Earlier this week, the Cleveland Clinic and LogicSource Inc. announced a collaboration designed to bring world-class capabilities in indirect or non-clinical procurement to the healthcare industry. In this blog, I share several reasons why this represents a much-needed game changer.
Healthcare executives are facing a perfect storm of challenges: rising costs, declining reimbursements, and an aging population driving increased demand. While traditional cost management methods may have been sufficient in the past, they are no longer enough to weather the financial pressures of today’s healthcare landscape.
As the population ages and new medical technologies emerge, the demand for healthcare services continues to grow. However, the financial resources available to meet this demand are not keeping pace. Reimbursement rates from both private and public payers fall short of the actual cost of care, leaving healthcare organizations struggling to balance their budgets.
The situation is only expected to worsen. With an aging population, there will be a significant shift from commercial to government payers. This shift, combined with the lower reimbursement rates from government sources, will have a devastating impact on healthcare organizations’ top-line revenue.
To survive and thrive in this challenging environment, healthcare executives must adopt innovative cost management strategies.
Health systems, like any enterprise, devote a substantial share of their operating budgets to goods and services not directly related to patient care. In healthcare, these are referred to as “non-clinical” or “purchased services,” though the latter moniker does not reflect the full scope of indirect spending. The retail parallel is “goods not for resale” or GNR.
Successful companies in retail, manufacturing, consumer packaged goods, and other industries manage those costs aggressively. And why wouldn’t they since customers are not directly affected?
Outside healthcare, companies spend 20% of revenue on indirect goods and services, including corporate services, technology, HR, marketing, finance, facilities, and the like. Healthcare systems spend more, about 22% of revenue. Why? Certainly, several factors could drive this spending differential. However, one that is clear from companies across these industries, indirect spending has been more rigorously managed in corporate environments than by health systems. Further, health systems invest far fewer resources necessary to effectively manage this spend than we find in well-run companies outside the industry.
Given increasing financial pressures, healthcare cannot afford to undermanage one-fifth of its operating budget—especially considering a potential margin impact of 2%.
Health systems rely on benchmarking tools, in-house procurement specialists, GPOs, advisors, and others to ensure they realize the best price-quality result across their direct spending. Benchmarking, while never perfect, works effectively when units of measure and unit price are clear and unassailable. However, indirect categories typically do not lend themselves to a simple, singular unit of measure. (Quick, what is the singular unit of measure for benchmarking an ad agency contract?)
Indirect benchmarking is significantly more nuanced and requires different tools, approaches, and experiences. For one, the analyst needs to understand the full-service offering, the user department’s specific requirements, and the context of the business area in question—marketing, finance, technology. Generalists fail on these criteria. Instead, an experienced partitioner devotes 100% to this business area and better yet, an experienced partitioner with operational experience is far better equipped to evaluate and negotiate contracts to deliver optimal results.
Noah Lyles won a gold medal in the 100m final at the recent Paris Olympics. In doing so, he ended a 20-year drought for the United States in the event. His experience shows the criticality of one’s frame of reference when pursuing excellence. To win on the world stage, Lyles needed to perform at a world-class level, not simply be the best in his own country—which he was. His time in winning the 2024 US Olympic trial of 9.83 would not have even placed at the Olympics. It would have finished in fifth. Further, he could not rely on meeting or beating the winning time from the prior Olympics. Marcel Jacobs’ 2020 Olympic gold time of 9.80 would not have qualified for the bronze medal in 2024. Standards must be set rigorously and high to deliver excellence. They must also evolve over time.
Yet, healthcare tends to compare itself to itself (despite universal agreement that the industry is inefficient) and compounds the error by using dated comparisons. Even data from six months ago is dated. The best organizations leveraged information on contracts negotiated in the last quarter. It is akin to an Olympic hopeful benchmarking his or her performance against the best high school five years ago. The comparison may make you feel good, but it will not deliver a gold medal performance.
Organizations outside healthcare buy the same or similar goods and services as health systems, often from the same suppliers. Given this, shouldn’t they benchmark their contracts against the best of the best, regardless of industry? Or can they be comfortable referencing an admittedly inefficient standard?
Business owners of non-clinical areas, whether IT, finance, marketing, and facilities, among other disciplines, set lofty expectations for the services they secure from outside the organization. For example, the CFO demands domain expertise, specialized skills, and experience when selecting an external audit firm. The chief marketing officer selects an outside ad agency only after matching that firm’s capabilities to the health system’s marketing strategies and objectives.
Given the complexity of these business requirements and complexity of vendor partner selection and contracting, it is not surprising that these business owners resist the involvement of procurement staff, consultants, and GPOs. Relying on generalists or even procurement staff who are not invested 100% in the category simply fuels this resistance.
Instead, leading companies access deep category expertise who spend 100% within that category to earn a seat at the table with the business owners. This seat extends from the initial stages of strategy and vendor identification, not solely at the time when the fully baked contract is ready for execution. Bringing prior experience as an operator or manager within the category solidifies their standing in the process.
An effective indirect procurement process can be a game changer for the industry, at a time when we are desperate for new tools. However, approaching it as an extension of direct procurement, with existing tools and with less than dedicated resources, will be no more effective than the Olympic track hopeful training for a race at the local county fair.
The collaboration between the Cleveland Clinic and LogicSource offers health systems access to cross-industry benchmarks, category expertise, and cross-industry experience that can spell the difference in a health system’s financial success.
About the Author
Mark Van Sumeren
Strategic Advisor, Healthcare
Mark Van Sumeren is the strategic advisor of the healthcare practice at LogicSource. He is a supply chain expert with 35 years of experience in business strategy and healthcare consulting. Mark has spent his career supporting health systems across the industry including large, academic medical centers, integrated delivery networks and for-profit health companies.
