U.S. Healthcare Organizations Are Overspending On Services Procurement…Here’s How To Fix It

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By Brian Eastwood

The American Hospital Association warned in an April report that the financial stability of U.S. hospitals and health systems is at risk. From 2019 to 2022, overall expenses for hospitals and health systems increased nearly 18%, driven in part by a staggering 258% increase in contract labor expenses. It’s no surprise that half of hospitals ended 2022 operating at a loss.

Clearly, organizations need to rein in labor expenses wherever they can without compromising quality of care. Services procurement offers a significant opportunity to drive cost savings, but doing so is often easier said than done, as procurement is rarely a transparent process. Some statement of work (SOW) contracts are signed without being reviewed; others never go out to bid.

“When it comes to the SOW, a lot of organizations don’t have a clear view of what they’re spending,” says Lindsay Maxwell, SVP of client services at RightSourcing, an integrated workforce management platform for the healthcare industry and a division of Magnit. “Everyone is signing off on different projects, and they’re not taking the time to look for cost-saving opportunities.”

Here, Maxwell details the steps organizations can take to reduce expenses associated with third-party contractors and describes the importance of data transparency in helping transform the services procurement process.

The Statement Of Work Is Overdue For Review

In matters of technology implementation, operations management, or strategy development, healthcare organizations often have preferred vendors. There are good business reasons for maintaining these relationships: Shared familiarity between the hospital and the consultancy, faster project kickoff, shorter project timelines, and so on.

In an effort to get a project moving quickly, organizations may sidestep the competitive bidding process and award the contract to their preferred vendor. This is problematic for two reasons, Maxwell says. One, it’s usually a violation of procurement policy, as most organizations technically require contracts above a certain budget threshold to go out to bid.

The other issue is that it can literally increase the cost of working with an outside contractor. “In a lot of cases, these suppliers are used to dictating their business to healthcare organizations,” Maxwell says. “They name the price. What the supplier says, goes.”

Fortunately, both problems come with straightforward solutions. It starts with reviewing the SOW and stripping out any staffing activities that shouldn’t be there. “If you look at a project’s scope, and staffing is part of milestones and deliverables, then you know it should fall under the SOW,” Maxwell says. “But if staffing is part of time and materials, then it can be moved to staff augmentation – and that’s an automatic cost savings of at least 20%.” (Related reading: “Sourcing Best-in-Class Statement of Work.”)

The next step is requiring a request for proposal (RFP) per company policy, which enables organizations to compare bids across the supplier-submitted RFPs. For example, a preferred vendor may provide a bid of $100,000 for a given project, but other bids may come in at $90,000. Or, a preferred vendor may charge up to $100 per hour more than the market rate for a contractor’s given role, determined either by the organization’s own rate card or comparing rates against a market rate solution such as Magnit’s Pay Intelligence.

This gives organizations leverage to negotiate, Maxwell says. “You can go to a supplier and say, ‘If those contractors want to stay on the assignment, then you have to bring the cost down.’”

Visibility Enables A Strategic Role For Procurement

Often, change management is the biggest hurdle to reforming procurement practices, Maxwell says. Competitive bidding processes and direct negotiations with suppliers both create additional work and lead to delayed start dates for critical projects. Suppliers, meanwhile, will likely push back – especially if they’ve been setting their own rates, without question, for some time.

Data transparency is key to easing the pain of change management. With the right technology tools in place, procurement teams can gain visibility into what they’ve spent with suppliers in the past, contrast that spending with market rates for contracted roles, and take the necessary steps to amend a SOW – and trim costs wherever possible – before putting a project out to bid.

As projects are kicked off, procurement is also equipped to track spending over time. This insight lets organizations see which suppliers hit their milestones, stay within budget, and ensure that the person assigned to the task is the same person who completes it.

An additional benefit of data transparency and visibility is that procurement can take a more proactive role, Maxwell notes. This is critical as healthcare organizations continue the push to reduce unnecessary spending while maintaining a high standard of care.

“Procurement teams have been taking a more strategic role recently,” Maxwell says. “They are not just order takers and are helping organizations mitigate risk and support cost-saving initiatives.”

For more on how rethinking your approach to services procurement can improve efficiency, increase visibility and drive significant cost savings, read “Next-Generation Services Procurement: Data-Driven and Optimized for the Future of Work.”

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