Tag: healthcare spend management

he Hidden Costs of Poorly Purchased Services Management in Healthcare

By : | Published On : January 27, 2026

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.

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 This allowed outdated contracts, unused services, and underperforming vendors to drain the budget year after year.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

  1. 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.

  1. 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.

  1. Are purchased services always negotiable?

Most categories offer significant negotiation opportunities, especially when hospitals utilize benchmark data and have visibility into aggregated spend.

  1. How often should these services be reviewed?

Hospitals should review contracts at least annually, with quarterly performance evaluations to catch issues early.

  1. 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.

Purchased Services

Defining Purchased Services in Healthcare: A Practical Guide

By : | Published On : January 9, 2015

Key Takeaways

Purchased services are the outside services hospitals rely on every day. Think IT support, facilities, staffing, clinical services, and admin work. These costs add up fast. The problem is definition. When every hospital defines purchased services differently, spend gets buried. Contracts overlap. Savings slip through the cracks. Once hospitals agree on what counts as purchased services, things change. Leaders see where money is really going. Teams negotiate better contracts. Waste becomes easier to spot. With the right data and tools, purchased services stop being a blind spot. They become a place to drive real savings without affecting patient care.

Hospitals today are facing rising costs on all fronts, from labor and supplies to technology and vendor contracts. With shrinking operating margins, health systems can no longer afford blind spending, especially in complex non‑labor areas. Purchased services; a major non‑labor expense category, represent a critical opportunity for cost savings, efficiency, and operational improvement.

Why Purchased Services Matter in Healthcare

Hospitals’ financial health hinges on controlling costs that often hide beneath the surface. While labor remains the largest expense category, non‑labor costs, which include purchased services, continue to rise faster than labor costs. According to industry benchmarks, total non‑labor expenses increased 8.7% year‑over‑year, outpacing labor expense growth.

Nearly 60% of hospitals report non‑labor expense increases of 6%–10% over the past year, driven by inflation, tariffs, and contract complexity. These rising costs squeeze already narrow operating margins, often hovering around 1% nationally.

Understanding purchased services, how they’re defined, categorized, and managed, is essential to identify hidden savings and make informed procurement decisions.

What Are Purchased Services in Healthcare?

Purchased services are non‑labor agreements a hospital contracts with external vendors or consultants to provide services instead of delivering them in‑house.

These services span many areas, including:

  • IT, software, and telecom contracts
  • Clinical service partnerships
  • Facility support (cleaning, food, maintenance)
  • Administrative outsourcing (billing, revenue cycle)
  • Specialized consulting or compliance services

Purchased services differ from labor costs (internal staff wages/benefits) and clinical supplies (medical products and equipment). They represent outsourced expertise or services that keep operations functioning.

How Big Is the Purchased Services Spend Category?

While official government breakdowns of purchased services alone are limited, independent industry research shows:

🔹 Purchased services can account for 40–50% of a hospital’s non‑labor spend.
🔹 Some analyses observe 45–55% of non‑labor costs tied to purchased services, highlighting how broad and impactful this category can be.

Non‑labor expenses include a wide range of categories but purchased services are one of the most complex and least visible without proper analytics.

Breakdown of Purchased Services Categories

To better understand this expense area, here’s how purchased services are typically classified:

Category Examples Why It Matters
Clinical Services Lab contracts, rehab services Impacts care delivery and regulatory compliance
Facility & Support Services Cleaning, food services, maintenance Essential for daily hospital operations
IT & Telecom Services EHR maintenance, cybersecurity, cloud services Critical for digital infrastructure
Administrative Services Revenue cycle, billing support Affects financial performance
Finance & Compliance Services Audit support, regulatory advisory Reduces risk and improves governance

Most hospitals have hundreds to thousands of individual service contracts across these categories. Without clear definitions, it’s difficult to manage this scale of spend effectively.

The Challenges of Purchased Services Management

Purchased services are difficult to track and optimize for several reasons:

1. Inconsistent Definitions Across Departments

Different leaders (IT, facilities, clinical departments) often define purchased services differently. Without a unified taxonomy, the same service may be categorized in multiple ways, leading to confusion and missed insights.

2. Fragmented Contract Ownership

Many departments manage their contracts independently. This fragmentation makes centralized visibility and benchmarking difficult.

3. Line‑Item Spend Buried in Invoices

Unlike supplies or labor, purchased services often show up in long, unstructured invoices rather than purchase orders. This makes it harder to reconcile spend against contract terms.

4. Limited Benchmarking and Spend Analytics

Without deeper spend analytics, hospitals cannot see where costs deviate from expectations or industry standards. This creates blind spots in budgeting and forecasting.

How to Define Purchased Services Clearly

Establishing a clear, organization‑wide definition is the first step toward managing purchased services strategically. Here’s how:

Create a Unified Spend Taxonomy

Align procurement, finance, and departmental leaders on what counts as purchased services. Define clear categories and subcategories for consistent classification.

Set Standard Naming Conventions

Use a centralized system of spend categories and naming conventions to avoid mislabeling. This allows easier reporting and benchmarking.

Map Contracts to Categories

Link each contract to its appropriate category and track related invoices at the line‑item level. This helps uncover utilization patterns and cost trends.

Include Scope Clarity

Define what is, and what is not, considered purchased services (e.g., exclude internal labor; include third‑party vendor services only).

The Strategic Benefits of a Clear Definition

Clearly defined and categorized purchased services enable:

See Every Dollar

Think of hospital spend like a foggy map. You know the money is there, but it’s hard to tell where it actually goes. Once purchased services are clearly defined, that fog starts to lift.

A large IT budget stops being one big number. It turns into cloud services, software support, and security costs. When spend is broken down this way, duplicate charges and overpriced contracts become much easier to spot.

Negotiate Smarter

Good data changes the tone of negotiations. If one hospital pays far more for cleaning than similar organizations, that gap raises questions. Finance teams no longer rely on instinct. They walk in with proof.

Clear definitions give teams the leverage they need to renegotiate, reduce vendors, or restructure agreements with confidence.

Benchmark and Uncover Savings

When everyone uses the same definition, comparisons finally make sense. Spend can be measured across departments and against peer hospitals.

That’s often when surprises show up. Duplicate charges. Services no longer in use. In one case, a hospital uncovered hundreds of thousands in overlapping IT and clinical services. Those savings were hiding in plain sight until the data was organized.

Align Teams and Reduce Friction

Finance, clinical, and IT departments often see services differently. A clear definition creates a shared understanding. Everyone categorizes the same service the same way. This alignment prevents duplicated invoices, wasted effort, and miscommunication. It makes operations smoother and decision-making faster.

Table: Example Classification & Spend Accountability

Category Owner Team Spend Trend Savings Opportunity
IT Services IT/Finance Rising Renegotiate contracts
Facility Maintenance Facilities Stable Consolidate vendors
Revenue Cycle Support Finance Fluctuating Benchmark pricing
Clinical Outsourced Labs Clinical Supply Increasing Benchmark vs internal

This table helps clarify who owns what and where the biggest savings opportunities lie.

Best Practices for Purchased Services Management

Purchased services management doesn’t have to be complicated. Hospitals that follow a few smart steps can save money, reduce risk, and run more efficiently.

Use Analytics Tools

Modern platforms like Valify do the heavy lifting. They clean messy spend data and categorize it automatically. They also flag unusual invoices before payment. For instance, a sudden spike in software costs triggers an alert. Teams can review it immediately and avoid costly errors.

Standardize Reporting

Standard reports help teams track spend by category, vendor, or service type. Trends become easy to spot. Sudden spikes or irregularities are caught early. Reporting also supports audits, compliance, and leadership review. Everyone knows what’s happening in real time.

Benchmark Often

Benchmarking is powerful. Compare internal spend over time or look at similar hospitals. One hospital found they were paying 15% more for outsourced lab services than peers. That insight drove renegotiations, saving hundreds of thousands in one year.

Build a Cross-Functional Team

Purchased services cut across finance, procurement, IT, and clinical teams. When everyone works together, decisions get better. Contracts make more sense. Vendor issues surface faster. Problems that slip through silos get caught early.

Review Contracts Regularly

Service contracts need regular check-ins. Quarterly or annual reviews confirm vendors deliver what they promise. These reviews often reveal unused services, outdated pricing, or easy savings opportunities.

Automate Where You Can

Automation reduces errors and speeds approvals. Discrepancies trigger workflows for review before payment. Teams avoid costly mistakes and maintain operational control.

Example in Action:
 A regional hospital system implemented analytics, cross-functional governance, and automation. In one year, they cut purchased services spend by 8%, eliminated duplicate contracts, and improved vendor compliance.

What Strong Purchased Services Management Looks Like

Successful hospitals approach purchased services with a strategic mindset, not just an administrative one:

Continuous Spend Visibility

Every dollar spent is categorized and tracked against expectations.

Regular Contract Performance Reviews

Contracts are reviewed for compliance, delivery performance, and pricing alignment with market benchmarks.

Proactive Savings Identification

Teams use metrics to identify pricing anomalies, vendor overlap, or services that could be insourced or restructured.

Collaborative Oversight

Shared dashboards and reporting structures ensure all decision‑makers see the same data and trends.

Purchased Services Clarity Starts With Visibility

Purchased services are one of the largest and most complex non‑labor cost categories in healthcare but they are also one of the biggest opportunities for savings and operational improvement. By defining purchased services clearly, hospitals gain the power to see, manage, and optimize every dollar spent.

If your organization is ready to transform how it handles purchased services, Valify can help. With advanced spend analytics, intelligent categorization, and benchmarking, Valify brings the clarity and insights you need to reduce costs while improving performance.

Schedule a demo today and uncover your hidden savings with Valify’s purchased services intelligence.

FAQs:

What are purchased services in healthcare?
 Purchased services are non‑labor contracts and outsourced services a hospital buys from third‑party vendors instead of performing internally.

How much can purchased services account for in hospital costs?
 Purchased services can make up 40–50% of a hospital’s non‑labor spend, representing a significant portion of total operating expenses.

Why is it important to define purchased services?
 A clear definition enables better spend visibility, benchmarking, cost savings, and improved contract negotiations.

Who should own purchased services categorization?
 A cross‑functional team including finance, supply chain/procurement, clinical leadership, and IT is best positioned to ensure alignment and accountability.

How does spend analytics help with purchased services?
 Analytics tools cleanse, categorize, and reconcile spend at the line‑item level, revealing hidden costs, trends, and savings opportunities.