At the Margins

Choosing not to choose—invest in infrastructure without losing price competitiveness

Current health care markets are making two big asks of hospitals and health systems. First, they’re signaling a clear interest in population-health capabilities. Second, they’re placing a premium on the “retail” characteristics of our offerings, including frictionless access, differentiated offerings, and broad geographical coverage.

The major infrastructure spending required to rise to either of these challenges won’t be a simple thing for most of us to manage. One big reason is the persistent pressure on hospitals to deliver low-unit cost—you’re not going to be able to pay for those big capital expenditures by raising prices.

Instead, progressive providers are upping their ambitions for the scale and speed of cost savings they’re going after. They’re continuing to pursue longer term cost-trend control—painstaking work, based on managing demand and utilization to prepare for risk contracting. But they’re also looking for more immediate impact, on a grander scale.

Purchased services: An unrivaled source of large, rapid savings

One lever providers are pulling to make this happen is purchased services. Typical categories include: transcription, printing, food, laundry, diagnostic imaging, and biomed. The logic is simple: purchased services account for huge amounts of spend, channeled through one focused mechanism of control—the contract. Refreshing contracts through incumbent renegotiation and/or competitive bidding can save millions. What’s more, the required work can often be done in a few short months.

Simple—but not easy

That’s not to say it’s easy. In fact, a lot of providers I talk to are reluctant to engage purchased services because they’ve been burned in the past. And there is a lesson here. This is an area where execution is 90% of success, and few hospitals redo contracts frequently enough to become experts at it. One simple way to think about it is navigating between two extremes; moving too quickly or moving too slowly. Here’s some observations from hospitals that have gotten it right (and a few that have gotten it wrong).

Jumping the gun

Let’s start with moving too quickly. Probably the most common failure path I’ve seen is when hospital leadership treats purchased services as a commodity—meaning, they underestimate the complexity of the task at hand. It’s an understandable impulse. Why make your life harder than it needs to be if you can simply choose a new service vendor from a catalog of options suggested by your GPO?

Three reasons finance leaders are scaling back on GPO contracting

The problem is that purchased services rarely are true commodities. In addition to impacting whatever service you’ve purchased, almost any contract will have a host of indirect touch points, across your nursing capabilities, IT infrastructure, patient experience, etc. This means they can create big headaches down the road if you’ve partnered with the wrong provider or haven’t thought through your contracts carefully.

Undue diligence

At the other extreme are hospitals that get bogged down in what might be called “undue diligence.” Often these are institutions that got burned in the past by under-thinking their commercial optimization efforts and are being extra careful the second time around. However, overthinking purchased services has its own penalties.

Why health care is rethinking the GPO model

An extreme example would be having all of your (say) 53 stakeholders edit a print services RFP document—something I’ve actually seen happen. This kind of approach can result in contract documents that are impossible to make sense of, and make it incredibly difficult to reach an agreement with your vendors. It can also draw out the time required for contracting to the point where the assumptions you’re working with—especially in fast-moving technology-related fields—become outdated by the time you’ve finalized your contract.

No substitute for knowing where to focus

The trick here boils down to knowing the right questions to ask—which will differ for the various services you’re purchasing. You’ll want to understand potential flashpoints that might result for any given service and how these map to local conditions within your hospital and health system. Once you do, you’ll be able to selectively head off those challenges, while avoiding the drain on momentum that can result from going overboard with analysis and stakeholder consultation.

Once you do get it right, the speed and scale of savings generated can be astonishing. In just one typical example I saw recently, a five-month contract renegotiation with an incumbent supplier of hotel services netted a 300-bed hospital $1 million in annual savings, a 10% reduction off their baseline spend, and a 20x ROI for the resources they invested in the renegotiation effort.

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