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Report: The Top 5 Areas of Purchased Services Spend – and How Providers Can Improve Margin

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With the Delta variant surging, U.S. hospitals and health systems are struggling to regain their financial health while providing the highest-quality care to their communities. According to a report published in March 2021:

  • Hospitals were projected to lose an estimated $323 billion in 2020, leaving nearly half with negative operating margins by the year’s end;
  • Hospital volumes have declined while patient length of stay has increased; and
  • 2021 revenue gains have been offset by escalating expenses, including in third-party purchased services, which saw a 17 percent increase since 2019.

In and out of a pandemic, tackling purchased services represents both a significant savings opportunity and a highly complex challenge that’s been decades in the making. Today, nearly seven out of 10 healthcare leaders are in the midst of renegotiating purchased services contracts, according to a recent HFMA survey.

Premier analyzed robust purchasing data from Conductiv to identify trending purchased services categories for high-impact savings.

What follows is an overview of this analysis, which looks at more than $49 billion in purchased services spend across 102 healthcare organizations from January 1, 2020 through July 31, 2021. Conductiv is a leading third-party spend optimization solutions provider and a consolidated subsidiary of Premier.

The Top Five Categories

The top five purchased services categories below represent Conductiv’s most active and requested categories for sourcing over the last 18 months, ranked by total spend. Also included is an overall weighted average savings estimate per category, based on both historical bid and negotiated savings data that Conductiv members achieved through a combination of both GPO and local contracts.

1. Revenue Cycle Management

With COVID-19’s emergence, business continuity became a matter of survival for many U.S. hospitals that have incurred significant financial losses as a result of the pandemic. An AHA analysis from earlier this year estimates that total hospital revenue in 2021 could be down between $53-$122 billion from pre-pandemic levels.

To optimize revenue and improve margin over the long term, many providers are investing in Revenue Cycle Management (RCM) capabilities. A successful RCM strategy and process can enable providers to maintain financial viability, build financial resilience and continue to provide quality care for patients.

Potential category savings is estimated to exceed $360 million across the representative membership sample.

2. Staffing - Clinical (Nursing, Respiratory Therapy, Radiology, etc.)

Across every industry, the pandemic has had a dramatic impact on the world’s workforce - and perhaps none more than healthcare.

Workers in high-demand labor groups have been in short supply alongside clinician retirements, burnout and a more competitive recruiting landscape. And since the pandemic’s onset, a typical 500-bed hospital has seen a $17 million increase in total labor expense, according to PINC AI data.

COVID-19 has hospital and health system leaders rethinking clinician staffing in both the short- and long-term - and for our part, Premier is committed to helping hospitals get ahead of the workforce strain curve.

Potential category savings is estimated to exceed $81 million across the representative membership sample.

3. Laboratory/Reference Lab Testing Services

Clinical laboratories were quickly overwhelmed by case surge and increased demand for testing as COVID-19 swept across the country in early 2020. In fact, some labs had built the capacity to process 20,000 COVID-19 test samples in a single day by November 2020 – up from about 2,500 in the spring of that year.

For many providers, however, scaling in-house capacity has proved an insurmountable challenge alongside workforce stability concerns as well as lab and diagnostic supply shortages. To support successful operations and maintain adequate test turnaround times amid the pandemic, many hospitals are engaging with third-party lab services providers.

Potential category savings is estimated to exceed $127 million across the representative membership sample.

4. FNS - Food & Nutrition Services

The keys to any successful foodservice operation are making sure you have great leaders and take advantage of the support from Premier. Self-op managed facilities are typically less costly when good foodservice leaders are in place to manage the operations within Food and Nutrition Services. In fact, approximately 75 percent of Premier member acute care hospitals are self-op, according to Premier data.

However, in some cases outsourcing the foodservice management in healthcare may be necessary to provide the tools and systems required to meet the needs of the hospital. Premier and Conductiv have foodservice subject matter experts that can help hospitals navigate through the complexities of outsourcing the management of the foodservice departments to maintain transparency and competitive cost while protecting quality.

Potential category savings is estimated to exceed $67 million across the representative membership sample.

5. Environmental Services (Cleaning/Janitorial)

Fundamental to patient safety, environmental services (EVS), including cleaning and janitorial services, are a key component of infection prevention and control in healthcare – even more so in the COVID-19 era.

Individuals in these roles are many of the unsung heroes of the pandemic, serving on the front lines of care. Today’s high-performing provider teams are supporting outsourced EVS staff with strong training and support as well as engagement as part of the core hospital team.

Potential category savings is estimated to exceed $58 million across the representative membership sample.

Like a movie on Netflix, other trending Purchased Services categories from July and August 2021 (ranked by total spend) include:

  • Laundry & Linen
  • INO Therapy (Inhaled Nitric Oxide)
  • Intraoperative Neurological Monitoring
  • Snow Removal

Purchased Services = An Untapped Savings Opportunity

U.S. hospitals spend more than one trillion dollars on annual operating expenses, with purchased services accounting for 34.8 percent of non-direct labor spend over the last 18 months, according to Conductiv data.

That means the entire healthcare industry spends roughly $200 billion on third-party vendor services every year.

In today’s healthcare environment – and for tomorrow’s healthcare future, enterprise-wide success is increasingly reliant on purchased services to help generate operational efficiencies and improved outcomes, including significant cost savings.

Here are Three Key Strategies for Providers to Tap into Purchased Service Savings:

1. Accelerate speed to insight with data

Although no one-size-fits all strategy exists, it starts at the same place: the data. You can’t manage purchased services spend that you can’t see. Hospitals need contract visibility and real-time access to utilization and usage rates to improve sourcing activity.

Powered by artificial intelligence and machine learning, a comprehensive purchased services platform equips providers with a real-time view into usage and spend - and can be indexed by supplier, category, service-level terms or contract renewal date. This technology can also set and manage specific savings targets and oversee contract compliance once new agreements take effect.

2. Analyze contract performance and engage suppliers

With stakeholder consensus building and supplier interactions managed via a dedicated team and through a unified data platform, supply chain teams have instant access to critical sourcing, spend and process information.

A technology-enabled means to monitor spend and utilization gives hospitals immediate visibility to ensure the services they receive match the contracted terms, which includes the quality of services and price.

Providers can also use this same optimization technology to identify and engage diverse and local suppliers. Supporting these suppliers builds a stronger workforce, can generate savings and opens opportunities for community-based collaboration on future contracts.

Even amid a pandemic, hospitals and health systems partnering with Conductiv have saved as much as 31 percent (weighted average) across categories through a combination of GPO/local contracts.

3. Leverage the power of GPO contracts

With hospitals and supply chain teams asked to do more with less, leveraging aggregate purchasing power can lead to significant cost savings and contract risk reduction. Ordering on contract yields the greatest savings and the fewest discrepancies – and saves time for both buyers and sellers.

For example, one regional health system in Baltimore, MD saw 61 percent savings on managed print third-party services totaling more than $738,000 in cost avoidance in under 90 days by leveraging our purchased services contracts portfolio. Another provider recently achieved seven percent savings on coding services within just 39 days of going on-contract with Conductiv.

Industry-leading purchased services contracts, technology and partners can help hospitals and health systems reduce costs, increase revenue, improve workflow and efficiencies, and enhance quality.

By integrating data sources, developing spend analytics and analyzing contract performance, hospitals are well positioned to uncover significant savings opportunities during a pandemic – and beyond.

Ready to transform your hospital’s purchased services program? Learn more.

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