January 31

Purchased Service Pitfalls To Avoid


More than ever before, healthcare organizations are targeting their purchased services for savings, which is a good thing. However, too often these same healthcare organizations are only nibbling around the edges of their purchased service costs. Here are three purchased service pitfalls that you need to avoid to reap the full benefits of purchased service management:

3 Purchased Service Pitfalls To Avoid

1. Forgetting that price is just the tip of the iceberg. We have observed that 97% of the time, healthcare organizations focus their purchased service contract analysis on price alone. These organizations either rebid their contracts or sign up for a local or national GPO contract to lower their costs. While price is important, the biggest cost driver on these contracts is their in-use or utilization cost. For instance, if you have the best price on your laundry/linen service in the region, but your cost per patient day is through the roof, what have you gained by getting a better price at the pump? Believe it or not, it’s a much better tactic to sign a laundry/linen service provider contract which has a higher unit price and a guaranteed cost per patient day. This is where your real savings reside.

2. Not starting with a blank piece of paper. Too many purchased service contracts are written using the contractor’s agreement, thereby, agreeing to terms, conditions, and service elements that could be detrimental to your hospital’s bottom line or not needed at all. We have a client that started with a blank piece of paper on his renewal food service contract that included 24/7 concierge services for their patients which was costing this hospital a million dollars annually. After consultation with his senior management, it was decided that this add-on service wasn’t needed at all. This is just one example that shows you don’t need everything you have in your purchased service agreements now.

3. Avoiding sacred cows. We hear from supply chain professionals that they don’t want to review the lab reference services, telecommunications, insurance, consulting, IT contracts, etc., because they are “sacred cows”. This should be a tip-off that there are savings in these contracts, but people are afraid to look at them. No contract should be “off limits” for review or you will find down the road that it is too costly, vendor centric, or downright prohibitive.

Savings Opportunities

Back to our original point. There are huge savings (11% to 18%) in most healthcare organizations’ purchased service contracts. However, if you are only looking at price savings, the savings are only 5% to 8%. Therefore, avoiding these three purchased service contract pitfalls will bring you much closer to wringing the towel dry on your purchased service contracts than any other tactics. Isn’t that why you decided to look at your hospital’s purchased service contracts in the first place?

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