Healthcare Indirect Spend
— A Call for Change

This blog was originally published on LinkedIn.

Managing indirect spend at healthcare providers is gaining traction again as health systems seek ways to save money amid looming reimbursement challenges. I have written previously about how improved supply chain governance for healthcare is the critical link to addressing this spend. Often, the debate starts with whether the supply chain should be invited in to address these categories at all. However, once a health system commits to governance, the 800+ categories of spend that don’t come in a box, the question becomes how to actually execute a strategy for sustainable savings.

In this post, I want to talk through the four main strategic approaches, looking at the pros and cons of each, and advocate for investment in a solution.advocate for productive investment in this space.

The “Status Quo” — Local Sourcing & Excel

This approach usually involves Excel spreadsheets, contract lists, and a few sourcing staff members dedicated to the challenge of managing upwards of 20% of net patient revenue. For a $5B health system, this could represent $1B of spend. It is typically managed by a small group of sourcing experts who often struggle to maintain a deep and continuous focus on a sprawling number of categories.

Their effort usually focuses on addressing high dollar categories or service failures, while the impact of the full tail spend remains unaddressed. Success in this model often results in the sourcing leader being promoted into larger roles, which fractures continuity. Access to tools is sporadic, and there is often a heavy reliance on national group purchasing agreements that may not address the local market realities for regional systems.

The “Short-Term Burst” — Consulting Firms

Purchased services have long been the domain of consulting firms looking for projects with a high potential for return on investment. Their expertise in specific areas of spend has yielded road maps of savings and, in some cases, the ongoing management of larger areas like laundry, linen, environmental services, and food services.

Progress is made in the short term, but my experience over the years is that many times, when the dust settles in two or three years, things can backslide, even after a hefty upfront investment. The challenge of balancing cost, service, and utilization versus simply finding the best rate causes issues for the sourcing team that inherits the relationship. Without the right management tools or staff continuity, they often fall back into the status quo, where only a limited number of categories are actively managed.

The “Digitized Internal Team” — Tech Platforms

In the past decade, several encouraging digital procurement technology platforms for managing purchased services have evolved. These platforms offer different levels of effectiveness, with some featuring built-in sourcing tools and benchmarking for specific categories. Generally, I view these platforms as a step forward, especially if they are accompanied by a significant increase in sourcing team members.

Many health systems under-invest in sourcing for indirect spend, often asking one person to cover $200 million across many diverse categories. This has proven to be a barrier to consistent savings. Investing in, developing, and sustaining health system-specific experts who can manage development, run sourcing events at scale, and balance the service/utilization/cost equation is vital to consistent cost savings.

Most of these platform benchmarks are also healthcare-centric, meaning they don’t always capture the best prices available across all industries. This has led to difficulty in nailing down a sustained positive return on the technology investment, causing a start-and-stop experience.

The “Integrated Partner” — Platform and Process

While the above mentioned models have met with varying levels of success, a new model combining platform and process is showing significant sustained savings at leading supply chains across the country. When implemented correctly, this approach, combining a technology platform, AI, committed resources, and process, can accelerate savings equaling tens of millions of dollars in non-traditional areas while setting up a system for sustained management of the service and cost continuum. The platform and process methodology accelerates the investment of professional, focused resources into this space, covering not just select categories, but the majority of indirect spend.

LogicSource, where I am a strategic advisor, is the leading new entrant to the healthcare supply chain indirect spend space, combining approaches that bring subject matter expertise, all-industry benchmarks, and comprehensive category coverage specifically to healthcare providers. Many of the categories where LogicSource excels are ones not traditionally well covered by the historical consulting and technology provider solutions available.

Having watched this space for years, I am encouraged to see renewed focus and investment. I advocate for health systems to move toward actionable and sustainable investments to bring savings to these areas. We need strategies like the advanced, integrated models of managing purchased services that can move fast and lower spend without any trade-offs to the quality of care that other clinical preference areas might impact.

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