A Guide for Health System Leaders

By Steven F. Honeywell, Associate Vice President, Corporate Finance, Penn Medicine

Why Vendor Partnerships Are Essential in Healthcare Today

Healthcare is facing a perfect storm of challenges—workforce shortages, rising costs, and increasing regulatory complexity. According to the American Hospital Association, nearly 80% of hospitals reported staffing shortages in 2024, significantly impacting revenue cycle operations. As a result, health systems are turning to vendor partnerships not just for cost savings, but for operational efficiency, technology integration, and strategic scalability. Gone are the days when outsourcing was seen as a stopgap measure. Today, it is a critical component of financial and operational strategy.
For health system leaders, the key is not just choosing the right vendors but fostering partnerships that deliver sustained value. This requires a shift from transactional, cost-driven decisions to strategic, performance-based relationships that ensure both parties thrive.

The Business Case for Vendor Partnerships

The decision to partner with vendors often boils down to a classic “make-or-buy” evaluation. Developing and maintaining in-house solutions can be costly, requiring significant capital investment and skilled personnel—resources that many health systems simply don’t have.

• Access to Specialized Expertise: Healthcare operations are becoming more complex, requiring niche expertise that external vendors can provide more efficiently. For example, 65% of health systems now outsource at least part of their revenue cycle management to external firms (Black Book, 2024).
• Technology Without the Upfront Investment: Partnering with vendors allows health systems to implement cutting-edge technology without the heavy capital costs associated with in-house development.
• Bridging Workforce Gaps: In competitive markets like Philadelphia, finding and retaining skilled revenue cycle professionals is a challenge. Vendors help fill the gaps, ensuring consistent performance.
• Speed to Market: When health systems acquire new facilities, integrating them into existing operations quickly is critical. Vendors enable rapid implementation and minimize revenue disruptions.

Tactical Takeaway: Before engaging a vendor, conduct a cost-benefit analysis comparing internal resources versus outsourcing. Factor in direct costs, opportunity costs, and time-to-value.

How to Choose the Right Vendor

Selecting a vendor is about more than just price—it’s about finding a partner that aligns with your health system’s goals and operational needs. The best partnerships are built on trust, performance, and shared success.

• Leverage Peer Networks Over Industry Ratings: While platforms like KLAS provide useful data, health system leaders often find that direct recommendations from trusted peers—through organizations like AAHAM, HFMA, and East Coast Core—offer more practical insights.
• Rethink the Traditional RFP Process: A rigid RFP process can slow down decision-making and limit flexibility. Health systems should consider more agile approaches that prioritize responsiveness and alignment with strategic goals.
• Pilot Programs Before Full Commitment: Testing a vendor with a small portion of business allows for performance assessment before scaling up, reducing risk and ensuring alignment.
• Tactical Takeaway: Develop a vendor evaluation scorecard that includes metrics such as financial stability, client references, and technology capabilities. Score vendors objectively before making a selection.

Building Long-Term, High-Value Partnerships

A successful vendor relationship is more than a contract—it’s a collaboration. Here’s how health systems can ensure these partnerships create real value:

• Think Beyond Cost-Cutting: The best vendor relationships are built on a win-win approach. If a vendor is forced to operate at unsustainably low margins, service quality will inevitably decline. Ensuring vendors are profitable leads to better outcomes for both sides.
• Integrate Vendors Into Operations: Regular check-ins, open communication, and treating vendors as an extension of the internal team foster alignment and improve performance.
• Invest in Vendor Management: A dedicated vendor manager ensures consistent oversight, tracks key performance indicators (KPIs), and fosters accountability.

Tactical Takeaway: Set up monthly performance review meetings with vendors and create a structured agenda covering KPIs, challenges, and improvement plans.

Ensuring Accountability and Continuous Improvement

Vendor partnerships must be continuously monitored to ensure they are delivering the expected value. Health systems can achieve this by:

• Defining Clear Success Metrics: Establishing baseline performance data before engaging a vendor allows for objective measurement of improvements.
• Maintaining Internal Performance Tracking: Relying solely on vendor-reported metrics can be misleading. Health systems should maintain independent scorecards to validate vendor performance.
• Using a “Challenge/Champion” Model: Assigning multiple vendors to the same service area and comparing performance fosters continuous improvement and prevents complacency.

Tactical Takeaway: Implement a performance dashboard that compares vendor results against internal benchmarks and industry averages. Use real-time data for decision-making.

The Future of Vendor Management in Healthcare

As vendor partnerships become more integral to health system operations, leaders must anticipate future trends:

• The Emergence of Chief Vendor Officers: As vendor ecosystems grow, some health systems are creating leadership roles focused solely on vendor strategy and coordination.
• AI and Automation as Differentiators: Vendors leveraging AI and automation to improve efficiency and reduce costs will set new industry standards.
• A study by the Healthcare Financial Management Association (HFMA) and AKASA found that hospitals using automation for revenue cycle operations had an average cost-to-collect of 3.51%, compared to 3.74% for those not using automation, indicating promising cost savings.
• Shifting Focus from Cost to Value: Purchasing teams must evolve from a cost-cutting mindset to a value-based approach that prioritizes long-term impact over short-term savings.

Tactical Takeaway: Evaluate vendors based on their AI and automation capabilities. Prioritize those with demonstrable efficiency gains and proven ROI.

Final Thoughts: Why This Matters

Vendor partnerships are no longer just about outsourcing non-core functions—they are a strategic imperative for modern health systems. Leaders who approach these relationships with a long-term, value-driven mindset will position their organizations for greater financial stability, operational efficiency, and ultimately, better patient care.

The healthcare landscape will only continue to grow in complexity, and the systems that leverage vendor partnerships effectively will be the ones that thrive in the years ahead.

Tactical Takeaway: Build a three-year vendor partnership roadmap that aligns with your health system’s strategic objectives. Ensure vendor relationships evolve alongside industry changes and organizational growth.