Learn how leading healthcare organizations optimize procurement through strategic sourcing, vendor consolidation, and data-driven decision making.
In an era of rising costs and complex healthcare operations, effective procurement strategies are more crucial than ever. Industry experts Eric Slimp, Director of Spend Management at symplr, and Todd Turner, Senior Director of Supply Chain Strategic Sourcing at Mass General Brigham, share their framework on how healthcare organizations can optimize their sourcing approaches to align with broader business goals and achieve significant cost savings.
Foundations: The Importance of Categorizing Types of Spend
Before developing strategic sourcing strategies, it’s critical to understand the different categories of healthcare spend. According to Turner, “You can’t have a strategy if you don’t know where or how the money’s being spent.”
Capital spending, which includes high-value medical equipment like ultrasounds and CT scanners, represents about 20% of a hospital’s non-labor expenditures. These items often have a high degree of end-user preference, limiting negotiability.
Consumables, such as single-use supplies and reagents, make up nearly 50% of non-labor spend. This category is typically analyzed through historical purchase order data, with pricing heavily influenced by volume-based discounts and rebates.
The remaining 30% of non-labor spend falls under purchased services – contracted third-party services like capital equipment maintenance, landscaping, and billing/collections. This area is highly variable in fee structure and can be challenging to manage
A key launch point is differentiating between direct and indirect spend, or clinical vs non-clinical spend.
Direct Spending
Indirect Spending
Indirect spend refers to the other costs associated with fulfilling a hospital’s services but are not directly tied to patient care. This can include:
Indirect spend frequently falls under the radar yet represents considerable expenditure for most health systems. “It’s such a broad category and if you’re managing indirect spend, it’s very complex,” notes Turner. “Part of that complexity comes from the fact that you’re dealing with different stakeholders and business owners.”
While supply chain leaders may not be experts in every area of indirect spend, it is critical to understand where this money is going in order to identify savings opportunities. Categories like capital equipment, consumables, and purchased services each require tailored sourcing strategies.
This mutual vulnerability allows for honest discussions about challenges and opportunities, leading to more effective and creative problem-solving.
Recent survey data from supply chain leaders provides sobering evidence, pointing to the critical need for targeted, strategic sourcing strategies across categories:
Additionally, many organizations are still working to strengthen their purchased services contracts with appropriate SLAs and language to address post-pandemic issues.
It’s clear sourcing strategies need to be deployed, but how can organizations select the best strategy?
For direct spend, common strategies include direct negotiation and consolidation.
Direct negotiation is effective when suppliers offer proprietary items or services, when specific items/services are needed, or when the organization wishes to maintain an existing vendor relationship.
TipsTodd Turner captured savings for his supply chain via direct negotiation even in a commoditized field. His team pursued direct negotiations in their last renewal with their long-term vendor partner for office supplies, whom they’ve had a positive working relationship with for years. By transparently communicating their expense management goals, they were able to achieve cost savings via direct negotiation by leveraging their strong historic partnership.
On the other hand, consolidation works well when there are many suppliers in a market, pricing is volume-driven, or there’s an opportunity to consolidate vendors post-merger. Fewer suppliers means reduced contract management and opens the door for economies of scale.
TipsHealthcare organizations must be cautious not to over-consolidate and restrict access to needed supplies.
“Consolidation efforts can reveal significant risks that weren’t previously visible,” explains Turner. His team’s initiative to consolidate answering services uncovered issues like lack of business associate agreements and inconsistent patient communication. While potentially costlier in the short term, the initiative to consolidate ultimately provided greater control over patient data security and messaging consistency, addressing previously hidden risks.
The request for proposal (RFP) process is often the most effective, yet time-consuming, approach. RFPs are best suited for high-spend, high-risk areas and the key is to be prescriptive in terms of fee structures and to ask questions that qualify and differentiate vendors.
Todd Turner, Senior Director of Supply Chain Strategic Sourcing at Mass General Brigham
TipsUse an automated platform to collect and evaluate responses.
Beyond the direct/indirect distinction, healthcare organizations must also consider market conditions and category-specific criteria when selecting the optimal sourcing strategy.
To guide strategy selection, Slimp and Turner recommend using a decision matrix that considers factors like the number of competitive vendors, market volatility, annual spend, and more. This can help determine whether direct negotiation, consolidation, or an RFP process is most likely to yield the best results for a given category.
Cost
Quality
Outcomes
The intersection of and the relationship between cost, quality, and outcomes
must be considered when selecting the most appropriate strategy
