How to achieve savings by reengineering nonclinical healthcare spending

With healthcare margins under constant and growing pressure, hospital and health system finance leaders must continue to explore all avenues for cost savings across their organization. Supply chain savings efforts have traditionally been focused on clinical spending and on contracts accessed via group purchasing organization (GPO) relationships. By looking to nonclinical spending on administrative and IT systems, waste management, transportation couriers and other areas, these financial executives can find valuable untapped savings within nonclinical procurement.

Why nonclinical spending matters

Recent research has found that up to 30% of a health system’s spending is associated with nonclinical costs.^a Typically  these expenditures tend not to be included in GPO agreements or managed by the procurement office, making them difficult to track and manage effectively. Furthermore, nonclinical spending isn’t commonly subject to a best-practice strategic sourcing process.

The need for a focus on reducing nonclinical spending becomes clear when one considers that the United States spends four times as much per capital on administrative cost than other wealthy countries ($925 versus $204 per capita).^b Yet significantly contributing to this cost are the types of nonclinical spend described here, which are often managed by staff who lack the requisite expertise or training to achieve the best possible results. 

A recent analysis disclosed that internal department heads, not procurement experts, often take ownership of nonclinical spending, with contracts renegotiated only every two, three or even four years.^c These department heads may not have sufficient resources, bandwidth, experience, or skillset to negotiate these contracts more frequently or effectively.

Instead, finance executives should understand how nonclinical spending represents a significant portion of the health system’s overall costs and why this area warrants dedicated resources and attention for process improvement and cost savings. And they should recognize how supply chain experts can play a valuable role here and during contract negotiations – where they can serve as the “bad guys,” thereby preserving the integrity of day-to-day relationships ancillary departments enjoy with the vendors that serve them.

Specifically, the procurement practices commonplace in industries other than healthcare – like retail and consumer goods – haven’t been applied as often in healthcare despite the potential to provide insight and value into to nonclinical spending as well.

Health systems tend to pay about 7% to 12% more than companies in other industries for many of the same goods and services.^d This situation makes cross-industry benchmarks particularly valuable for healthcare organizations in assessing their nonclinical spend categories.

Simply put, areas in healthcare spending that aren’t well monitored likely are also not well managed. And poorly managed spending increases the risk of unnecessary costs and negative impacts on the bottom line. Nonclinical expenditures, also termed indirect spending, constitute one of these areas.

What return to expect

An upfront investment in time and resources is needed to reengineer a nonclinical procurement process. As a best practice, health systems should allocate between 0.6% and 0.8% of their total nonclinical spending on managing the nonclinical procurement function.^e

For example, if a health system’s supply chain oversees $600 million in nonclinical spending, in accordance with industry best practices, it should allocate $3.6 million to $4.8 million to dedicated indirect procurement staffing, technology and other resources. Unfortunately, many businesses – not just in healthcare but across all sectors – fall short of this level of investment in procurement.

An important consideration is the correlation between nonclinical spending and the management of clinical expenses, such as cardiac stents and ortho and cardiac implants. Valuable insights into the effectiveness of purchasing management strategies can be derived from analyzing how much time and resources are spent managing clinical finances in relation to the time and costs spent on nonclinical items. The ROI is extremely impressive for health systems that take the time to analyze, staff and technology-enable nonclinical procurement teams.

(See the sidebar at the end of this article for 10 questions organizations should ask when assessing their current supply chain process for nonclinical procurement.)

Take, for instance, the experiences of York, Pennsylvania-based WellSpan Health, a health system that has demonstrated best practice in managing its nonclinical spending.

How WellSpan Health discovered strategic savings

WellSpan’s reengineering of its nonclinical spending yielded tangible results in 2022, the first year of the initiative, with $6 million in savings achieved across commercial, operational and technical initiatives. The health system performed a comprehensive analysis of every category of nonclinical purchasing, and it engaged representatives from departments across the enterprise in various key indirect spending initiatives aimed at achieving both quality improvements and significant savings. The following solutions that WellSpan identified and implemented provide examples of where it focused its efforts to reduce its nonclinical spend.

Contact center. The team improved the cost and quality of its enterprise call center by contracting with a different vendor for a new solution that offered significantly reduced fees, improved technology and better reporting overall. The change resulted in $2.3 million in savings over the life of the contract.

Information security. The team identified a new vendor that offered improved information security related to remote/VPN work across the system, resulting in $1.05 million in savings for the life of the contract.

Server and storage functions. As a strategic initiative involving several contracts, the team conducted direct negotiations aimed at reducing its server and storage costs. The negotiations resulted in contractual changes that save as much as 9.5% for server costs and 43% for storage costs, resulting in capital budget savings of $600,000 across both categories.

Patient prior authorization. By renegotiating its purchase of a patient prior authorization tool and by adopting a tiered-pricing model in place of a flat-rate fee model, the team was able to improve efficiency in the patient care process by connecting payors and providers, saving WellSpan nearly $1 million against the annual operating budget.

Virtual machine software. The teams directly negotiated conversion from on-premises, perpetual licensing for machine software to a SaaS-based/subscription licensing model. Through cross-industry benchmarking and negotiation, this effort saved WellSpan 17.56%, or $400,000, against its annual operating budget.

Treasury services. The team negotiated with Wellspan’s incumbent bank to achieve savings, using specific benchmarks for high-volume services to identify savings opportunities. The team shared with the bank benchmark data that demonstrated the bank’s current rates were not market competitive, prompting the bank to reduce its fees to align with the benchmark and to avoid a competitive bid. Annualized savings amounted to $346,000.

External audit services. WellSpan’s team conducted a benchmark analysis to identify a cost savings opportunity in its agreement with a market-leading audit service provider. Through a comprehensive request for proposal (RFP) process, the team negotiated a 24% fee reduction, for an annualized savings of $283,000, and secured additional assurances for improved quality around experience and speed.

Interpretation services: The team conducted an RFP process and needs assessment to gauge whether an additional vendor was needed to provide interpretation services for non-English-speaking patients. By focusing on high-volume interpretation services, it was able to negotiate lower rates with the incumbent vendor, saving 24% over previous rates, or $215,000.

Results achieved through best practices

WellSpan’s ability to realize significant ROI from these initiatives stemmed from its efforts to demonstrate best practices in four areas.

1 Streamlining contract negotiations. Purchasing experts worked alongside the supply chain team to negotiate financial terms and conditions, pushing for deeper discounts and more favorable contract terms.

2 Applying the necessary amount of oversight and expertise. Efforts within each of its departments were guided by procurement experts with appropriate specialized knowledge, including IT proficiency, who reported to the chief administrative officer. Such expertise and centralization of efforts are needed to boost negotiation confidence among internal stakeholders, while constructively challenging procurement practices.

3 Tapping benchmarking data from other industries. WellSpan’s team gained new insights and best practices to inform their nonclinical contract negotiations by assessing procurement data and practices from other industries. Applying these practices helped to significantly improve efficiencies, both in pricing and process.

4 Challenging traditional understanding and assumptions across the organization about spending. WellSpan deployed a strategic inhouse marketing campaign about the value and importance of nonclinical spending, referencing benchmarks outside of healthcare. The campaign effectively brought more attention and focus to this often-overlooked set of expenditures.

A need for commitment

Finance executives have much to gain by focusing on nonclinical spend optimization. However, the journey requires ongoing commitment and a willingness to embrace best practices and lessons learned from other industries.

From their position of financial oversight, senior finance executives should be strong advocates for recognizing the significance of nonclinical spending, engaging with the organization’s supply chain team, establishing cross-department collaboration and using external data to drive informed decision-making. By asking the right questions and fostering open dialogue, finance executives can initiate discussions that lead to process improvements, cost savings and enhanced vendor relationships.

Footnotes

a. “The role of administrative waste in excess us health spending,” Health Affairs Research Brief, Oct. 6, 2022.
b. Peter G. Peterson Foundations, “How does the U.S. healthcare system compare to other countries,” Blog, July 12, 2023.
c. This assertion is based on a proprietary non-clinical procurement assessment across dozens of healthcare organizations by LogicSource in Norwalk, Connecticut.
d. Morse, S., “HIMSSCast: To cut expenses, hospitals should look at indirect spend,” Healthcare Finance, Jan.6, 2023.
e. This recommended allocation is based on the authors’ experience, compared with published findings of third-party research.

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10 questions to assess a health system’s supply chain process

For hospitals and health systems seeking to evaluate their supply chain processes – around both clinical and nonclinical spend – a best practice is to conduct an assessment using the following questions, with the goal of fostering a culture of collaborative, data-driven decision-making intently focused on achieving cost savings and process improvements.

1. Do we have transparency into the costs associated with our supply chain, including nonclinical categories? Do we know which expenditures are not addressed in our existing group purchasing organization agreements?
2. Are there dedicated category experts within our supply chain team who can monitor market trends, pricing fluctuations and opportunities for cost savings in specific nonclinical categories?
3. Are we actively exploring suppliers outside our local ecosystem to ensure we get the best value and are accounting for regional market dynamics?
4. Do we have reliable systems to track and monitor purchases? Are we confident that we are consistently obtaining items at optimal prices?
5. Are departments within our organization making purchases independently, without being under formal contracts? How can we increase the percentage of spending under formal agreements to manage costs and reduce risk proactively?
6. How do we plan and execute acquisitions of critical items during times of crisis or national shortages? Do we have contingency plans in place to mitigate disruptions in the supply chain?
7. Are there opportunities to consolidate or centralize nonclinical spending across ancillary departments to leverage the expertise and resources of the supply chain team effectively?
8. How can we access benchmarking data and best practices from other industries like retail and consumer goods to drive more informed purchasing decisions and achieve greater efficiencies?
9. Do we have a collaborative process to engage the supply chain team early in evaluation and acquisition initiatives, ensuring their expertise is leveraged to maximize savings and negotiate favorable terms?
10. What staffing, technology and other resources are needed to effectively manage and optimize our nonclinical approach? Are we adequately resourced based on the total amount of nonclinical finances we are managing?