Throughout my nearly ten years managing purchased service sourcing initiatives for health systems across the country, I’ve been provided countless third-party reports labeled as “purchased service benchmarks”. I’m asked to use these reports to set internal expectations, to use as part of the negotiation strategy, or to use as a cost comparison for a financial analysis. My clients purchase or obtain these reports from consulting organizations or GPOs in the hopes that the data inside would guide them to the most competitive pricing available.
Most health systems believe this benchmark data to be accurate and attainable despite the lack of visibility around the methodology and source data used to create the benchmark. Unfortunately, many of these reports apply the same price benchmarking methodology that is used for medical/surgical and commodity products. These reports only consider price based on a comparison of various organizations’ contracted costs.
Purchased services benchmarking requires a unique analytical approach that differs from the process of simply comparing product costs.
For anyone that has negotiated a purchased service, vendors determine costs uniquely by evaluating multiple factors as dictated by each health system. Logic says that if a vendor uses unique factors to define costs, purchased services benchmark need to use the same factors in order to ensure accuracy. Unfortunately, most available purchased service benchmarking solutions do not evaluate a sufficient number of non-price factors to ensure accurate comparisons. Using a report that does not consider these factors to guide your negotiation and decision-making will establish unrealistic expectations and may damage your savings opportunities and supplier relationships.
Based on Medpricer’s experience sourcing $2.7 billion in purchased services spend, we’ve identified five key factors for evaluation when benchmarking purchased service costs. If your benchmarking partner is not considering criteria below when benchmarking your purchased service costs, it’s likely those reports will not contain accurate information and will not effectively support your negotiation strategy.
Medpricer’s Five Factors™ are:
- Service Volume & Frequency
- Service Levels
- Unique Category Considerations
- Vendor Standardization Potential
Most benchmark reports for purchased services ignore these factors, leading to the growing problem of misinformation.
If you are entering a negotiation with a target price based on an inaccurate benchmarks, you might find yourself paying more than you should or you may damage your vendor relationships by pushing them to a price points that are unrealistic.
Finally, it is critical to ensure that your data matches your planned negotiation method and is recent. Many benchmark organizations collect their price data from collected contracts.
Relying primarily on costs from historic contract data means that figures could be years old and do not reflect current market dynamics. Additionally, the costs and terms are as good as those that negotiated them. Organizations that did not pursue rigorous, competitive negotiations instead relying on incumbent costs reductions year over year will tend to have higher prices and less favorable terms.
Click here for part II where we unfold Medpricer’s Five Factors™ and some action steps you can take.
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