Cleveland Clinic and LogicSource Set
Benchmarks for Non-Clinical Procurement
Health systems spend between 20-25% of net revenue on indirect categories, seek savings.
This article was originally published on The Journal of Healthcare Contracting website and digital publication.
Cleveland Clinic and LogicSource announced a collaboration last September aimed at bringing leading practices and benchmarking of non-clinical procurement to health systems.
LogicSource has honed procurement practices in other industries for 15 years and this brings it into healthcare through Cleveland Clinic’s top-ranked healthcare supply chain. It allows health systems to apply benchmarks from complex and difficult-to-assess spending categories and provide health systems with access to LogicSource’s extensive category experts.
“There are significant opportunities for health systems to find efficiency and savings in non-clinical expenditures,” said John Dockins, executive director of sourcing and vendor management for Cleveland Clinic. “We are working with LogicSource to take our learnings a step further – to help make the business side of managing a health system more financially viable for everyone involved.”
Health systems spend between 20-25% of net revenue in non-clinical procurement categories but they are broadly underinvested in these categories compared to other industries, according to Mark Van Sumeren, Board Advisor and Chair, Healthcare and Life Sciences for LogicSource. He says healthcare can benefit from practices and benchmarks established across non-healthcare industries to improve profitability for the organization and free capital to enhance high-impact clinical initiatives.
“Healthcare is at an inflection point for innovative solutions,” Van Sumeren said. “We’re all eager for improvement, and non-clinical spend is one of those high-impact opportunities ripe for innovation that we have a responsibility to explore, advance and share.”
Finding best practices
Cleveland Clinic and LogicSource hope to find and share best practices from their collaboration at industry events with other healthcare supply chain and procurement leaders. These leaders are dealing with increased costs, talent challenges in retention and recruitment, and are navigating a rapidly changing technological landscape that all impacts their bottom line.
“Almost all health systems are turning the dial on cost savings,” said Steve Downey, chief supply chain officer for Cleveland Clinic. “They turn to suppliers for savings but that’s not necessarily the only answer. Some of it is utilization. How often do you get your trash emptied? How often do you wash your windows? But knowing some of those answers is difficult. So, we were seeking a partner with knowledge and expertise there to combine with our clinical supply chain knowledge and expertise to help others.”
LogicSource brings experience in retail, consumer packaged goods, financial services and manufacturing, along with other industries.
“We wanted to learn from Cleveland Clinic and see if our benchmarks could stand up in healthcare,” Van Sumeren said. “They are applicable and meaningful, and are a standard that we should ascribe to healthcare.”
LogicSource and Cleveland Clinic are helping each other understand which benchmarks can be effectively leveraged in healthcare. Furthermore, Cleveland Clinic expects to gain insight from LogicSource’s nearly continuous access to the market through their 20,000+ annual sourcing events, and from access to deep specialized category expertise on an as-needed basis. LogicSource also intends to advise on risk management as risk can also impact indirect spending for health systems.
Finding savings
While there’s a lot of focus on direct expenses like clinical supplies and pharmaceuticals in healthcare, there isn’t much on indirect costs. But every dollar saved can go directly to patient care.
Dockins says most hospitals or health systems don’t have a single leader over the indirect side. It might be layered into another role, or they might rely on their GPO for what’s available on the indirect side.
“For decades it’s been about implants and med/surg devices,” he said. “The commodities world has been standardized for a long time with the GPOs. Most supply chains don’t have much to do with the indirect side.”
An IT manager might negotiate a network contract. The facilities team might negotiate cleaning contracts, while the supply chain team might not be involved at all in these.
“If you don’t understand the service-based contracts, it’s a really hard problem to solve, and the GPOs haven’t really tried to tackle it yet. There are some solutions out there but it’s much easier to put your finger on it when it’s SKU-based like products are,” Dockins said.
For example, Dockins asks, what’s the unit of measurement for snowplow removal? Is it an open parking lot? Is it a hospital where patient and visitor cars are parked all the time? Do you have light poles? Do you have flower beds? All of these things come into play. It’s not an easy factor or a unit of measure to benchmark.
Unfortunately, most indirect spend for health systems has grown due to a lack of attention from health systems themselves.
“We find that outside of healthcare, 20% of revenue is eaten up by indirect spending but in healthcare it’s 22%,” Van Sumeren said. “We think it’s higher because we’ve paid less attention to it in healthcare and the supply chain departments don’t gain this credibility overnight to serve this area.”
Finding credibility
But Cleveland Clinic’s supply chain team has been investing in indirect procurement for close to 20 years and that’s almost two decades of credibility gained with the CIO, the chief marketing officer and the chief human resources officer at the health system.
“Without establishing that credibility, you’re really not at the table,” Van Sumeren said. “But Cleveland Clinic’s supply chain has gotten there.”
It’s important to be able to judge the validity of any contract in any category or anything coming from a vendor. It’s not just a price per unit but it also comes with a level of service expectation. Expertise and scope of services are required from vendors to solve specific issues and there are multiple dimensions built into that benchmarking analysis, according to Van Sumeren, as opposed to simply a line item on a spreadsheet.
“It’s much different than benchmarking products where there’s a manufacturer ID, there’s a product ID, there’s a unit of measure and a price point,” Dockins added. “When you get to services, those usually don’t exist. Take something like a videoconferencing application, for example. Do you have an enterprise license so everybody can use it as much as they want to for a price? Keep in mind, you can only have 250 people on at one time. It’s different aspects that come into play.”
He says you must invoice match to really understand why a price is set versus another price point.
Finding the right price
The credibility for supply chain teams to centralize control on indirect spend and build their reputations on it is critical. It helps in finding source savings and drilling down the right price.
If you think about how much savings ought to be achievable, it should be upper single to lower double digit percentage increases year over year, according to Van Sumeren. “We think it’s worth 1% or 2% operating margin impact potentially, depending on where the organization is in its life cycle,” he said.
That credibility helps supply chain teams talk to vendors about how much they’re using a service and what changes they need to make. It also helps supply chain teams talk to their executive suite about when they need to implement a service for their health system.
“There are all sorts of levers out there that can be pulled,” Downey said. “Maybe you weren’t thinking about them before, but they can be used for additional savings.”
Learn more about how our collaboration with Cleveland Clinic is helping health systems improve margins and enhance care delivery.
