Ardent Health Services’ Focus on Purchased Services Uncovers Millions in Savings
Most contracting strategies start with a focus on categories such as med/surg supplies and physician preference items to cut costs. But purchased services is often another largely untapped source of savings in the healthcare supply chain that touches every department in a hospital.
This broad and diverse category—covering everything from food services to facilities management—typically accounts for at least one-third of a hospital’s non-labor spend.
Nashville, Tennessee-based Ardent Health Services, which operates 31 hospitals in seven states, discovered that purchased services consumed nearly half of its $2 billion annual non-labor spend. Nowhere is that focus more on display than at Albuquerque, New Mexico-based Lovelace Health System, which started to take a look at the purchased services category in 2014, with the addition of a dedicated, full-time purchased services contract administrator. Andrea Hunnicutt, CMRP, assistant vice president of supply chain for the five-hospital system, estimates the decision to concentrate on this category resulted in $2 million in savings.
“We started by putting a few of our purchased services contracts into a benchmarking tool, which made us realize that this category had a tremendous amount of low-hanging fruit,” Hunnicutt says. “It brought to light the fact that this was an area that really needed to be examined closely.”
The Value of Centralization
Contracts for purchased services are easily overlooked because they traditionally fall outside of a supply chain leader’s area of responsibility and are instead managed by various people throughout the hospital. But that’s a mistake, says Andy Motz, HealthTrust’s assistant vice president of supply chain consulting and inSight Advisory–Purchased Services.
“Purchased services tend to be very relationship-based, with department directors often writing and signing their own contracts or sometimes using only a handshake to bind the agreement,” he explains. “But there’s a lot of value that comes from centralizing all of your purchased services contracting under supply chain.”
By going through typical supply chain strategies, like a formalized bidding process, hospitals can ensure they’re paying the right price for each purchased service, Motz adds. Supply chain oversight also can help ensure standard terms and conditions, as well as quality control measures, are included in contracts. Volume-based contracting for the same purchased service can generate savings for multiple departments and dramatic reductions are possible, for both single hospitals and multi-facility IDNs—especially if purchasing is currently limited to just one or two suppliers.
Lovelace Health System is on track for about $350,000 in purchased services savings in 2019, thanks in part to a partnership with HealthTrust’s inSight Advisory Services that began last year.
Led by Motz, the HealthTrust team has helped Lovelace Health System implement new contracts for blood products and elevator maintenance. Future plans include dialysis services and linen and laundry services.
At the start of the engagement, Motz’s team worked with all of Ardent to implement the use of an analytics tool that groups purchased services spend so users can quickly identify contracting opportunities. The tool, from HealthTrust technology partner Valify, is used in tandem with inSight Advisory Services. It helps organizations identify, benchmark and track savings. It also aggregates accounts payable data and then makes comparisons across facilities within and outside of a health system.
“These contracts and invoices are spread out all over multiple sites and departments,” Hunnicutt says. “There’s not enough time in the day to scrutinize everything. That’s why a tool like this is so valuable. It helps us get a grasp on where we need to focus.”
Benchmarking speeds up timelines and provides perspective, says Tom Chickerella, vice president of materials management for Ardent Health Services.
“The challenge in the purchased services space is the inability to quickly analyze market conditions and capture spend,” Chickerella says. “With this analytics tool, tasks that would take three months can now be done in a week or two.”
Comparison shopping is also more difficult with services than with supplies, Motz notes. “If you look at a glove, no matter where you buy it, it’s still a glove. Purchased services are far less standardized, so they need to be evaluated based on their unique characteristics.”
Increasing a Facility’s Bandwidth
After Valify helped identify contracting opportunities, together the team determined which tasks Tammy Snowden—who took over the purchased services contract administrator position in 2017—could handle on her own and which ones needed HealthTrust’s involvement.
“A lot of the decision-making has to do with the category itself and whether we’re knowledgeable enough about it,” Hunnicutt says. “Other times, it’s a bandwidth issue. Purchased services contracting, especially when there’s a clinical implication, takes a lot of work. Tammy’s only one person, and we know that the HealthTrust team can help us get across the finish line.”
The likelihood of changing suppliers is another consideration because that can be “difficult, not to mention disruptive,” Hunnicutt says. “Ideally, the outcome of an RFP process is staying with a good partner and getting a little more value out of the relationship.”
But if a change in suppliers looks likely, partnering with the inSight Advisory Services team can be the smartest choice.
For example, consider the new elevator maintenance service agreement that took effect in December. Minor savings came from switching suppliers, amounting to just $35,000 over three years, but the level of service increased.
“HealthTrust taught us that it’s not always about the savings,” Snowden says. “We also need to make sure that suppliers have metrics in place so that we can hold them accountable when they are not performing as expected.”
In other situations, the decision to switch can be driven purely by savings—as was the case when a longtime supplier increased its price by 40 percent. “We like them, they bend over backward to help us and there’s a relationship of trust, but we have to vet the other possibilities after receiving this kind of an increase,” Hunnicutt explains.
While HealthTrust took the lead on the elevator maintenance strategy, Snowden played an important role as the liaison between HealthTrust and the facilities managers, as well as the local suppliers. She set up the site visits and attended all of the meetings to stay up-to-speed on the needs of the facilities.
“Tammy was instrumental in getting the four elevator maintenance suppliers on-site and in front of the facilities managers to facilitate discussions,” Motz says. “Because of that teamwork, the project stayed on track and the decision to switch to a new supplier came with a full understanding of what level of service would be expected from them.”
To ensure suppliers meet performance expectations, new purchased services contracts across Ardent include weekly implementation calls that roll seamlessly into regular performance reviews throughout the life of the contracts. The reviews provide a picture of what’s happening across all aspects of the supplier relationship, based on the previous month’s spend, hospital feedback and key performance indicators such as savings, supplier conduct and contract pricing compliance.
“Follow-up is a key factor in maximizing the value that was negotiated in the contract,” says Tom Birmingham, Ardent’s corporate director of purchased services and capital equipment. “Without proper attention to behavior, the level of service you receive is left up to the supplier.”
A Winning Strategy
Despite the associated challenges, a strategic approach to purchased services contracting can have payoffs.
“The opportunities for double-digit savings in the traditional supply arena are now far and few between,” Chickerella notes. “Given the share of spend it represents, purchased services has to be a part of total expense management.”
To achieve success, Hunnicutt underscores the need to keep people in the loop. “We try to involve frontline staff as much as possible in the early stages, challenging them to articulate what they like and don’t like about a current supplier,” she says. “Ultimately, we’re looking for their buy-in as well as an openness to change.”