This article was originally published by MedCity News.
There’s a common belief in the healthcare industry that partnering with Group Purchasing Organizations (GPOs) means that most or all non-clinical purchases are covered by the contract.
It almost sounds too good to be true: GPOs have all the answers for all your procurement needs. Finally, a one-stop shop for all your procurement solutions!
Unfortunately, this is far from reality.
In reality, GPOs only cover around 12-25% of non-clinical spend. This means that over 75% of non-clinical expenditures might not be covered by GPOs. Considering the scale of operations in the healthcare sector, the amount of money that isn’t maximizing its purchasing power is staggering. Potentially tens of, or even hundreds of millions of dollars, are minimally managed or unmanaged.
By our estimate, elevating your attention and control of indirect spending could improve your health system’s operating margin by 200-300 basis points.
Would you hire a general practitioner to perform complex heart surgery? Sounds risky, doesn’t it? This is similar to what happens when healthcare organizations rely solely on Group Purchasing Organizations (GPOs) for their non-clinical procurement needs.
A GPO, with its broad focus on healthcare, may not have the specific expertise needed to navigate the non-clinical space effectively. They are the general practitioner – great for an overview but perhaps less reliable when it comes to specialized needs.
Non-clinical procurement isn’t just about identifying the right opportunities based on high-level national benchmarks. You need a deep understanding of the local market, an understanding of what non-healthcare organizations pay for these same goods and services, the ability to anticipate trends, and the skills to negotiate terms that are favorable to the healthcare organization.
For instance, an IT procurement specialist will understand the dynamic nature of the IT services market. They will not only be able to identify the best service providers but also negotiate a contract that reflects current market conditions. And they can do this because they’ve negotiated similar contracts repeatedly over recent months, including provisions for regular updates, data security measures, and contingency plans for any technical issues.
A GPO, on the other hand, may explore the IT services market every year or every few years, and may not have insight into what non-healthcare organizations negotiate, potentially leaving the healthcare organization vulnerable to sub-par services or unexpected costs.
Another challenge with relying solely on GPOs is the lack of granularity in the benchmarks provided by their tools. While these benchmarks can give a broad overview, they often lack the specificity needed to identify further savings opportunities.
Typically, a GPO might provide a benchmark for landscaping services, but it may not delve into the specifics of different types of landscaping requirements, scope, frequencies, or regional cost differences. Without this level of detail, it becomes challenging to identify areas where costs can be optimized.
Our internal benchmarks show that non-healthcare organizations are contracting for the same non-clinical goods and services as healthcare organizations. And often, the non-healthcare organizations do it better.
Healthcare organizations are, on average, paying 7-12% more for the same goods and services as consumer brands. By expanding the basis of comparison for their non-clinical expenditures, healthcare organizations can achieve best-in-class pricing and terms rather than just best-in-industry.
While GPOs play a crucial role in healthcare procurement, they should not be the sole strategy for managing procurement. A more holistic, in-depth approach is necessary to truly optimize non-clinical expenditures and drive significant savings in the healthcare sector.
There is an opportunity that is not being captured by your national GPO contracts. It’s a huge pool of funds, most likely being spent as needed by discrete departments within the healthcare system and with little thought given to rates, efficiency, and process. This decentralized format means you’re not using the appropriate investments, resources, and sourcing in a directed and disciplined fashion.
Also, when we talk about non-clinical costs, we’re talking about areas that have zero impact on patient care models. This means that any savings identified and realized in this area can be immediately redirected to critical clinical initiatives without disrupting patient care or compromising quality.
As healthcare leaders stare down a difficult future with rising costs, razor-thin operating margins, and an unpredictable supply chain, non-clinical expenditures remain an overlooked lifeline for cost savings and margin improvement.
These are big problems. Internal teams and traditional solutions like GPO partners are rarely up to the task of managing and optimizing the scope and complexity inherent to this base of spend. They simply aren’t designed to solve these problems.
With no impact on the patient care model, a focused approach to non-clinical procurement can extend budgets further, drive sustainable cost savings, and fund a health system’s top clinical and patient-facing priorities.
But how do you tap into this potential? By partnering with a comprehensive procurement solutions provider, like LogicSource, healthcare systems can explore and optimize non-clinical expenditures. With a deep understanding of procurement and a suite of innovative solutions, LogicSource can help identify potential cost savings that might otherwise go unnoticed under a decentralized system, driving immediate value back into your health system.
Read more about working with LogicSource here. And for a real-life success story, read about how WellSpan Health optimized their non-clinical purchasing process to save $6MM during 2022, with the organization on track to save more than $20MM throughout the life of WellSpan’s multi-year agreement with LogicSource.