Proven Strategies for Driving Services Procurement Cost Savings in Healthcare

Although U.S. hospitals are now profitable following the recovery of the pandemic, their expenses continue to rise 3% year-over-year. Additionally, the cost of contract talent is still 150% higher compared to pre-pandemic levels. As healthcare organizations seek to find ways to maintain financial stability and improve their margins, effectively controlling their costs of labor will be key.   

Many are turning to services procurement as a solution to reduce talent costs without sacrificing the high standard of patient care. While it provides a great way to lessen spend, it can involve some challenges because the procurement process isn’t always fully transparent. Some contracts for statement of work (SOW) are signed without being examined and others may never go out to bid. Many organizations do not get the clear view into exactly what they are spending either, signing off on various projects without considering where they could save on costs.

In this blog post, we’re going to discuss the different strategies healthcare organizations can implement to effectively lower their third-party contractor expenses.

Strategy #1: Review the SOW

When it comes to implementing technology, developing strategy or managing operations, healthcare organizations frequently utilize preferred vendors. Maintaining these partnerships makes sense from a financial standpoint: the hospital and the consultancy have common ground, the project can begin sooner, schedules can be shortened, etc.

As a result, organizations may choose to give contracts to their vendor of choice instead of going through the competitive bidding process. However, taking this approach can present two major issues:

1. Most firms require contracts beyond a specific financial threshold to go out to bid, which is usually against procurement policy.
2. It has the potential to significantly raise the cost of hiring an outside contractor, since these suppliers are often accustomed to controlling their business relationships with healthcare institutions – including specifying the cost.

The good news is that these problems can easily be fixed. The first step is to go over the SOW and remove any staffing activities that aren't necessary. If a project's scope includes staffing as one of the deliverables and milestones, it should be covered by the SOW. However, if staffing is a component of time and materials, it can be transferred to staff augmentation, which will typically result in at least a 20% cost decrease.

See why NelsonHall named Magnit a Services Procurement Leader when you download the full NEAT Evaluation for CWS and MSP.

Strategy #2: Require a Request for Proposal (RFP) Per Company Policy

The next action is to mandate a request for proposal (RFP) in accordance with business policy. This allows companies to evaluate offers from all of the RFPs that suppliers have filed. For a particular project, for instance, a favored vendor might submit a proposal of $100,000, while other bids might come in at $90,000.

Alternatively, a preferred vendor could charge $100 more an hour than the going rate for a contractor's specific position, which may be verified by comparing rates with a market rate solution like Magnit's Pay Intelligence or by utilizing the organization's own rate card. By taking this approach, organizations gain the leverage they need to negotiate with suppliers and bring prices down. (Learn how you can attract top talent and control costs at the same time with Magnit Pay Intelligence when you view our webinar.)

Strategy #3: Ensure Visibility

The largest obstacle to improving procurement practices is change management. Both direct talks with suppliers and competitive bidding procedures result in extra work and postpone the start dates of important projects. Meanwhile, suppliers are likely to object, particularly if they have been unquestioningly determining their own rates for a long time.

The key for mitigating the challenges of change management is data transparency. By putting the right technological tools in place, procurement teams can see what they have previously spent with suppliers. They can then compare that number to market rates for contracted roles, take the appropriate action to modify a SOW and reduce costs when needed before even putting a project out to bid.

Procurement also is set up to monitor spend over time as projects get kicked off, which is key information. Healthcare organizations can strategically use this knowledge to identify suppliers who meet their deadlines, stick to budgets and guarantee that the individual allocated to a task completes it. Additionally, having this visibility enables procurement teams to be more proactive and take on a more strategic role. As healthcare organizations are keeping up the pressure of cutting wasteful spending without sacrificing high quality of care, this is absolutely crucial to their success.  

Discover how you can take a data-driven approach to services procurement that improves efficiency, increases visibility and drives significant cost savings when you download our white paper, “Next-Generation Services Procurement: Data-Driven and Optimized for the Future of Work.”

Disclaimer: The content in this blog post is for informational purposes only and cannot be construed as specific legal advice or as a substitute for legal advice. The blog post reflects the opinion of Magnit and is not to be construed as legal solutions and positions. Contact an attorney for specific advice and guidance for specific issues or questions.