Purchased services - The SMART way to benchmark services

Many hospitals are very challenged getting to the invoice line-item details. They need help with creating a spend map and understanding what they're spending on utilization.

We’ve been working in this space for over two decades, and we've seen a lot of what we can call “The good, the bad, and the average.”

In this article, we'll take you through the intricacies of purchased services benchmarking by breaking down to you the seven types of purchased services benchmarking every healthcare organization needs to know.?

Let’s dive in.

Request for proposals (RFP)

A while back, the best approach to price benchmarking in many organizations was RFPs. It allowed organizations to confirm if their rates were competitive or if there was room for improvement.?

It wasn't the most accurate technique because it was very time-consuming and many vendors could have different cost structures or perform the services differently. Plus, there’s a lot of gaps and a lot of things that were missed with RFP (and they still are today).

In fact, there are key points to an RFP and sometimes people get so focused on those key points that they miss some of the ancillary fees. And the truth is, those ancillary fees in some cases could be a million dollars in savings. NOT EVEN IN SPEND.

We have multiple examples where, even when we give a template to the vendors to input all their pricing in for an RFP, regardless of what it is, there are always differences. There are always things they're inputting incorrectly or they're not inputting in, or they're just providing something that doesn't fit what it’s asked for.?

Technology (RFP platforms)

Technology is now present in all aspects of our lives and RFPs have not been left out of this revolution.?

Yet, some of the issues that have always been around with RFP platforms are still present.?

Since services are not the same, you still have that issue when you're trying to marry up costs and establish a cost baseline.?

And that a lot is missed because be it an RFP or just a cost analysis, establishing the cost baseline is critical. Among other things, it can help you figure out the fees that are currently there, and see if you’re going to save money or if you’ll have new fees.

But again, how do you establish a baseline if you can't run a report?

So, a lot of the benchmarking services or the RFP platform services ask for a sample of invoices. While having a sample of invoices is better than having no invoices at all, it usually comes with some challenges. Some trends are missed and some fees are overlooked.?

Case in point: we had a client that used one of the RFP platforms for laundry and linen services. About 3 weeks after the contract was executed, he was spending two days a week folding sheets because they missed a whole section in the agreement.?

In a nutshell, there are some challenges and pitfalls with RFP platforms. And unfortunately, people overuse them and expect technologies to do everything, which is not just possible. At least, not in purchased services.

GPO purchased services contracts?

There’s a little bit of a false sense of security with the GPO agreements.

Why?

Because when you look at the real difficult purchased services that are under a GPO agreement, the liability, the payment terms, and the admin fees are usually reflected on the GPO terms. But if there is no pricing, it's a snapshot in time.

When that contract is put in place, then whatever the GPO relationship pricing would be is put into the contract and done over 5 or 7 years.?

Now, if two years later the GPO negotiated a better deal, you won’t get it unless you renegotiate at that point and extend the agreement .?

We have an example with one hospital that had the same vendor and multiple locations. They had four different price schedules over the course of +7 years in this one category.

The reason was that each time they reached an agreement, they got that specific price, and then the CPI increased.?

Benchmarking by contract alone

The challenges of getting invoices, line-item details, and data reports, are making “benchmarking by contract alone” more common.?

One of the major red flags we’re used to is hearing people say "just send me your contract on benchmarking". As a matter of fact, it’s horrifying because there's so much that's not on the contract.?

People do it because it takes so much work to roll up their sleeves and get a 12 to 18-month line-item spend map. So, it's a matter of just doing something — but leaving a whole host of opportunities left unreviewed.?

Approximately 9 out of 10 of the agreement contracts that we get for our clients are incomplete (there are missing amendments, fees on the invoices that are under the contract, or services on the contract that are not on the invoices, etc.).?

Again, we had a client that gave us the contract while we were still waiting on the invoices. We looked at it and saw about a $250,000 spend on the AP spend report. We assumed there’d be around a $15,000 opportunity. But later on, when we saw the invoices, it ended up being about a $190,000 cost reduction.?

The CPI increase was one of the main things that made all the difference.?

When we brought it to the supply chain leader, he really didn't believe us. In fact, he thought he picked the wrong company to help him with purchased services.

Benchmarking by metrics

Sometimes, this can mislead and give a false sense of security.?

When you're comparing organizations by metrics, there are times you don’t get the full picture.?

Let’s say one organization gets picked up at the loading dock. And at the other organization, the actual vendor goes to the floors to pick it up. Which one's going to be more expensive? It’s a no-brainer, but you can't see that from a spend. You can't see it from a bed size.?

You would need to get into the weeds to understand what the difference really is. And it's a big cost difference between someone just having to go to the doctor to pick it up as opposed to someone having to go to every floor to pick it up.?

While we’re at it, dialysis is another point.

While some organizations have a dialysis suite, others don't. But if you have a dialysis suite, you could have multiple patients there doing two-one-ones. So you have one tech, two beds as opposed to going on the one-on-one bedside.?

In that case, what is going to be more expensive? Obviously, the bedside.?

Another example is one of our clients that had over 100 beds that they converted to office space.

Now they left the 100 beds available from a CMS standpoint because obviously, it's harder to get the beds back to reduce them. Because they felt at some point they might need them in the future to flex, but now you're comparing them to somebody else even though these 100 beds really don't exist.?

6. Benchmarking by a few key areas

Benchmarking by a few key areas is the 20-80 rule and it makes sense sometimes. An example of this is food nutrition. The majority of them is based on food rebates, management fees, and fringe rate.

But if you're not doing a full P&L, you're missing a whole area cost. Those administrative buckets have a lot of costs that you have to look for. This includes the GPO fees.?

Hemodialysis is 201. But if you don't have those hours, there are other fees hours operation. There's a big difference between regular hours, Monday through Friday, 9:00 to 5:00, and regular hours, Monday through Saturday, 9:00 to 6:00.

7. Benchmarking no opportunity

There's a new vendor, new space, which automatically most time benchmarking, no opportunity. But there are ways of breaking down a new agreement, a new service, by their cost to be able to see what is driving it to be able to provide opportunities to reduce those costs.

Streamline your purchased services

At VIE Healthcare , we have specialized in helping hospital clients to reduce and eliminate unnecessary costs for over two decades. We have saved our clients $776 Million.

Are you struggling to run a report on specific purchased services to get to the line item details? Let's help you .?

?Learn more: https://viehealthcare.com/purchased-services-consulting/