existing budgets, which are already strained as a result of lost elective procedure revenue, and record-high outlays to attract and retain labor.

Premier continues to pursue innovative, multi-faceted strategies that drive savings and offset the rising costs of purchased services in healthcare – and that address overall inflation.

• With hospitals and supply chain teams asked to do more with less, leveraging aggregate purchasing power and contracts with firm, fixed pricing can help keep inflation at bay and reduce risk. Alongside the power of Premier’s national GPO contracts, hospitals and health systems partnering with Premier’s Conductiv® subsidiaries have saved as much as 31% (weighted average) across categories during the pandemic through a combination of GPO/local services-specific contracts.

• Conductiv has analyzed more than $566 billion in healthcare services spend. And we’re enabling a healthy, competitive services market – creating new opportunities for smaller, diverse suppliers and helping hospitals invest locally across many different categories of their business.

• Historically, purchased services benchmarks have been hard to come by. With a comprehensive technology platform, providers are now equipped with analytics, benchmarks and powerful insights to source competitive contracts and easily measure purchased services usage and spend. Additionally, this technology allows for providers to automate RFPs, to compare prices, and to manage savings targets – a strong means to counter inflation.

Using Conductiv to streamline contract negotiations, benchmark service providers and manage spend, Conductiv customers have reported cumulative, documented savings of more than $800 million or an average savings value of 24% to date.

• Beyond purchased services, providers across the nation are leveraging PINC AI™ technology to analyze total supply spend, transform accounts payable processes and find savings opportunities all in one place.

• One wake-up call is that nearly $40 billion in healthcare waste and inefficiencies is tied to invoicing errors alone. Remitra™ challenges the status quo to improve invoicing accuracy and streamline cumbersome healthcare financial processes for both providers and suppliers. Embracing procure-to-pay automation:

• • Baptist Health South Florida was able to recoup $7 million in overpayments due to invoicing errors.
  • Henry Ford Health System was able to drive operational efficiencies and recognize more than $1.8 million in savings in less than three years.
  • What’s more, Remitra’s capabilities can translate into hard dollars saved for suppliers.

The technologies and capabilities to unlock significant savings and efficiencies with AP and AR are literally at our fingertips, whether we're swiping, tapping or clicking. With Remitra, we’re embracing them and fostering their adoption industry-wide among both providers and suppliers.

In this dynamic environment, “greedflation” – or companies raising prices more than necessary to net higher profits – has also been a topic of conversation, and has been noted as a concern in certain, overconcentrated market segments that also lack benchmarks. With strong contract bidding and negotiations capabilities, a focus on healthy competition, and technology and data for transparency and visibility, Premier affords healthcare providers protection against the potential for bad actors in the market.

With higher costs likely here to stay for some time, we’ve got your back.

Backed by the PINC AI™ technology, a full consulting suite and industry-leading supply chain services, Premier will continue to arm our member healthcare providers with the information, tools and support needed to drive cost savings and address inflation.