Key Takeaways
It is not the medical supplies or pharmaceuticals that cause hospitals to lose more money than they are aware of, but rather the purchased services that are inadequately run or neglected. Inefficient contracts, rogue spending, and limited visibility quietly erode budgets, restrict investments, and weaken operational stability. With Valify’s purchased services analytics and categorization expertise, health systems can uncover hidden waste, negotiate better rates, and redirect savings toward stronger patient care.
he Hidden Costs of Poorly Purchased Services Management in Healthcare
A mid-sized hospital in the Midwestern United States began a detailed financial audit after leaders noticed that operating margins had been steadily declining over the previous three years. While they initially suspected common causes, such as rising drug prices, increasing labor costs, and higher supply expenses, the true issue turned out to be something different entirely.
The audit showed that the hospital had been overspending hundreds of thousands of dollars annually on purchased services across categories such as laundry, groundskeeping, medical equipment repair, dietary services, document destruction, and clinical waste disposal. The issue wasn’t that the services were unnecessary—it was that they were poorly controlled, inconsistently priced, and rarely reviewed. This allowed outdated contracts, unused services, and underperforming vendors to drain the budget year after year. The impact was gradual and, without centralized oversight, largely unnoticed. These inefficiencies, when combined, had consumed significant operating funds.
Stories like this are common. Many hospitals lose more money through unmanaged purchased services than through supply chain issues. And unlike supplies—which are typically well tracked—purchased services often operate in the shadows. This quiet leakage remains one of the most significant and overlooked financial risks in healthcare today.
Understanding Purchased Services in Healthcare
Purchased services comprise a vast and diverse set of third-party expenses. They include:
- Biomedical equipment maintenance
- Laundry and linen
- Environmental services
- Waste management
- Dietary services
- Transportation and courier services
- IT support
- Clinical equipment repair
- Landscaping and snow removal
- Security services
- Document shredding and storage
These services are essential to daily operations, yet their costs can be hard to evaluate. Purchased services involve variables like labor hours, service frequency, specialized skills, vendor performance, and regional pricing differences.
In a hospital’s financial structure, purchased services often account for 20% to 25% of total non-labor expenses, making them one of the largest and most complex cost categories.
Because many of these services are decentralized, managed by individual departments rather than a unified procurement strategy, overspending is almost guaranteed unless systems are in place to monitor them.
Purchased services can either support a high-performing, cost-efficient organization or quietly become the largest source of preventable financial waste.
The Hidden Costs
Poorly managed outsourced services do not necessarily manifest themselves in the form of an enormous red flag. Regular invoices, renewals, or long-term vendor relationships often conceal overages.
1. Overpaying Due to Outdated Contracts
Hospital contracts are often run on multi-year terms. If no one regularly reviews them, the organization risks:
- Paying above-market rates
- Missing competitive pricing opportunities
- Carrying outdated service requirements
- Overlooking automatic renewals with unfavorable terms
Vendors are aware that many hospitals struggle to track these contracts. When rates increase unnoticed, the cost difference compounds over time.
2. Service Duplication or Inefficiencies
With limited visibility across the system, hospitals may contract with multiple vendors for the same service, resulting in unnecessary spending and operational inconsistencies.
A lack of centralized oversight often leads organizations to:
- Contract with multiple vendors for the same service
- Procure unnecessary add-ons
- Overuse of services due to a lack of internal review
- Fail to consolidate contracts across locations
If three facilities use three shredding vendors, or five clinics independently contract IT support, the organization loses volume-based negotiating power and consistency.
3. Lack of Vendor Performance Tracking
Performance issues cost money, too:
- Slow response times
- Missed SLAs
- Overage charges
- Billing irregularities
- Low-quality work that requires rework
In the absence of centralized evaluation of vendors, hospitals, in most cases, pay for the level of service they never receive, or even maintain working relationships with non-performing vendors, simply because no one has pointed out the problem. These expenses operate in the dark with broken information and haphazard management.
How These Costs Impact More Than the Budget
The consequences of mismanaged purchased services stretch far beyond spreadsheets.
1. Reduced Funds for Patient Care Improvements
Every dollar wasted is a dollar not invested in:
- New diagnostic equipment
- Staffing resources
- Patient comfort upgrades
- Digital transformation
- Clinical quality initiatives
Over time, these missed opportunities erode a hospital’s ability to innovate and expand its services.
2. Lower Staff Satisfaction
When budgets tighten, departments often face:
- Hiring freezes
- Delayed equipment replacements
- Reduced training allocation
- Slower turnaround for operational support
Staff feel the pressure long before the board does. Inefficiencies in purchased services ultimately restrict frontline teams, who depend on reliable support to deliver care.
3. Ripple Effect on Community Trust
Patients and communities notice when hospitals:
- Delay facility upgrades
- Struggle to maintain equipment
- Operate with outdated technology
- Reduce available services
Even when clinical care remains strong, visible signs of budget constraint weaken public confidence.
Poorly managed purchased services quietly undermine the hospital’s ability to deliver high-quality, modern care.
Spotting the Warning Signs
Hospitals can often detect purchased services issues long before they escalate if they know where to look.
1. No Regular Contract Reviews
If contracts simply auto-renew year after year, the hospital is almost certainly overpaying for its services.
2. Vague or Outdated Service Level Agreements
Missing or unclear SLAs allow vendors to underdeliver while still billing full rates.
3. Reliance on a Single Vendor Without Comparison
Sole-sourcing can be efficient, but not if the vendor hasn’t been benchmarked against competitive rates.
4. Limited Visibility Into AP Spend Data
If leaders cannot see:
- How much do they spend
- With whom
- For what
- Across all facilities
Costs will always be higher than necessary.
5. Rogue or Off-Contract Spending
Whenever departments bypass procurement to “just get it done,” costs tend to drift upward, and the hospital loses negotiating leverage.
Recognizing these signals is the first step toward stronger financial control.
Strategies for Improvement
Hospitals don’t need to overhaul their procurement structure to see better results. Starting with manageable steps can lead to significant savings.
1. Implement Routine Audits
Annual or semiannual reviews help:
- Identify outdated contracts
- Catch duplicate services
- Verify invoicing accuracy
- Measure vendor performance
- Highlight savings opportunities
Even a basic audit often uncovers immediate low-hanging fruit.
2. Negotiate Using Current Market Data
Hospitals that negotiate with outdated assumptions typically overpay. Using:
- Benchmark data
- Category insights
- Volume consolidation
- Industry-standard rates
Gives procurement teams the leverage they need to negotiate confidently.
3. Encourage Cross-Department Collaboration
Bringing department leaders together helps:
- Standardize service expectations
- Consolidate contracts
- Align service levels
- Eliminate unnecessary add-ons
Purchased services decisions should be made with the big picture in mind, not just individual department needs.
4. Use a Centralized Spend Analytics Platform
Technology plays a critical role. Platforms like Valify:
- Cleanse and categorize AP data
- Standardize purchased services categories
- Provide benchmarks for comparison
- Highlight savings opportunities
- Track contract compliance
- Centralize vendor performance metrics
Centralized visibility drives smarter decisions and more consistent financial outcomes.
The ROI of Better Purchased Services Management
Even small improvements in oversight of purchased services can generate significant returns.
A Simple Hypothetical Savings Model
A hospital spending $40 million annually on purchased services could reasonably save:
- 3% through contract alignment
- 5% through updated market rates
- 2% through eliminating duplicates
- 1–3% through improved vendor performance
That’s $4–$6 million in annual savings.
Where Those Savings Go
Hospitals can reinvest savings into:
- Patient safety programs
- Staffing
- Updated imaging or surgical equipment
- Facility improvements
- Technology modernization
- Community health initiatives
Better purchasing services management strengthens the hospital’s mission at every level.
Conclusion & Takeaway
One of the simplest yet most expensive categories of healthcare expenses is purchased services, which are often overlooked. Out of control, they cost hospitals millions, are growth inhibitory, and negatively impact both staff and patient experiences. The good news is that the said costs are manageable through visibility, benchmarking, and effective contract discipline. Such services as Valify are used to assist hospitals in finding waste, inefficiencies, and near-term savings. Purchased services cannot be overlooked anymore in hospitals. They are able to transform the costs that may be hidden into financial benefits in the long term with the right tools and processes.
Healthcare leaders should also have a complete review of the purchased services contracts, rates, and performance measures before the next fiscal year. With Valify, you can find hidden savings and create a more anticipated spending plan. Demo book a demo to have complete visibility on the amount spent on purchased services and optimize financial results with confidence.
FAQs
- What are the most commonly purchased services in hospitals?
These include laundry, food service, maintenance, waste management, IT support, biomedical equipment repair, environmental services, transportation, security, and more.
- How can hospitals track vendor performance effectively?
By using standardized SLAs, centralized contract dashboards, and platforms like Valify that monitor KPIs, compliance, and cost trends.
- Are purchased services always negotiable?
Most categories offer significant negotiation opportunities, especially when hospitals utilize benchmark data and have visibility into aggregated spend.
- How often should these services be reviewed?
Hospitals should review contracts at least annually, with quarterly performance evaluations to catch issues early.
- Can switching vendors save money without sacrificing quality?
Yes. With the right benchmarks and performance data, hospitals can identify high-value vendors who deliver both cost savings and strong service levels.
Shara Smith serves as the Marketing Director for both Valify and Valify Solutions Group, where she oversees all facets of marketing, including strategic planning, branding, digital marketing, and event management. She joined Valify in September 2021, bringing with her a wealth of experience in healthcare marketing and business development.
