The 6 Categories Of Hospital Purchased Services Spend

This article was written by Lisa Miller.

A Proven Purchased Services Methodology 

Hospital Purchased Services Spend – Move Beyond Improvement into Transformation

Lets consider rethinking how we analyze purchased services agreements, and it requires us to take  a step back to look at purchased services from a 30,000-foot view, and really see some of the characteristics of purchased services spend.

That begins with the fact that purchased services spend is a large category of expense for a hospital. It represents anywhere from 45% to greater than 50% of a hospital’s non-labor expenses. So it’s significant. And if you look at other areas of a hospital’s spend, for instance, physician preference items or clinical items or general medical surgical items, there’s a lot of focus around those strategies and techniques to be utilized to ensure best pricing for physician preference items. A best practice process is to benchmark the line item implant component pricing. You will also need to engage physicians, possibly have a standardization strategy.  And you would map those implant costs to actual reimbursement to understand and analyze the profitability by DRG and physician.

So that’s a distinct characteristic of physician preference items. They’re high cost implants. The hospital pays for implants, but they are a preference by the physician and the physician controls the decision. So there’s a balance of having to work with the physicians yet working with the implant vendors for pricing negotiations. And sometimes that gets complex if not done in the appropriate way.

As we look at purchase services spend, there are also some unique characteristics. One is the fact that it’s such a large area expense for a hospital. Two, and I think it’s the most significant, is that there’s a lack of line item detail level of visibility that hospitals can’t get from their ERP systems. You can get that line item detail report for physician preference items or med/surg items. You could run the report from your ERP system, and you can do analytics for PPIs, and you could run a reimbursement report, and you can tie them together.

But the uniqueness and the biggest challenge of purchased services spend is that services are performed and then invoiced. As a result, the line item spend data and the specific utilization that was used during a month are only on the invoices.  They’re not in your ERP system.

Some hospitals now have systems where they are scanning in purchased services invoices in their ERP. That full scan of that invoice could be in your Oracle system, your GHX system, or any other system – but that invoice is a total image. Those details still reside on that image, on that invoice in your system. The details of the invoice are not extracted and accessible.

If you have multiple vendors, let’s say seven vendors for outsourced lab services, and you want to run a report on the line item detail for your laboratory spend for the month of May, you can’t press a button or run a canned report and get that information from your ERP system. You would have to go to the month of May. You would download those invoices for each of those seven vendors. And now have paper invoices on your desk where you are either going to use a highlighter and try to match up different tests and a manual analysis, or you are taking that month of seven vendors and invoice data and you are putting the line item information manually into an excel spreadsheet for analysis. This could take you weeks or months to complete a comprehensive outsourced lab services cost savings analysis.

This is the absolute challenge, the uniqueness of purchase services spend and the one that we have to focus on in order to get real results.

This is where our focus needs to be as an industry.

This is how we need to rethink purchase services spend.

Categorization is directional. You could run a check register report for the last 12 months and see your vendors by monthly spend.

Yes, there are tools in the marketplace that will help you to categorize, you could do that same categorization internally. The tools probably will help you expedite that process, as categorization for purchased services spend in an advanced dashboard is definitely an evolution as compared with using your check register in excel.

But you can utilize your check register and analyze the spend in an excel spreadsheet.  Microsoft Power BI allows you to do that work very easily and very inexpensively and very effectively.

But it’s directional. It gives you the ability to say,  “We have three elevator vendors with a total annual spend of $1.2 million. Last year, we spent $900,000. This year, we’re spending $1.2 million. I wonder why there’s a $300,000 increase.” That’s what you are going to get from categorization.

Once you have identified this annual increase in elevator spend, you will need to go to those invoices and really dig in and see what is happening last year to this year by invoice line item spend details.

What’s going on with three of those vendors.

Are there some duplicates?

Are there any part of that spend that two vendors are covering the same elevators?

There’s a whole suite of questions and thinking that has to go on when once you dig into the invoice line item detail and then pulling in your contracts for a contract compliance audit.

This is the area that we need to rethink. Can we automate this? Can we decide, as an organization, that we need to do a very thorough historical reconciliation of past purchase services invoices? And yes, from an AP credit standpoint or a contracting auditing perspective. But more importantly, from a utilization perspective, from a benchmarking perspective, and from an overall understanding your spend perspective.

Secondly, the ability to benchmark on a line item detail is so powerful. There are so many more line items in purchase services spend that rarely get highlighted or recognized or acknowledged. And there’s a lot of opportunities in those very, very small, specific details. We know that on the supply side that happens. It happens just as frequently on the purchased services side, yet we don’t hear enough about the line item details and how important it is to get to those details. We hear about dashboards, we hear ratio benchmarking, we hear you have a benchmarking opportunity based on your bed size compared to other hospitals and your spend.

This whole area of spend, we need to really go back to a very foundational principle in financial management, which is the opportunities are going to be in your line item spend details. We’ve got to rethink and reprioritize and recreate how our hospitals are managing this spend.

Finally, for real, true cost control, cost protection, cost optimization, you need a management system in place. That management system is not looking at a dashboard that shows you your total spend for a category or a vendor, month over month. Unfortunately, that will give you a false sense of security in terms of saying, “Okay, we’re managing spend based on aggregate data.”

You can’t manage purchased services spend based on aggregate data. You can only manage purchased services spend based on line item data.

I’m going to go back to the analogy or the example with physician preference items.

Nobody would benchmark physician preference items based on a hospital’s bed size as a percentage of what they spend. They would never do that. We benchmark based on line item implant pricing. There is no ratio benchmarking for PPIs.

That is the same methodology that we have perform for purchase services spend. It is going to require effort. It is a change in thinking. It is going to be a change in the process.

There is an enormous amount of opportunity that is being missed and that will always be missed if hospitals will not commit to a line item detail strategy. Some hospitals that have begun to commit to this line item strategy, are achieving remarkable cost savings results. They’re shocked. Hospitals are recapturing money, looking at utilization differently, obtaining better benchmarking intelligence data(even though they had just renegotiated the contract) because they were able to see line item details and think about it and analyze the spend differently.

With so many resources available to hospitals to support their purchased services cost savings initiatives; it’s important to take a step back and discuss the real issue with purchased services management so that hospital supply chain and finance leaders can move beyond “improving” into transforming how they manage this spend.

As a high level overview of the marketplace, there are categorization dashboards, RFP tools, benchmarking reports, consulting services and ready-to-use agreements that GPOs have put into place.

These are tools which you can utilize in your hospital to potentially reduce purchased services costs.

However, none of these tools or services address the single most important aspect of managing purchased services spend. Yes, these tools and resources are helping you to improve purchased services visibility but they do not address the transformation needed to reduce your purchased services costs with maximum financial impact and give you a way to effectively put in place purchased services cost controls for long term sustainability.

The Missing Element is Invoice Line Item Details

Unlike supplies where you place a specific line item order to a vendor, services are performed first and then invoiced second. This means every single line item of services spend is not in your ERP system to run a utilization report as you would if you wanted to see your PPI utilization for the last 12 months. The only purchased services spend data report you can run from your ERP system will show you the total amount on the invoice and vendor information. You have no ability to run a line item report for the last months of your purchased services spend to analyze the utilization of specific services.

That’s because the line item details of your service utilization spend is in your invoices. These invoices may be scanned into your ERP system, but the details of your utilization are not extracted into your ERP system. This is the major underlining root problem to managing this spend. So, any improvement misses the opportunity—and that is why we need a transformative approach to identifying cost savings and managing purchased services spend.

At VIE, we took a different transformative approach to help hospitals gain line item spend visibility into their purchased services spend, by creating a patented technology that extracts the invoice line item details through 100% automation. Our technology provides hospitals with purchased services line item data, benchmarking by line item data, and reconciling invoices by line item services to a specific agreement.

You can schedule a call with Lisa Miller at lmiller@viehealthcare.com to learn how high performing hospitals are creating a new and transformative process to significantly reduce their purchased services spend through analyzing line item spend details.

Here are the 6 categories of purchased services spend:

Category 1: Clinical Services

At VIE Healthcare Consulting, we work with six categories of hospital purchased services spend. This blog looks at clinical services.

To review our summary of this entire series, click here.

Purchased services is that part of your organization’s spend that is contracted, purchased from or outsourced to a third party vendor, rather than carried out by your hospital’s in-house team. 

Purchased services can account for up to 40%-50% of your organization’s non-labor spend yet hiding in your invoices is the potential for major savings which can dramatically improve your hospital’s margins.

Purchased services encompasses every department in your health system.

At VIE Healthcare Consulting, we provide a framework for our clients to categorize their purchased services spend. That framework consists of six categories.

The first category is clinical services.

What are clinical services?

Clinical services are the services that most often come to mind when people think of hospitals, surgery centers, and doctors’ offices. They are those services that involve direct patient care.

The clinical services at any given healthcare facility are what define that organization.

Patient care is the primary focus of healthcare systems. Without clinical services, patient care would not happen and these organizations would not exist as we know them today.

The clinical services at any facility must meet local, state, and national standards in order to optimize direct patient care. The quality of this patient care is measured by patient outcomes and patient satisfaction and is increasingly being used to determine financial reimbursement.

Outsourcing Clinical Services

The outsourcing of certain clinical services is a common practice among hospitals and can offer the following benefits:

• It commits specialized responsibilities to providers who are experienced at providing those treatments effectively and efficiently to patients.
• Outsourcing clinical services can help hospitals to manage rising costs more effectively.

In the arena of purchased services, however, clinical services often require more regular and rigorous clinical oversight to ensure they are operating smoothly and providing patient satisfaction.

It is vital, therefore, to schedule regular reviews with your vendor to assess opportunities for optimization, improvement and cost reduction.

Clinical Services Case Study

• Higher patient throughput while improving patient care.
• Increased physician satisfaction and retention.
• Access to superior purchasing power for your organization.

Clinical Services: What’s Included?

Clinical services encompass a diverse range of services, such as, diagnostic tests and procedures, rehabilitation services, preventative and post-operative care, surgeries and procedures, and anything relating to a patient’s day-to-day care and treatment.

Clinical services include but are not limited to:

• Perfusion Services
• Wound Care
• Rehabilitation Services
• Physical & Occupational Therapy
• Respiratory Therapy
• Laboratory/Blood Bank
• Pharmacy
• Dialysis
• Lithotripsy
• Radiology
• Anesthesiology
• Social Services
• Intraoperative Neuromonitoring
• Ambulance Services
• Emergency Department Services
• Physician Staffing