PURCHASED SERVICES CONTRACTING:

WHITE PAPER PURCHASED SERVICES CONTRACTING:

In healthcare there are many different services and work processes that are more effectively outsourced to a contracted supplier than performed by in-house staff. These services typically involve special skills or frequencies that are not cost effective for a full time employment arrangement. They include everything from window washing and maintenance of high-tech equipment, to consulting and financial services. Many healthcare supply chain operations have not traditionally had much involvement in the negotiation, selection and control of these contracted services. In these organizations, the sourcing of these services is typically under the purview of the individual departments that require these services. Purchased services is an area of significant cost savings potential for most healthcare organizations. Thirty percent of a facility s spend, including capital, leases and other operating expenses, is ripe for inclusion in a formal program to manage purchased services. As a result, this category of expense represents a significant opportunity to impact the bottom line, and just like supplies, every dollar saved here will have a full and direct impact unlike the path of increasing revenues, where maybe 10 percent of those scarce and risky dollars are realized in the final accounting. Supply chain experts can learn to leverage their strong negotiating skills, objectivity and analytical skills, and contracting expertise to conquer this final hurdle in healthcare purchasing. In the following pages, we will offer tips on how to select, negotiate and control purchased services at your facility. Key highlights will include: The definition of purchased services and identification of the potential impact and value of a successful purchased services program. The processes, considerations and negotiating points that will deliver the best possible outcomes for your organization. The potential features and functions available and required in a contract management software system. Specific examples and points of consideration of a broad spectrum of purchased service categories. What Exactly are Purchased Services? As defined by the Healthcare Financial Management Association (HFMA), purchased services are those that are outsourced to external suppliers. According to BusinessDictionary.com, this cost classification includes costs not under direct labor or direct supplies, such as consulting, freight, travel, etc. Why is contracting for services so different from the other purchasing activities that supply chain professionals have worked on for years? Following are a few explanations: Typically, it s an individual department that is responsible for the service. Most of these services do NOT run through an automated MMIS system. Many of these contracts cover an extended period of time, and there could be a long-term relationship with the supplier that has never experienced the benefit of competition. www.amerinet-gpo.com 2

It is difficult to monitor and evaluate the work, and also to record the completion or receipt of the work for internal systems. The evergreen clause, which is a statement within a contract, that says something to the effect of this agreement shall automatically renew for another one (1) year term, unless either party provides notice to the other of its intent to terminate this agreement not less than thirty (30) days before the end of the then current term. Some of these auto-renewals will require extended notice to cancel before they expire, many times 180 days or a full year prior to the expiration date. What are Purchased Services? Any supplier that brings in experts to perform a function. Expertise to perform, analyze or manage non-core business operations. Delivery of a supply requires significant expertise to install or replenish. Components of a function that include parts and replacements. Why Does Supply Chain Need to be Involved? What can the supply chain expert within an organization bring to the table in these situations? Why would an organization want supply chain to take a more proactive, leadership role in this arena? To start, knowledge of the standard terms and conditions that may already be in place and knowledge of the organization s pre-defined legal requirements. Past experience working on special projects, such as capital purchases, can provide value to the determination of the unique requirements and deliverables that will make each new agreement a success. Supply chain will also understand that all purchased services should be covered by a written contract. They can ensure that every contract is carefully monitored to know when each contract will expire and needs to be renewed. Supply chain s experience and skill at negotiating is critical they know how to introduce and maintain competition and through industry knowledge can find competitive companies that provide similar services. This offers a mechanism to measure and judge the services received, and to ensure they are satisfactory. Supply chain is well versed in striving for a balanced outcome that brings both quality and cost-effectiveness in pricing and terms. Standard terms and conditions Another component of supply chain s expertise is the ability to be objective, and to do the numbers and complete the analysis. This includes: Supplier research and qualification Analysis to compare all costs and services Expertise to normalize variations in pricing structure Assurance that all billed services are being used How to Get Started Contracting Expertise Pre-defined organizational legal requirements Unique requirements and deliverables Organizations at the beginning of this process may need to spend time reviewing and assembling data regarding their facilities current purchased services. First, ask the accounts payable department for a printout showing the total amount paid to every supplier. Next, be sure access is available to all of the contracts that currently exist. These may be centralized, or possibly are decentralized and residing in many different departments within the organization. If that is the case, it will be vital to gain executive support to gather the contracts into a central repository. Even if access is available to all of the service contracts, it is important to request reports from suppliers in order to summarize services delivered and payments, identify all price points and types of fees, measure volume of services delivered and report adherence to defined service levels. Finally, invoices should be spot checked to verify all price points and make sure fees match supplier reporting. A contract management system is one of the key elements of any purchased services contracting strategy. Depending on the size and/or complexity of a facility s operation, this process can be managed successfully with either a robust and sophisticated software system, or with a simple database or spreadsheet. The assembly of this information into one centralized database will assist in matters including Joint Commission inspections, when information on exactly when current contracts will be expiring may be needed. A more robust software system offers online contract repositories which will allow for upload, storage, maintenance and controlled access by anyone who is authorized. Organizations will also benefit from contract documents, with edit capability and templates, which will permit, among other things, mandating the adoption of internal terms and conditions, rather than those of the vendor. Newer systems provide action lists and dashboard www.amerinet-gpo.com 3

Software: Web Hosted or Packaged Key System or Database Elements: Service provider name Contract number(s) Contract start and end dates Contract termination notice period/date Description of services Performance metrics Remedies for failure to correct Type of service screens, and will help track the various contracts through internal processes. It should also provide some common reports or report writers. Other related modules or links that might prove useful include conflict of interest, vendor credentialing and collaborator for document review. After establishing the infrastructure for a basic process, it will be important to establish the categories for contracts and then begin to review/target contracts for action. It is generally best to start with just one or two. Most contracts will fall into three general contract categories: support services, equipment maintenance/ building and grounds, and professional clinical. Next steps should include creating a schedule using expiration dates, obtaining stakeholder input and support, and identifying competitors, service requirements and goals. Group purchasing organizations (GPOs) offer a great avenue to obtain objective and competitive information by which to judge and evaluate current services and contracts. A wealth of information can be gleaned by reviewing GPO contract information details, and can help to jump start a purchased services program by providing: Pre-screened, pre-evaluated national vendors Negotiated terms, pricing and value adds Contract source (facility, local or GPO) Department owner/key contacts Price list (link to file) Performance requirements Issue correction process Other terms and conditions A means to minimize or eliminate the lengthy RFP process A project process that includes initial research and timelines should be established and a determination made whether to use a formal RFP or more expedient vetting and negotiation tactics. Analytics to compare results should be developed. When negotiating contracts, two areas of concentration should be automatic renewal clauses and price confidentiality clauses. It is advisable to always challenge and strike clauses stipulating that pricing information is confidential. These confidentiality clauses disallow purchasers from sharing pricing information Key Considerations Performance Expectations Some Contracting Best Practices with benchmark companies, or even with an organization s physicians or consultative partners. According to a report on price transparency by the Government Accountability Office (GAO), lack of transparency is causing hospitals, Medicare and Medicaid to pay higher prices than warranted for goods and services. Other contract points to consider: No evergreen clauses No price gag clauses Define specific requirements based on type of service Consider risk and quality concerns Consider impact of service or vendor failure Require vendor measurement and reporting Negotiate penalties for failure Require periodic business reviews The addition of a clause stating that once the contract expires, current pricing remains in effect until a new contract is established. A maximum term of no more than three years, or three years and a review and opportunity to extend. This ensures that organizations will not be locked into a long-term agreement should something change, such as changes to service delivery or organizational needs, or the development of superior technologies. Compare and negotiate to achieve the best price. Some general tips: Debundle the cost of non value-added services. Review the list of services being provided and make sure they are all needed and that they ll actually be used. If not, ask for a discount and have them removed from the contract. Pursue volume discounts, or set a schedule in place that provides discounts later if you achieve higher volumes. Minimize (or control) price escalation by asking for firm pricing for the entire term. A fallback position would be to ask for a cap and a schedule for exactly when pricing could be changed. Another strategy would be to ask for pricing to be tied to an external monitoring tool, such as the price of www.amerinet-gpo.com 4

oil, the price of other publicly accessible commodities or the consumer price index. Collaborate with larger or high cost impact vendors to reduce costs through value analysis, consultative expertise and inventory management. Define acceptance so that clear expectations are set for what the service provider must do to get paid. Again, put the onus on the vendor to make sure they ve met the contract requirements and needs before they are paid. Purchased Services Categories and Examples Equipment Maintenance/Building and Grounds Equipment service agreements and maintenance is probably the most well-known area, and is an excellent starting point to begin gaining control over the contracting process. Start with a careful consideration of service or vendor failure if the equipment is down, what impact does that have on operations, ability to deliver services or conduct revenue generating procedures? This will help define the level of service that is required. If there are several pieces of the same equipment, there is some built-in backup and the facility can afford to assume more risk. What is the best way to differentiate between warranty vs. preventive or corrective maintenance? When is each type appropriate or important? Items such as sterilizers and gas machines require routine maintenance or calibration, so it may be wise to negotiate a discounted price and pay for this maintenance on a schedule. Other items, such as monitors, will only need corrective maintenance if they break down, and in those situations, it s typically a reboot or a replacement of a circuit board or other component. In any case, make sure to define the type of service that is required for various items and only pay for the level that will likely be needed. For service by the hour, define when the service time starts. Is travel time included, discounted from hourly cost and, most of all, reasonable? For time-sensitive services and/or revenue generating equipment, include response times. The main goal is to minimize the risk of price escalation. Another suggestion for controlling and reducing costs on equipment maintenance is to make sure the cost of rare and expensive parts, such as the glassware and tubes required for expensive DI equipment, is debundled and not included in the service contract. The cost of these expensive parts will be much higher to an organization if the vendor assumes all the risk. One thing to consider is to include preventive maintenance and calibration only in pre-paid plans, and go on time and materials for corrective maintenance. If an organization deems this as risky and a situation that could result in occasional budget-breakers, then a Managed Equipment Maintenance service should be considered. With this service, the third party vendor reviews and bids on the existing service contract portfolio, providing a guaranteed level of savings. All agreements with the original equipment manufacturers (OEMs) are cancelled, and the third party is paid a set fee that is usually at least 10 percent below the cost of service contracts. The management firm pays the OEMs on a time and materials basis, which equates to generally splitting any savings with the facility. Shipping and Freight Management Freight costs can be addressed in several ways. The most basic step involves putting an agreement in place to cover outbound freight, and gain access to some basic services and discounts. Inbound freight is by far the highest cost category in this area. Because many organizations may not have the time or expertise to manage all freight processes, a possible option to explore is working through a distributor program, or a third party logistics company (3PL). Working through a distributor program, organizations can expect average savings of 30 percent for small package freight costs and benefits including vendor management and compliance, cost allocation management, freight pay and audit services. They can also receive freight consulting resources that are critical to effectively manage the customer s in-bound freight expense. The 3PL option will generally provide a tiered discount off list pricing with cost plus pricing or flat fee pricing options and partnership with small package nationwide air freight carriers. Either will offer a guaranteed level of savings, and will help put a process in place with vendors to transfer control of inbound freight to the organization. Instrument Repair Some key considerations in this area include: On-site repair vs. mail-in repair (or combination) Guaranteed frequency or turnaround time Loaner or parts availability Scope repair, set/tray/container repair Item specific price lists with specified turnaround times Shipping containers and pre-paid ship labels with insurance In terms of performance expectations, at minimum there must be a warranty of services/guaranteed replacement and that replacement parts meet or exceed industry standards. Price negotiation should identify all potential price points and fees, include tiered and volume discounts and seek to minimize any risk of price escalation. Generally, it is much more cost effective to go with a single third party repair service rather than sending each individual product to its own OEM. It is also important not to be swayed by OEM scare tactics they may say their warranty will be void, but what good is that warranty when every repair is so expensive? The third party will provide some guarantees be sure to ask for those in writing and compare the written guarantees with the cost and promises from the OEM. www.amerinet-gpo.com 5

Financial Management Solutions If an organization is looking to generate improved revenue capture, outsourcing billing service may be a possibility to explore. This is certainly a viable option for non-acute care facilities, and may be worth considering if a hospital is beginning the process of purchasing its physician practices and needs to get a jump start on making this process smooth and effective. However, the transition should be carefully planned, and should include guarantees on how quickly processes will begin delivering cash payments. If an outsourced billing department is not an option, then a software subscription should be considered. This will quickly pay for itself in increased revenue and shorter AR cycle time. Revenue cycle software products will address the charge master, patient bill estimating, and linking supply costs and charges through the following features: Toolkit and online reference Bill analyzer Patient charge estimator Pharmacy cross match from bill to product Supplies cross match from bill to product Dashboard to monitor KPIs Contact info@amerinet-gpo.com 877-711-5700 About Amerinet, Inc. As a leading national healthcare solutions organization, Amerinet collaborates with acute and non-acute care providers to create and deliver unique solutions through performance improvement resources, guidance and ongoing support. With better product standardization and utilization, new financial tools beyond contracting and alliances that help lower costs, raise revenue and champion quality, Amerinet enriches healthcare delivery for its members and the communities they serve. To learn more about how Amerinet can help you successfully navigate the future of healthcare reform, visit www.amerinet-gpo.com. Amerinet, Inc. Two CityPlace Drive, Suite 400 St. Louis, MO 63141 877-711-5700 www.amerinet-gpo.com In conclusion, the area of purchased services represents a significant opportunity for healthcare facilities to explore cost savings opportunities. Every dollar saved is returned directly to the bottom line. In some purchased services areas, there is also opportunity for increased revenue. Although some organizations may be hesitant to delve into certain areas for reasons including lack of expertise, lack of resources or political ramifications, it behooves them to very carefully consider all aspects of spend. The new models of healthcare reimbursement, based on quality of care and decreased reimbursement are the industry s present and future, and for this reason, organizations must not be afraid to turn over every stone in search of ways to reduce their costs. www.amerinet-gpo.com 6