TAKING CONTROL OF YOUR PURCHASED SERVICES Western States Healthcare Materials Management Association 2014

Agenda What is a Purchased Service? Purchased Services Challenges Purchased Services Opportunities Factors Causing Growth in Purchased Services The Future of Purchased Services The Value Analysis Approach Case Studies

What is a Purchased Service? Procedure Function Operation Job Task

Purchased Services Challenges increase in spend services lack of visibility & executive sponsorship lack of broad category expertise decentralized decision making and purchasing lack of infrastructure to control and manage contracts no benchmarking data available regional variations

Poll Question What is your biggest challenge? – Contracts and departments are disconnected – No central reporting, process or transparency – Lack of benchmarks and/or expertise in many areas – Processes vary by service, department, etc.

Purchased Service Opportunities 4%7% Operating Margin Purchased Services 20%17% Labor, Supplies and Other Non-purchased Services Operating Expenses 76% Best practice organizations spend 8% to 25% less on purchased services than average performers. The average hospital can quickly realize 3% or more sustainable improvements in their operating margin by applying best practices. Savings drop immediately to the bottom line. Organizations spending $30 to $40 million on purchased services could see cost reductions of $4.5 to $6 million.

Poll Question How much do you spend on purchased services each year? – Less than $1 million – $1 million to $10 million – $10 million to $25 million – $25 million to $50 million – More than $50 million

Factors Causing Growth in Purchased Services Specialization Innovation Core Competency Patient Satisfaction Reduced Costs Critical services, such as Virtual ICU, offer immediate access to highly skilled experts at a time where there is a national shortage of intensivists‎ and skilled critical care nurses. New services like Image Guided Neurosurgery are offering the provider access to cutting edge technology without requiring an up-front capital investment. Outsourcing a clinical service, such as cataract, to a third party gives hospitals the opportunity to focus on achieving their strategic initiatives like cancer care, surgical towers, a bariatric center or ambulatory surgery center. Improving patient satisfaction is often a motivator for outsourcing services, such as translation, because communication is improved and streamlined between patients, staff and physicians. Infrastructure costs, such as IT, can be time consuming and costly which makes outsourcing an attractive choice. Lower labor costs, call and overtime reduction.

The Future of Purchased Services It’s easier to get the wins here than in supplies It’s billed monthly, so the savings are immediate The scope is always changing for the services Control what you can control: your costs, not your reimbursements

The Value Analysis Approach ASSESS REVIEW FINALIZE MEASURE ENLIST AN EXECUTIVE CHAMPION This can be anyone from the VP-level in Supply Chain to the CFO or CEO directly. Enlist a task force and key stakeholders around purchased services. Prioritize, categorize and create a single point of focus for purchased services contracting and sourcing. ARM YOURSELF WITH DATA Learn market highlights, industry best practices by category, pricing metrics, competitive vendor directory and key performance indicators. Create a knowledge library to include RFPs, SOWs, SLAs, sample contracts, price benchmarks and more. FOLLOW THE PLAN Continue to monitor both the performance and billing of the service under the terms of the contracts against your expectations and utilization.

Case Study: Transcription MULTI-FACILITY SYSTEM IN THE MIDWEST $200 million annual purchased services spend Centralizing purchased services is a key strategic priority Historically relied on a contingency consulting firm to support their efforts Vendor was the incumbent and integrated into system EMR platform. Corporate offices wanted to add new modules and centralize facility-level contracts. A consulting firm reviewed the new proposal and corrected only grammatical errors, which offered no additional insight. Vendor later offered a price reduction. TAT & Error Rates: There were no penalties defined for errors or failure to meet TAT guidelines. Price benchmarking: Rates offered by the vendor were not competitive. Transcription volume: Increases in volume were not reflected in price. In most cases when a volume increases, you should see a unit price reduction. Contract length: We recommend contracts no longer than three years with annual reviews and opportunities for adjustments. Special concession: It is important to look for small concessions that are unique to your situation and can allow you to make price reductions. SCENARIO CONTRACT REVIEW INSIGHT

Case Study: Transcription Achieved 28% cost reduction based on current annual transcription services spend of $2.5 million. Domestic vs. global transcription: Offshore transcription was dropped for domestic transcription. Price benchmarking: Vendor rates for transcription services were above industry accepted rates. Transcription volume: Pricing was adjusted to account for an increase in volume. Contract length: Contract length reduced from a seven-year agreement to a three-year with annual reviews. Contract language: Penalties for error rates were inserted into the agreement along with defined dispute resolution (extremely important for offshore transcription services). A 98% accuracy guarantee along with penalties when SLA not met was also added. $667,892 cost reduction over the committed three-year period Type of ServiceVendor RateTarget Rate Domestic Transcription Services Domestic Transcription Services with Speech Recognition Global Transcription Services with ASR Price Benchmarking MULTI-FACILITY SYSTEM IN THE MIDWEST $200 million annual purchased services spend Centralizing purchased services is a key strategic priority Historically relied on a contingency consulting firm to support their efforts CONTRACT REVIEW RESULTS

Case Study: Elevators MULTI-FACILITY SYSTEM IN THE NORTHWEST Renewal of elevator contract Service support declining over time Historically relied on staff to negotiate purchase services Corporate offices wanted to vet pricing and contract terms. Vendor submitted contract renewal. The hospital had no way to compare proposal to the vendor’s other contracts. Sister facility’s elevator proposal offered more coverage for lower pricing with competitive vendor. Contract language: The contract had no penalty for downtime, lacked a termination clause and renewal language was not defined in the agreement. Quality benchmarking: Lacked a checklist to determine the quality of service being provided and measure it against other vendors. Price benchmarking: Unclear if pricing was competitive for other contracts of similar coverage, type and quantity. SCENARIO CONTRACT REVIEW INSIGHT

Case Study: Elevators Achieved 45% reduction cost. Contract language: Termination and annual industry standard cap language was able to be added to the contract along with a vendor responsiveness clause. Quality benchmarking: Provided benchmarks to help the hospital better measure their quality of service. Number of call-backs or unscheduled service outages Response time Guaranteed up-time Hours of service Cost of afterhours repair Parts availability and costs, etc. Price benchmarking: Monthly payment was negotiated from the original contract price of $3,990 per month to $1,936 per month for the same level of coverage. $160,000 cost reduction over the committed three-year period CONTRACT REVIEW RESULTS MULTI-FACILITY SYSTEM IN THE NORTHWEST Renewal of elevator contract Service support declining over time Historically relied on staff to negotiate purchase services