Co-Authored by Joanna Guziak and Joseph Jang

Pathstone Partners is a management consulting firm that collaborates with hospital providers to identify and implement sustainable non-labor financial benefit. In the past five years Pathstone has partnered with over 100+ hospitals across 32 states delivering $100M+ annual benefit for our clients.

Previously, we discussed how standardization is a value lever that can complement outcomes of other value levers such as price and utilization. In this edition of our article series, we will be discussing a unique value lever, make vs. buy.

What is Make vs. Buy?

Make vs. buy can be defined as the extent to which hospitals choose to use in-sourced or out-sourced resources.  Many clients often do not pursue this lever because each evaluation is unique; it requires robust data analysis, deep operational knowledge, change management and a longer timeline to successfully implement. However, the benefits that come with the make vs. buy lever can be enormous to any healthcare organization:

Key Opportunity Indicators:

1)  Significant Change in Volumes: A significant change in volumes, regardless if products or services are outsourced or provided in-house, can be a good signal it is time to evaluate the make vs. buy value lever. As demand changes, hospitals need to determine if either a make or buy model is best suited to maintain costs and quality levels over the long-term. Often, an increase in volume can serve as a strong leverage point for negotiations with suppliers. Conversely, with a significant decrease in volumes, organizations need to evaluate if its service delivery model has a flexible cost structure that can match current demand or if it is heavily burdened by fixed costs.

Client Example: Pathstone recently worked with a large health system that was experiencing continuous growth in annual bed rental spend. Although renting beds provided benefits such as procurement flexibility and third-party maintenances services, our analysis showed the increase in volumes was large enough that an investment in purchasing hospital beds was more favorable to the organization. As a result of our recommendations, the health system was able to reduce rental costs by 20%.

2) Increasing Program Costs & Decreasing Quality: If annual costs related to a service are increasing while quality is decreasing, it may be worth evaluating make vs. buy opportunities. From a cost perspective, organizations need to understand the key drivers of increased costs. Is it price, volume or productivity? Furthermore, hospitals can partner with third parties (GPO, consultants, benchmarking service, etc.) to determine how costs compare to the market. From a quality perspective, performance on key service level agreements (SLA) and end-user feedback can be gathered to understand key drivers of decreasing quality levels. Is it bandwidth, staff capabilities or limited resources?  By understanding the current state, hospitals can then effectively evaluate the benefits of transitioning to a make or buy model.

3) Fragmented Service Delivery Models: If your organization has a different mix of service delivery models, it may indicate opportunities to generate value. Fragmented service delivery models lead to differing levels of productivity, cost and quality, potentially impacting patient care and operations. By selecting a standard make or buy model for a given product or service, an organization is essentially applying another form of the third value lever we’ve covered, standardization.

Client Example: Pathstone has encountered several clients that have fragmented models for courier services which led to differing levels of staffing, service quality and cost, all of which can also make daily operations challenging to manage. In several of those situations, a decision was made to outsource courier services by working closely with key stakeholders across the health system, leading to more consistent service delivery and lower costs.

Key Success Factors:

1) Develop Business Cases: Organizations that utilize a comprehensive business case to evaluate the pros and cons of an in-sourced or outsourced model will increase their chance of success. The business case is a fact-based tool that allows teams to have an open and objective dialogue when selecting the best strategy.  For complex categories, engaging third parties to develop business cases can provide market information and objective analysis necessary to make the best decision.

Client Example: Pathstone has a proven methodology for business case development that includes a comprehensive fact-based analysis to determine various options for a given product or service category. In addition, we engage key stakeholders throughout the business case process, ensuring necessary operational context is understood and support from decision makers is present, which is crucial during the implementation process.

2) Evaluate Program on an Ongoing Basis: Since costs, quality and performance of programs can change over time, organizations that continuously evaluate make vs. buy opportunities position themselves to generate more value over the long-term. Continuous self-assessment can uncover opportunities resulting from minor improvements in supplier relationships to complete transformations for an organization’s service delivery model. For example, one important question for an organization to ask about an insourced operation is: “What else can we do with these resources?” The opportunity cost of those resources can help identify alternatives that drive more value for the organization. Furthermore, alignment of the service with the organization’s overall mission should be evaluated.

3) Access to Market Intelligence and Best Practices: Hospitals that have conducted extensive market research are well positioned to evaluate existing outsourced or internal programs.  Market intelligence on leading practice cost metrics and performance indicators can be an effective barometer to measure financial, quality and operational performance. Partnering with third party providers that can provide insight on market benchmarks can help an organization set the right targets to measure the competitiveness of existing programs.

We are now past the halfway mark of Pathstone’s “Healthcare Supply Chain Value Lever Series”. In future articles we will cover more complex value levers. In the next article, Pathstone will discuss the value lever of revenue.