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Making Sense of a Moonshot Mindset




Where do outsourcing and purchased services meet with Supply Chain?

by Rick Dana Barlow

Mention the terms "outsourcing" and "purchased services" to a roomful of healthcare supply chain leaders, managers and professionals and the elicited reactions will span disdain, fear, surprise and wonder.

Those who fret about job security find unlikely allies with those who spot financial and operational opportunities.

Those who see their world of influence, oversight and responsibility being expanded well beyond the scope of what they have yet to tame unite with those who may have propelled themselves to the rim of effectiveness and efficiency and seek new worlds to conquer.

Yes, outsourcing and purchased services fuse strange bedfellows.

If anything, supply chain pros may equate outsourcing alternately with job loss or revenue generation, depending on their perspectives. With purchased services, questions continue to linger about boundaries, delineation and scope.

What encompasses the category of "purchased services?" How is it different from traditional, typical supply chain issues? Where does supply chain fit into purchased services or vice versa? Is it a "new" area for supply chain to exploit or just an existing area that Supply Chain has overlooked until now?

Within the last few years, purchased services emerged as one of the latest hot topics to discuss and drive seminar interest as hospitals showcase their early and initial successes in tackling this intriguing market basket. (See "New name for familiar contracting category? January 2011 HPN.) Interest continues to simmer. Last August, the Association for Healthcare Resource & Materials Management (AHRMM) devoted an educational session to the topic at its annual conference in Indianapolis. The panel of operations and supply chain executives from acute and nonacute care organizations attracted more than 100 attendees stuffed in a packed subdivided ballroom.

Despite the curiosity and enduring questions, several surefire themes have taken root to feed expected fiscal and operational success stemming from purchased services. First, purchased services extends to every area, every department of an organization. Second, purchased services reinforces that Supply Chain should control all contracting and contract negotiations for every product and service entering and leaving the organization as well as be the central repository for all contracting data, contracts and supplier contact, regardless of requisitioning department.

Defining boundaries

How can healthcare organizations draw a line between outsourcing and purchased services, particularly if the borders seem blurry and gray?

"Purchased services are provided by a third-party supplier and cover a broad array of categories, such as equipment maintenance (mobile imaging, scope repair), facility maintenance (elevators, lawn care), clinical services (dialysis) and management services," indicated Christina Katamay, Assistant Vice President of ServiceTrust, the purchased services consulting division of HealthTrust. "Outsourcing typically covers the management and staffing of an entire hospital department, such as environmental services, food services, plant operations and security."

Michael Bohon, Founding Principal, HealthCare Solutions Bureau and former hospital supply chain executive, concurs, but adds a time element as a prominent differentiator. "Outsourcing refers to contracts that provide personnel that work exclusively for a client — usually on-site — for a definite contracted period of time," he said. "The relationship includes a full complement of hiring expectations — salary, benefits, vacation, etc. Purchased services refer to contracts for services on an as-needed basis. These services may be performed remotely. They can be provided on an irregular schedule and the people involved are considered as contractors rather than employees."

Mark Landau, Senior Vice President, Capstone Health Alliance, distinguishes the two squarely on the scope of services provided. "Outsourcing the entire laboratory, biomedical, food services or environmental departments is different from the individual categories that are typically viewed as a purchased service," Landau noted. Otherwise, he said he believes they’re "virtually the same."

For Fred Crans, Co-Founder and Senior Vice President, Healthcare Supply Chain Strategies, Consilium Healthcare Strategy Group LLC, it’s simply a matter of semantics.

"Theoretically, anything you don’t do yourself is a purchased service," said Crans, whose supply chain career has spanned hospitals and health systems, group purchasing organizations and equipment sourcing and management firms. "The dividing line might be when you decide to let someone other than yourself manage an entire function like, say, Environmental Services. There you have outsourced the function to a third party. However, to organizations [that] provide tools to address purchased services costs, that outsourcing falls within the scope of their purchased services tool."

Experts stop short of fusing purchased services with supply chain, but they are mixed when classifying one as the subset of the other.

"Purchased services is a collection of service contracts managed at the department level, and Supply Chain is a hospital department that negotiates contracts for services and supplies," Katamay noted. "One is not necessarily a subcategory of the other. Purchased services contracts are utilized in almost every hospital department, and contracting for these services has traditionally had little involvement from Supply Chain. But hospitals are now finding that including Supply Chain in service contract negotiations results in better negotiated pricing, terms and conditions.

"In the past, Supply Chain focused on their traditional functions of managing supply costs, inventory and distribution," Katamay added. "Today, they’re much more apt to be involved in negotiating and managing the purchased services contracts as well."

Bohon delineates the two based on a C-suite perspective. "Purchased services is a section of an organization’s budget or general ledger," he said. "[They] are a type or grouping of expenses that involves contracting for assistance with operations that are not core competencies of the hospital/system. The supply chain is a section of the organization’s operational function. Supply Chain traditionally focuses on the management of supplies and materials. However, the administration of purchased services contracting should also be included in the supply chain’s responsibilities.

"The first includes the management of multiple functions or needs," Bohon added. "The second should be the operational area managing those functions and needs."  

Crans doesn’t believe purchased services and Supply Chain necessarily are dependent on each other.

"Supply Chain is a discreet operational activity within an organization, generally characterized by the inclusion of specific functions related to purchasing, contracting, logistics and other areas of service," he said. "Purchased services are different. They can be completely independent of Supply Chain, such as translation service, or tied to Supply Chain, such as distribution services or couriers. Most are self-evident. Esoteric lab testing, for example, fits into the Laboratory Services, whereas Document Storage and Retrieving may well fit into Supply Chain as part of the logistics operation."

Landau steadfastly argues that purchased services is a subcategory of Supply Chain.

"Supply Chain, as we know it today, is much bigger and broader than purchased services," he emphasized. "Supply Chain covers all supplies and equipment, sometimes food and pharmacy, most always lab, etc., whereas the purchased services categories are typically just service-related in nature even though the total spend is high."

The labor question

Some industry experts have stated that purchased services on average accounts for 35 percent of a provider’s total non-labor expense stream. Historically, that percentage has been attributed to supply chain, too. However, if purchased services includes outsourced expertise, or consulting labor, does that mean the labor portion of a provider’s expense stream encompasses only the employed staff? Does it include contracted staff, too, or are they part of purchased services?

That depends.

"It can certainly be both as long as the necessary stakeholders are involved in the process, but that is the case for even the non-labor categories to ensure success," Landau surmised.

"Employed staff, contracted labor and contracted services that include labor are all categories of labor costs, but ultimately what constitutes ‘labor’ is determined by a hospital’s accounting practices," Katamay noted. "Typically, contracted labor/staff is considered part of a purchased services contract and not a labor cost."

Bohon acknowledges the conundrum.

"Attempting to calculate shares of total expense in this manner can be confusing and very deceptive," he said. "There can be overlaps as hospitals tend to break these numbers down in countless different ways, and this is why comparisons and benchmarking can be so difficult. I would suggest that the standard be the following: Labor expense should include all employees and any personnel provided under outsourcing agreements as these are taking the place of people who would otherwise be listed as employees. The other major expense category should be broken down into two divisions: Material goods, such as med/surg supplies, and services provided by outside providers."

Crans spots the debate and uncertainty as an effective differentiation point.

"From an accounting standpoint, any use of human beings to render services not included as full-time equivalents (FTEs) on the organization’s formal operating budget — including consultants — are counted as purchased services. However, when calculating [key performance indicators] that include people — nursing cost per adjusted discharge, etc. — there has to be a way to incorporate those costs into the calculation," he said. "From a cost reduction opportunity standpoint, however, the opportunity falls under the purchased services umbrella.

"In truth, there are two categories: People and stuff," Crans added. "However, stuff can include people who do the same things as people who are reflected on the budget as employees."

P.S. in pop culture

Purchased services’ emergence during President Obama’s healthcare reform initiative begs the question as to why it’s so popular now versus, say, during President Clinton’s healthcare reform initiative in the 1990s.

"National healthcare reform has placed added pressure on hospitals to reduce costs," Katamay said. "In addition to the reduced reimbursement from insurance companies, alternative care delivery models are developing and taking volume and revenue away from the acute care setting, making it even more important for hospitals to find ways to reduce costs to remain profitable. For several years, the focus has been on product standardization and reducing supply, pharmacy and food costs, and significant progress has been made in these areas. Purchased services have more recently been identified as an often-overlooked area for savings opportunities as these contracts have not been centrally managed and many have been left in place for years without re-evaluating the market or the service needs of the hospital."

Bohon attributes the current popularity to organizational span.

"Purchased services have been virtually ignored as an opportunity for better management and cost reduction because they are often spread across so many departments," he said. "As a result, few people realize how large the total volume is. In many cases everyone assumes that these services are being managed by someone else when, in fact, no one has taken responsibility. On the opposite end of the spectrum often people set in place agreements for the service provided specifically for their areas without taking into consideration all the other departments that use the same services.

"Additionally, it is often found that no one has taken the time to research exactly how their purchased services dollars are being spent," Bohon continued. "A few years ago I interviewed a large children’s hospital’s clinical laboratory’s management regarding their use of reference labs. They were certain that they used two, perhaps three. I explained that their general ledger report showed the 71 different labs had billed them for services in the past 12 months. They insisted that all but two or three of them were one-time use and or highly specialized labs. I informed them that there were 21 labs whose total billing was $10,000 and up. Also, I pointed out that of the three labs they said they were using as their standards they currently had signed contracts with only two of them. Such is the confusion that is commonplace."

Crans describes how external politics has affected internal politics.

"The Affordable Care Act and its accompanying demand to lower operating costs and reward or punish based on performance has brushed aside the ‘Gentlemen’s Agreements’ that were in place in prior years," he said. "The territorial power of individual Department Directors is giving way to the organization’s need to perform well in all areas. This is requiring a greater rigor as it relates to all contracting. It is also requiring Supply Chain leaders — usually with the urging and support of the C-suite — to knock on doors that were formerly closed to them. Many Supply Chain leaders have embraced the opportunity, while others remain daunted by the concept of working outside the area of their primary expertise.

"Since the Clinton Administration, the worldview of what constitutes healthcare has been expanding from what was once acute care to what is now population health," Crans continued. "This is a necessary and good thing, and a real challenge to a status quo that has been in place largely unchanged since the Social Security Act of 1965, with only a minor modification under the Tax Equity and Fiscal Responsibility Act of 1983." HPN 

P.S.: the list

What would you include in the market basket of purchased services? Here’s a comprehensive list of suggestions that may transcend Supply Chain’s typical panoramic view. Noted Michael Bohon, Founding Principal, HealthCare Solutions Bureau: "The last time I composed a list of services that could be considered for the purchased services category, it had over 60 items on it, and I still felt there were others that could be added. The list will vary as some organizations may have internal expertise for some categories or no need for the services." Noteworthy and curiously: Capital equipment, consulting, food and nutritional supplies, information technology hardware and software, medical/surgical supplies and pharmacy/pharmaceutical supplies didn’t make the cut.

  • Food service contracts
  • Furniture (particularly leased or rented)
  • Construction and renovations
  • Laundry and linen
  • Housekeeping
  • Biomedical engineering
  • Environmental/facility services
  • Printing
  • Freight and shipping
  • Medical waste treatment/disposal
  • Hazardous waste treatment/disposal
  • General waste disposal
  • Equipment/maintenance service contracts
  • MRO supplies
  • Insurance
  • Temporary staffing
  • Billing and coding
  • Advertising, marketing and public relations
  • Transcription services
  • Pest services
  • Elevator maintenance
  • HVAC maintenance
  • Procurement cards
  • Landscaping
  • Valet parking
  • Dialysis services

Source: Healthcare Purchasing News interviews, January 2016

Should Supply Chain oversee purchased services?

Supply Chain executives give the short answer of "yes," but add the caveat of collaboration with clinical leaders and other department heads.

"Supply Chain leaders should always be in charge of hospital contracts for third-party services because they have extensive contracting experience as well as access to benchmark pricing that may not be available at the department level. Centralized oversight helps ensure that contracts are properly managed — and consolidated in categories where services are required across multiple hospital departments."

Christina Katamay, Assistant Vice President of ServiceTrust,
the purchased services consulting division of HealthTrust

"I certainly believe Supply Chain should be involved in the purchased services process. That is their area of expertise, experience and focus."

Mark Landau, Senior Vice President, Capstone Health Alliance

"In my opinion, the approach to purchased services needs to be collaborative as opposed to having a singular leader in charge of it. There are three key elements necessary to the solving of any problem: People, process and technology. No single person in any organization knows enough to single-handedly manage the purchased services opportunity. Supply Chain leaders should be strong in contracting expertise and in instituting the necessary procedural rigors to make certain things are done correctly every time. Specific departmental heads or other internal subject matter experts possess discreet knowledge of the functions being addressed — knowledge and experience the Supply Chain leader does not possess — and tools exist that provide key information to optimize decisions related to the management of purchased services. All three elements must be present in a successful program. Who runs the process is not as important as the fact that a formal process exists and is followed with great rigor."

Fred Crans, veteran healthcare supply chain executive with experience in a variety of hospitals, GPOs, equipment planning and sourcing firms and consulting firms

"The Supply Chain operation at a hospital is ideally suited to manage the purchased services agreements for the following reasons:

  • They are skilled at both contract management and negotiation — or should be.
  • Their area of responsibility covers all departments in the organization and they should have strong relationships in place with them.
  • They should already be knowledgeable in tracking contract performance and consolidation of contracts
  • They provide an objective approach to the consideration of potential providers of services.

"Often the issue with pursuing this cost savings opportunity is short-sightedness on the part of hospital execs. A few years ago I was consulting at a 1,000-bed hospital. I uncovered a prospect for significant savings by addressing purchased services across their organization. The leader of the Supply Chain agreed with my evaluation. She said that her staff was maxed out with their current work and that the C-suite would not provide any additional labor. So she declined to consider the prospect of substantial financial improvements."

Michael Bohon, Managing Director, Health Care Solutions Bureau


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