Purchased Services Done Properly Can Pay Double-Dividends
BY JEFF LITTLE
Partner
[April 18, 2023] – To say we live in complex times is perhaps the understatement of the decade, especially for those of us working in the healthcare industry.
More than ever, there’s extraordinary pressure on administrators, clinicians and suppliers to drive excess cost out of the system. Whereas hospitals and other healthcare facilities once had the luxury of picking and choosing areas in which to seek more favorable pricing without sacrificing value, that mandate now applies across the board – whether it’s pharmaceuticals, medical devices and, more and more these days, purchased services. At the same time, there’s tremendous pressure to shorten hospital stays and improve patient outcomes.
Can you do both at the same time? I say, yes.
When we think of hospitals, we automatically tick off a list: Doctors, nurses, technicians, medical equipment, pharmaceuticals, beds, ERs, surgery centers, etc. What we don’t instinctively think of is landscaping, window-washing, parking & valet services, IT, marketing, legal, insurance, foodservice, environmental & janitorial services, and all the other non-healthcare needs a brick-and-mortar facility has. And you might be surprised that many of these disciplines – when executed well at a fair price – can not only achieve cost-savings but contribute indirectly to the overall patient experience.
These days, hospital margins are infinitesimal, believe it or not. While the cost of healthcare services has skyrocketed over the years, it would be an inaccurate assumption that margins have escalated accordingly. They haven’t. In fact, they’re headed in the opposite direction as top-line costs continue to rise.
A study released early last month by Fitch Ratings and shared online by Healthcare Financial Management Association [HFMA] indicated hospital margins were at 3.8% in 2021. The follow-up portion of the study conducted with the same group a year later in 2022 showed that margins had dropped sharply to 0.9% -- less than 1%! [ https://www.hfma.org/finance-and-business-strategy/healthcare-business-trends/financial-and-operational-pressures-continue-for-hospitals/ ]
Factors negatively impacting margins include labor, operating costs such as insurance and utilities, year-over-year operating room minutes that were flat [likely due to lingering concerns from the pandemic], etc.
Healthcare economists say every $1 saved on a contract equates to $20 in revenue. So you can certainly understand the mandate to contract for products and services at a fair price without compromising quality.
For the sake of today’s discussion, let’s look specifically at purchased services [all those non-healthcare needs I mentioned above] and some of the challenges vendors and providers of these services face:
Challenge #1: Getting in the Door – Access to decision-makers, exacerbated by the pandemic, is tighter than ever. It’s one thing to offer a quality service at an attractive price; it’s an altogether different thing to gain an audience with those who contract for these services. And you’ve got to know precisely who the right people are. It will do you little to no good to pitch your service to someone who can only pass along the info to a decision-maker. Sometimes, it’s a challenge to simply identify key players within each organization.
Challenge #2: Carefully Crafted Messaging – If you’re fortunate enough to score an appointment with a decision-maker, you’d better be prepared because your time will likely be limited and this may be your only shot to shine.
It’s critically important to clearly and thoughtfully identify your unique value proposition in advance of your presentation and to be able to articulate it in language that will resonate with Value Analysis Committee members and other decision-makers. Also, understand that hospitals and other healthcare facilities aren’t always searching for the lowest price, they’re seeking the best value in most cases. If your company’s service is priced higher than your competitors’, be sure you convincingly address how and why your offering is superior and a stronger value for their investment.
Challenge #3: Contractual Language – Most contracts generated by hospital systems are based on purchasing healthcare-related products and devices and, the reality is, a one-size-fits-all contract can be problematic for service vendors. Contracts will almost often include HIPAA considerations [I doubt very seriously the fella planting a beautiful bed of flowers outside is going to ever have access to sensitive patient info, much less the opportunity to share it inappropriately, but the clause will likely be there], legal and indemnification language, etc.
Chances are, as a service-provider, you’re probably going to see clauses and demands you’ve never encountered before in a contract. Yes, if a rock kicks up while a crew member is using a string-trimmer and hits someone in the head, you’re going to be held accountable and that’s fair. But some of the other contract clauses and demands simply don’t apply to parking attendants or window washers or landscape workers. Some organizations understand this and have crafted contract language specific to these “outside-the-four-walls” purchased services, while other hospital systems have stuck with often-rigid, take-it-or-leave-it language and terms.
Having said that, there are some outsourced services that do actually need healthcare-centric contract wording such as cafeteria workers and plant maintenance professionals who work inside the four walls. In other cases like outsourced IT services, expect there to also be detailed language that specifically addresses cyber-security, data integrity, patient privacy, etc. As time and technology march on and hackers hone their craft, expect these types of contractual demands to increase. [Again, we live in crazy, complex times.]
Further complicating matters are national Group Purchasing Organizations [GPO] that may require you to service their entire footprint, which could be nationwide or a vast swath of the country. Unless you’re a huge company operating in most or all of the 50 states, you might find yourself shut out of the process. In these situations, your preferred point-of-entry is more likely a smaller GPO, a Regional Purchasing Coalition [RPC] or with an Integrated Delivery Network [IDN]. Again, simply knowing where to go and whom to talk to can be confusing and challenging.
Challenge #4: “But this is how we’ve always done it.” – Until recently, purchased services flew mostly under the radar, contracted easily and without many hoops to jump through for approval. As a result, companies handling landscaping or marketing or foodservice or parking often remained in place for an extended period of time. Too many other higher priorities in a healthcare environment and, besides, “We’ve used these folks for 10 years or more.”
So what?
In today’s world where containing costs is an imperative, every operational aspect of the facility should be on the table for periodic review/assessment of value gained for price paid. [Remember that 0.9% margin I mentioned?] Decision-makers must shed this mindset and be willing to look at new and better options. Vendors need to be aware they may have to bust through this mindset.
Challenge 5: Industry Complexity – Healthcare has always included some degree of complexity, as does everything that’s regulated, but never more so than present times. Layer upon layer of complexity exists and it’s never quite the same experience from one facility to the next. Knowledge is key if you’re to maximize your shot at going to contract as a service-provider. Contracting with a hospital or hospital system is not the same as contracting with an office park or other commercial enterprise.
Assuming I haven’t discouraged you, there are two significant advantages to contracting with qualified, reputable service-providers. Let’s take a look:
Advantage #1: Bundling, Be Gone! – Americans are abandoning cable television in staggering numbers in favor or more contemporary [and more affordable] viewing platforms and options. Some industry experts predict cable will go the way of the 8-track player and computer punch cards in the near future. Much of the decision to migrate to these newer, modern services is based on a desire to lift the “burden of the bundle”. Buy 500 channels and watch 10, where’s the wisdom in that?
The same has been true in hospitals for decades. Let’s say you have an infusion pump at a bedside. Along with that pump, you need tubing and an IV bag and the solution contained within. All of these items may be proprietary, so you have no other option to find a like-quality tube, IV bag or solution from another provider offering a better price and higher quality service. You’ve been “burdened with the bundle”.
For the most part, this doesn’t occur in non-healthcare-related purchased services. If a company offers landscaping, window-washing and janitorial services, you go to contract only for the specific service[s] you need. And if you find their sales pitch proved to be better than their delivery, you can part ways and find a more desirable vendor or provider. It’s much, much easier to terminate an agreement for purchased services than it is with healthcare products and devices.
Advantage #2: Elevating the Patient Experience – While a non-healthcare service provider cannot directly improve patient outcomes, they can elevate the patient experience.
Imagine a patient arriving for surgery. They drive onto litter-free, beautifully maintained grounds with spirit-boosting pops of floral color and neatly trimmed shrubbery. They’re greeted by a crisply uniformed valet who opens the door for them and greets them with a smile and a cheery “Good morning!” The patient walks through the automatic doors and notices how the glass glistens. In the lobby, there are well-tended plants and shiny floors and comfortable furniture. Pleasant artwork is on the walls, restrooms gleam and smell fresh … and so forth. You get the picture.
This type of experience cannot directly increase chances of a successful patient outcome, but it can influence their spirits in a positive way, put them at ease, and add a dimension of pleasantness to the otherwise worrisome experience of undergoing surgery.
Purchased services are a critical component of a hospital or healthcare facility’s operations. But going to contract with them can be confusing and challenging, at times. I’d venture to say, most of the time. If your company offers a quality service at a fair price, you’ve only done half the work. Getting before the right people, speaking their language, clearly articulating your unique value proposition, and securing a contract that’s favorable for both parties is the other half.
Don’t go it alone. Contact Excelerant today and let’s have a chat.