Tag: hospital non labor costs

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:

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

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.

Valify Team

The Valify Editorial Team is dedicated to sharing insights, strategies, and innovations that help healthcare organizations gain control of purchased services spend. Backed by years of expertise in data analytics, procurement, and healthcare technology, the team curates practical resources and thought leadership to guide hospitals and health systems toward greater efficiency and savings. By combining industry knowledge with real-world case studies, the Valify Editorial Team delivers content that empowers decision-makers to drive smarter, data-driven sourcing strategies.