The supply chain director is the ideal standard-bearer for purchased services contracting
Supply chain executives have no shortage of opportunities to provide value to their health systems. Purchased services is one such opportunity, and a big one at that.
The supply chain director is the ideal standard-bearer for purchased services contracting, bringing efficiency and quality to the process and resulting service, say Eric Slimp, operations analyst, and Lyle Ellerbach, vice president, of MD Buyline, the Dallas, Texas-based strategic sourcing and contract management company, focused on healthcare. Perhaps with assistance from a third party, and certainly with input from the user departments, the supply chain team is well-equipped to research options among vendors and present them dispassionately to the departments and CFO. “That’s the ideal situation,” says Slimp.
Unfortunately, purchased-services decisions are often made by department stakeholders without supply chain’s assistance, adds Slimp. These stakeholders may carry the flag from start to finish, often looking only at one service provider – frequently, the incumbent. Then they present their findings to the CFO, who may or may not fully understand the service under discussion.
The result? “You can see different departments doing their own thing,” says Slimp. The hospital or IDN may end up with multiple contracts for the same service, such as document management and shredding services. The IDN loses the opportunity to leverage its volume and generate competition among service providers, and must manage multiple contracts and monitor the performance of multiple service vendors.
Says Ellerbach, “When departments manage the process from beginning to end, each one meets their own goals, but not necessarily the strategic goals of the hospital or IDN.” It’s much better to handle purchased services as many IDNs handle medical equipment, where the user department makes clear its clinical applications and needs, then hands over sourcing and contracting responsibilities to supply chain. “This brings consistency on the contract side,” he says. “And consistency means success.”
Where to start?
Environmental services may be a good place to start, says Slimp. It’s typically a huge spend area, and IDNs often contract with multiple providers for it. What’s more, environmental services is usually a competitive market, with national and local service providers ready to vie for the business. Meanwhile, dialysis services is a “fairly simple but high-impact category,” he adds. It is a fairly commoditized service, and, because there are just a couple of service providers, the IDN can easily establish a competitive situation.
Another area ripe with opportunity is transcription services, says Ellerbach. With technology continually improving, “it’s a tumbling market in terms of price,” he says. Reference labs represent another opportunity, simply because of the sheer dollars involved. “If you can standardize cost per test over a wide range of tests, you can save substantial dollars.”
The contracting process
A good place to begin the contracting process is with an existing contract, says Slimp. If the service provider offers appropriate service levels, and the IDN’s usage of that service is consistent, the supply chain team can use that contract as a basis for specs in an RFP. And issuing formal RFPs is the best way to proceed, he adds. When the IDN sends out a uniform bid request, vendors respond in the exact same format, making it easy for the IDN – or third-party consultant – to compare service offerings.
Third-party consultants, such as MD Buyline, offer advantages in that they bring an industry-wide perspective to the process, and can bring questions to the table of which the IDN might be unaware, adds Ellerbach. “We see hundreds of contracts for transcription services, for example, and we can see which methodology is most widely accepted.
“Remember that the majority of purchased services are a lot more quantifiable than people want to think,” he adds. Knowing the key metrics makes it easy for supply chain to contract and then monitor the vendor’s performance throughout the life of the contract. E.g., for linen services, key metrics might be pounds or units delivered; for blood services, volume purchased; and for transcription services, lines or characters transcribed.
“The idea is to incentivize the service provider around quantifiable metrics,” says Slimp. For example, in a reference lab contract, the IDN should look at turnaround time and accuracy.
“We recommend hospitals review performance at least on an annual basis,” he continues. During those reviews, the IDN and vendor can discuss the vendor’s performance as well as ways that performance can be improved in the coming year. If the contract includes incentives or penalties, sit-down meetings provide an opportunity to look at incentives paid or credits charged. “Just having an open dialogue with the service provider is important,” he says.
An important component in any purchased-services contract is clearly defined termination language, says Slimp. “Make sure you have a way out, either with cause or without cause.” Price escalation language should also be included. “You want to make this as concise as possible.”
Ellerbach urges IDNs to pay close attention to contract-renewal provisions, particularly so-called “automatic” or “evergreen” renewal terms. “You want to make sure these are advantageous to you,” he says. “You don’t want to get into a situation where things just continue to roll without review or negotiation.”