This article was originally published by HFMA.
Because healthcare supply chain savings can be found in the most unexpected places, such as indirect spending, it is imperative for health system finance leaders to be continually alert to the opportunities they provide — especially given today’s unpredictable healthcare financial outlook.
With healthcare margins under constant and growing pressure, hospital and health system finance leaders must continue to explore all avenues for cost savings across their organization. Supply chain savings efforts have traditionally been focused on clinical spending and on contracts accessed via group purchasing organization (GPO) relationships. By looking to nonclinical spending on administrative and IT systems, waste management, transportation couriers and other areas, these financial executives can find valuable untapped savings within nonclinical procurement.
Recent research has found that up to 30% of a health system’s spending is associated with non-clinical costs. Typically these expenditures tend not to be included in GPO agreements or managed by the procurement office, making them difficult to track and manage effectively. Furthermore, nonclinical spending isn’t commonly subject to a best-practice strategic sourcing process.
The need for a focus on reducing nonclinical spending becomes clear when one considers that the United States spends four times as much per capital on administrative cost than other wealthy countries ($925 versus $204 per capita). Yet significantly contributing to this cost are the types of nonclinical spend described here, which are often managed by staff who lack the requisite expertise or training to achieve the best possible results.
A recent analysis disclosed that internal department heads, not procurement experts, often take ownership of nonclinical spending, with contracts renegotiated only every two, three or even four years. These department heads may not have sufficient resources, bandwidth, experience, or skillset to negotiate these contracts more frequently or effectively.
Instead, finance executives should understand how nonclinical spending represents a significant portion of the health system’s overall costs and why this area warrants dedicated resources and attention for process improvement and cost savings. And they should recognize how supply chain experts can play a valuable role here and during contract negotiations – where they can serve as the “bad guys,” thereby preserving the integrity of day-to-day relationships ancillary departments enjoy with the vendors that serve them.
Specifically, the procurement practices commonplace in industries other than healthcare – like retail and consumer goods – haven’t been applied as often in healthcare despite the potential to provide insight and value into to nonclinical spending as well.
Health systems tend to pay about 7% to 12% more than companies in other industries for many of the same goods and services. This situation makes cross-industry benchmarks particularly valuable for healthcare organizations in assessing their nonclinical spend categories.
Simply put, areas in healthcare spending that aren’t well monitored likely are also not well managed. And poorly managed spending increases the risk of unnecessary costs and negative impacts on the bottom line. Nonclinical expenditures, also termed indirect spending, constitute one of these areas.
An upfront investment in time and resources is needed to reengineer a nonclinical procurement process. As a best practice, health systems should allocate between 0.6% and 0.8% of their total nonclinical spending on managing the nonclinical procurement function.
For example, if a health system’s supply chain oversees $600 million in nonclinical spending, in accordance with industry best practices, it should allocate $3.6 million to $4.8 million to dedicated indirect procurement staffing, technology and other resources. Unfortunately, many businesses – not just in healthcare but across all sectors – fall short of this level of investment in procurement.
An important consideration is the correlation between nonclinical spending and the management of clinical expenses, such as cardiac stents and ortho and cardiac implants. Valuable insights into the effectiveness of purchasing management strategies can be derived from analyzing how much time and resources are spent managing clinical finances in relation to the time and costs spent on nonclinical items. The ROI is extremely impressive for health systems that take the time to analyze, staff and technology-enable nonclinical procurement teams.
Take, for instance, the experiences of York, Pennsylvania-based WellSpan Health, a health system that has demonstrated best practice in managing its nonclinical spending.
WellSpan’s reengineering of its nonclinical spending yielded tangible results in 2022, the first year of the initiative, with $6 million in savings achieved across commercial, operational and technical initiatives. The health system performed a comprehensive analysis of every category of nonclinical purchasing, and it engaged representatives from departments across the enterprise in various key indirect spending initiatives aimed at achieving both quality improvements and significant savings. The following solutions that WellSpan identified and implemented provide examples of where it focused its efforts to reduce its nonclinical spend.
WellSpan’s ability to realize significant ROI from these initiatives stemmed from its efforts to demonstrate best practices in four areas.
Finance executives have much to gain by focusing on nonclinical spend optimization. However, the journey requires ongoing commitment and a willingness to embrace best practices and lessons learned from other industries.
From their position of financial oversight, senior finance executives should be strong advocates for recognizing the significance of nonclinical spending, engaging with the organization’s supply chain team, establishing cross-department collaboration and using external data to drive informed decision-making. By asking the right questions and fostering open dialogue, finance executives can initiate discussions that lead to process improvements, cost savings and enhanced vendor relationships.