Cost Containment Corner - How well are you actually managing contracts?

March 02, 2016
Michael DeLuca
From the January/February 2016 issue of HealthCare Business News magazine
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).

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