Health systems have two options for increasing profitability — attack costs or chase revenue. For many, attacking costs is an easier path to financial stability because accountable care and declining reimbursements make chasing revenue extremely difficult. On the attacking costs side of the profitability equation, the cost of supplies and third-party services are the second-largest expense after labor. Many health systems are nowhere near close to tapping the full cost-savings potential, leaving millions on the table.

Squeezing more savings from your supply chain starts with effective contract management. It’s the front line of the battle. The reality is that most health systems stop after expending a great deal of effort negotiating and signing contracts. Due to the complexity of the health care supply chain — with thousands of contracts from different sources — contracts generally are not managed at all, or are managed very little.

Case in point: Health systems typically rely heavily upon their Group Purchasing Organization contracts. Once they sign a contract with a GPO, most health systems pay very little attention to that contract. They don’t store the contract, manage terms and rebate opportunities, expirations, or even fully understand the item sets covered in the contract. But vendors are watching those terms closely to look for opportunities to move their discounted products back to list price, thereby increasing the provider’s supply chain expense. Vendors shouldn’t be blamed for this, however. They’re just playing by the letter of the law.

If you don’t have an effective process to manage all of your contracts, or don’t have the staff to manage them, it stands to reason that the agreements will expire without you realizing it. You run the risk of paying too much for a product, or buying products that are not under contract. There is also risk of unintentionally buying products that violate the terms of another contract, such as a sole-source agreement. If you’re buying a product that’s not on-contract, there’s a chance the product may not be clinically approved or meet the health systems’ own clinical standards. Bottom line: you open your health system up to a lot of risk when you don’t operationalize contracts.

Whether it’s a local contract or a GPO contract, the best way to effectively manage all contracts is to have technology keeping an eye on the terms and conditions of all of them, holistically, so things don’t get missed and mistakes aren’t made (e.g. having multiple contracts for the same items, or not having contracts for items that you use regularly).

By more effectively managing contracts through technology, a typical IDN can save up to $2 million per year. Other benefits include minimized risk, as explained above, and reduced dependence on others to keep track of your contracts.

A well-respected IDN, widely recognized as one of the nation’s top hospitals, is currently implementing a pilot program to more effectively manage contracts by implementing supply chain technology that will monitor and oversee thousands of disparate contracts in one place. The program’s goal is to significantly reduce supply chain expenses by automating price changes, monitoring rebates so they can be realized, analyzing spend against contract commitments, rationalizing overlapping contracts and automating notifications for key events, such as pending contract expirations.

The program will be ready for implementation in just a few months, and the IDN expects to start realizing savings immediately. The savings are expected to grow every time a new contract is created and managed. Furthermore, by managing each contract more effectively, the IDN will be in a position to better leverage its buying power during future purchasing cycles.

After all the hard work of negotiating contracts is complete, it’s critical to ensure the negotiated savings hit your bottom line. It doesn’t have to be difficult. Utilizing available technology to help you more effectively manage contracts will not only yield significant supply chain savings, it will also help you gain independence from others in managing your contracts. Controlling their own supply chain destiny is the way of the future for health systems. Those that embrace this concept will achieve financial sustainability and rise to the top. The others will continue to chase declining revenue streams.

About the author: Michael DeLuca is executive vice president of technology and client services for Prodigo Solutions, a health care supply chain solutions company helping hospitals gain control of supply chain spend through contract compliance and automation.