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Building an Effective Contracting Strategy

Building an Effective Contracting Strategy

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Michael Darling Director, Clinical Supply Chain Services Price Waterhouse Coopers Dallas, TX Lance Robinson Director Price Waterhouse Coopers Birmingham, AL

Healthcare Advisory Practice PwC Presentation to the Association for Healthcare Resource & Materials Management .

Agenda „ „ „ „ „ „ „ „ „ Overview of Contracting Process Data Gathering and Analysis Request for Information – Potential Vendors Consensus Building with Key Stakeholders Contract Execution Ongoing Contract Management Key Performance Metrics Roadblocks and Barriers Questions .

streamlined product flow Critical needs for data accuracy .Overview of Contracting Process Current Supply Chain Environment In recent years. there has been a shift regarding the sophistication of the healthcare Traditional Supply Chain Clinician selected products High inventory levels Discontinuous product flow Paper-based information flow Inconsistent technologies Limited data collection Inefficient. fragmented buying practices High purchasing costs Supply Chain Implications Cost/outcome based product selection Increased pressure to remove non-value added costs and activities Increased pressure to improve service quality Need for relevant information sharing Move to continuous.

but are not limited to: Increasing demand for greater commitment to and customization of value-added services Ability to effectively gather and share utilization and clinical data Demand forecasting and clinical practice guidelines to develop procedure-based supply distribution and to reduce unused/unneeded inventory in system Ability to link resource consumption to individual patient.Overview of Contracting Process Role of Supplier Management Recent shifts in elements that are now part of successful contract negotiations in the current environment include. physician and diagnosis/procedure to drive clinical resource management Minimized supplier relationships with individual providers (physicians) will be in favor of closer ties to the provider systems Flexible contract utilization E-commerce strategies .

Suppliers Suppliers & & Services Services GPO GPO Product Product Categories Categories Contract Contract Negotiations Negotiations Voice Voice of of Customer Customer Hospitals Hospitals Product Product Categories Categories Contract Contract Selection Selection Contract Contract Information Information Contract Contract Distribution Distribution Support Support Processes Processes & & Value Added Programs Value Added Programs Contract Contract Signing Signing Contract Contract Utilization Utilization Utilization Utilization Data Data Customer Customer Care Care Purchase of Products Delivery of Products .Overview of Contracting Process Role of Supplier Management A strong contract negotiation strategy plays a key role in the management of a hospital’s suppliers / vendors and GPO.

MD.) Verify Data with VAT/Stakeholder (Total Spend Validation) Obtain Stakeholder Sign-Off (Stakeholder Acceptance) Assess/ research Marketplace Identify appropriate Benchmarks Prepare Presentation of Opportunity Present Opportunity to VAT/ Stakeholder(s) Obtain VAT/ Stakeholder(s) Acceptance of Opportunity (Sign-Off) Prepare Initiative Packet (Analysis. High-Level Implementation Plan) .Data Gathering and Analysis Collect Data Validate Data (Minimum two-way validation) Identify Value Analysis Team (“VAT”)/Stakeholders (Dept Director.Overview of Contracting Process Outline of Effective Contracting / Negotiation Strategy Phase I. Presentation. etc.

Request for Information Identify vendor(s) to participate in RFI/ RFP Develop RFI/ RFP – requirements & expectations Develop initial negotiation strategy Prepare for bidders conference Conduct bidders conference RFI/ RFP responses due from Vendors Phase III. cont’d .Consensus Building Analyze RFI/ RFP responses Completed RFI/ RFP analyzed and reviewed (Contract Administrator/ VAT/ Stakeholder) Develop business snapshot for VAT/ Stakeholder(s) VAT/ Stakeholder(s) review of business snapshot Obtain VAT/ Stakeholder(s) acceptance (Sign-Off) Select vendor(s) to participate in next round of negotiations Outline of Effective Contracting / Negotiation Strategy.Overview of Contracting Process Phase II.

Overview of Contracting Process Phase IV.Contract Execution Develop final negotiation strategy Establish leverage points and givebacks Engage selected vendor(s) in negotiation Share outcome with VAT / Stakeholder(s) Update leverage points and re-negotiate (if necessary) Finalize negotiation Select vendor Complete legal and financial documentation Submit contract/ proposal for approval and sign contract Develop conversion/ implementation Plan Obtain completed initiative’s Stakeholder Acceptance (Sign-Off) Develop product education (vendor supported) (if necessary) Order new supplies/ convert (if necessary) Phase V. cont’d .Ongoing Contract Maintenance and Key Performance Metrics Develop realization tracking methodology Track monthly realization (On-going monitoring) Outline of Effective Contracting / Negotiation Strategy.

Overview of Contracting Process Build an Effective Contracting/ Negotiation Strategy .

Overview of Contracting Process Benefits of Effective Contract Negotiations Benefits of an effective contract negotiation strategy include: Reduced cost for quality products and services Improved vendor response Support use of fewer vendors for each type of supply product Increased contract compliance Enhanced availability of product utilization data Reduction in inventory levels Enhanced opportunities for clinical resource management Improved consolidation and standardization of products Improved supply logistics .

market share information) Include all vendor utilization Include all relevant products Appropriate data sources include: Master Item File Requesting data from the vendor Departmental logs Implant logs A review of benchmark pricing provides an excellent comparison of current pricing and desired outcome of vendor negotiations. The goal of data gathering and analysis is to be as prepared as the vendors.Data Gathering and Analysis Data gathering and analysis is the most critical element in preparing for a successful contract negotiation.g. Key Elements to data gathering and analysis: Understand current environment (e. Sample sources for benchmarking include: Contacts at peer hospitals AHRMM AORN ECRI Outside professional services firm .

Data Gathering and Analysis Identification of Contract Opportunities: Obtain AP supplier files to identify high-dollar suppliers Conduct a contract Inventory and perform a gap analysis Identify current agreements available Contact suppliers to determine if they have contract documents. brand name drug moving to generic) Changes in manufacturer competition Specific requests for review . compare rates to GPO. new pricing.g. obligations. and Identify those suppliers without agreements Review current rates for high-dollar suppliers. costs) Suppliers above market rates with significant cost savings potential and supplier agreements nearing expiration New market opportunity (e. market/industry benchmarks or other sources. and identify rates above reasonable standards Identify contract opportunities based upon: Suppliers without agreements in place that pose a high risk potential (liability.

) . Medicare reimbursement. Bankruptcy. Capital. etc. Background checks.Data Gathering and Analysis Prioritization of Contract Opportunities: Identified contract opportunities shall be prioritized for review using a number of criteria to gauge the benefit that will be provided when compared to the difficulty of the implementation of a contract (single-facility or system-wide) Categories – Med/Surg. etc. Clinical acceptability Ease of conversion Terms and conditions of contract IT capabilities Compatibility with current IT systems Current contract commitments Ability to work with primary distributor(s) Impact to Community Environmental Diversity Vendor Credentialing (e. Service Agreements. Rx.g.

.Request for Information.Potential Vendors Request for Information A request for information for select vendors should include the following elements: Vendor expectations Anticipated decision criteria illustrated in decision matrix Required terms and conditions This type of data leverages the hospital to enhance its contract negotiations.

Request for Information. Based on those amounts.Potential Vendors Vendor Expectations Clear communication of expectations of vendors illustrates the Materials Management department is clear about what is required as it relates to the future supplier/ vendor relationship. but are not limited to: Any fees or rebates collected as a result of purchases through the supplier/ vendor or GPO agreements will be identified by vendor and shared with the hospital. a percentage of the fees will be returned to the hospital in the form of quarterly payments Use of web-assisted programs will be at the discretion of the hospital and will not affect the ability to participate in programs provided by the vendor/ supplier or GPO The hospital will have the ability to appoint a representative to each of the clinical. medical and materials support/ advisory groups within the GPO organization . Sample Expectations include.

industry sponsored trials. Radiology) Accounts Payable review Charge master review Participation in benchmarking studies Membership conferences with education sessions . input into product design) Contracts geared to physician practices Electronic catalogs Field service representatives assigned to member hospitals Clinical support in specialty areas to assist in implementation of available contracts and further assess needs (Pharmacy. Lab. continued: Utilization reports with recommendations to increase savings and optimize contracts Additional savings for further commitment to product standardization Ability to create custom contracts for large health systems Early access to new technologies (e. Operating Room.g.Request for Information.Potential Vendors Vendor Expectations Sample Expectations.

The Decision Matrix is a tool to quantitatively score key information that has been identified as important in the decision-making process of Initiatives. The Decision Criteria are rated on a scale of 1 to 5 as follows: 5 = Exceeds Criteria 4 = Meets Criteria 3 = Neither Meets/Does Not Meet Criteria (Neutral) 2 = Does Not Meet Criteria 1 = Definitely Does Not Meet Criteria These criteria will be used to guide prioritization.Request for Information. Methodology: Please enter your rating in the corresponding "Rating" cell on the Decision Matrix. . objective. not all criteria are required for an opportunity to be pursued. Scoring must be adjusted accordingly. The Matrix provides a standardized.Potential Contract Administration Vendors Decision Matrix Business Case Decision Matrix Product/Service: ____________________________________________ Vendor: ___________________________________________________ Distributor: ________________________________________________ Key Stakeholders: __________________________________________ Date: ____________________________________________________ Purpose : The Business Case Decision Matrix provides a template for presenting the business case for moving forward on contracts or processes. and quantifiable approach with which to analyze contract. service or other opportunities within the system. Decision Matrices should then be sent to the Contract Administration Group (as available) for compiling and analyzing the data.

Request for Information.Potential Vendors Decision Matrix .

This is applicable to agreements outside of those negotiated by the GPO.Request for Information . The GPO should be encouraged to provide fixed multi year pricing. Negotiated pricing should have a minimum term of one year. Market Competitive Clause will be needed to protect hospital based on cost reductions identified in the market place. Sample standard terms and conditions may include: Termination clause without cause should be available based on 30 days written notice.Potential Vendors Terms and Conditions In order to provide a consistent contracting methodology. The purpose is to provide structure and a standardized approach to contracting that assures strong cost management activities and protection of pricing once established. . The clause allows the hospital to go back at any point during the term of the agreement to request cost reductions based on changes in the market place. Length of up to 90 to 120 days can be acceptable. standardized contract language should be utilized in the negotiation of all purchasing agreements.

it should be based on the CPI urban or CPI Medical which is available from the Federal Reserve. . Inventory should be set up contractually as a consignment product. Another financial incentive for the hospital is terminology that allows for additional discounts of 1% to 2% based on utilizing EDI for order placement. continued: Cost increases during the term of the agreement will not be accepted. For high cost products that change in technology on a frequent basis. Language should be included in the agreement that commits the vendor to providing vendor resources short-term to implement product changes and or pricing. Common terms of 2/10 net thirty should be included. This should include funds to be utilized for education and in-services for affected staff.Request for Information . Should a cost escalator be needed. The responsibility for the inventory will remain with the vendor. a clause that protects the hospital from obsolescence of products is in the best interest of the hospital. Payment terms should be included that provide a financial incentive to the hospital for early payment as the cost of money and cash flow allow.Potential Vendors Terms and Conditions Sample standard terms and conditions. while the inventory amount and replacement process will be determined by the hospital.

Clinicians have the necessary knowledge on required use of product and ability to change products as it will benefit the hospital. . Key stakeholders may include: CEO/COO CFO Physicians/ Clinicians Key Department Directors Plan to involve key stakeholders in the following: Reviewing results of data gathering Validating data Prioritizing options Preparing for and participating in vendor negotiations Clinician’s involvement in vendor negotiations can carry significant influence.Consensus Building with Key Stakeholders Involving key stakeholders throughout the process of preparing for and conducting contract negotiations is a key distinction for gaining consensus and building an effective contracting strategy. We have found great success in presenting data to physicians to gain consensus on desired changes in vendors/ utilization.

cost savings available to department for other projects) .Consensus Building with Key Stakeholders As mentioned. illustrating data analysis effectively to one’s audience is a key factor in being successful in building necessary consensus for vendor negotiations. Some keys to success to involving clinicians include: Open sharing of all data Fact driven presentation Education of clinicians regarding data Clarification of need for product evaluation Possibility for creative benefits to clinicians from reduce non-labor expense (e.g. Tailoring the message to match the audience’s key interests promotes successful consensus building.

Contract Execution As part of the completion of successful contract negotiations and contract execution. the following steps need to be considered: Clarification of value added services Required terms and conditions (as specified in RFI) Internal legal review Signature of contract by appropriate purchasing authority Communication with key stakeholders regarding results of contract negotiation Timely change of pricing in system (may require MMIS involvement) Vendor Hospital .

terms.GPO Resources . and Corporate Æ Proper corrective action taken if needed .Key Performance Indicator Reports . GPO. contracts are loaded within 5 days of execution) 832 price catalog updates Regular monitoring and tracking of key performance indicators (see next section) Contract Administration Compliance Process Monitoring and Tracking Tools : . Key elements include: Realization schedule Contract management database (expiration date.Distributor WBC Contract utilization measured against baseline Continuous Compliance Monitoring & Tracking Maintain contract requirements (market share.Ongoing Contract Management Maintaining the results achieved in your successful contract negotiations requires ongoing contract management. expenditure or volume commitments) Identify Variances: Regular review of contract compliance with vendors.

000. the vendor provides total purchases and suggested new opportunities to continue to streamline non-labor expenses. The goal of quarterly business reviews is to ensure: Ongoing accuracy of pricing Shared accountability with vendor for desired results . For vendors with spend greater than $100. These may include: Monthly dashboard GPO resources Distributor’s web-based consolidator (WBC) Quarterly business reviews Quarterly business reviews are driven by the vendor.Key Performance Metrics Key aspects of a hospital’s monitoring program to ensure sustainable results from contract negotiations include the use of several key performance metrics on a regular basis.

Key Performance Metrics Suggested Global (high-level) Key Performance Indicators (KPIs) ƒ ƒ ƒ Supply Cost as a % of Net Revenue Supply Expense as a % of Operating Expense Supply Cost per Adjusted Patient Day Suggested Materials Management Key Performance Indicators (MMKPIs) Quality – ƒ Average $ amount per PO ƒ Average lines per PO ƒ # of PO lines EDI ƒ # of PO non-stock vs stock ƒ % of PO lines with invoice discrepancy ƒ Percent of invoices that match on first review Productivity – ƒ # of PO per FTE ƒ $ Received – Stock ƒ $ Received – Non-Stock ƒ Dollar value of issues by supply location ƒ # of stock issues by location ƒ # of stock and patient issues per FTE (distribution) ƒ $ Volume by vendor ƒ % PO complete on first Receiving (exclusive of “T” deliveries) ƒ Fill rates (internal and external) Financial – ƒ Inventory Turns (all inventory locations) ƒ Inventory Dollars per Occupied Bed ƒ Dollar value of items with days on hand (DOH) > 45 days .

g.g. CFO) Inadequate building of context for successful contract negotiations Lack of understanding regarding benefits of GPO contract versus local agreement .Roadblocks and Barriers There are typical roadblocks and barriers that negatively impact a facility/system’s efforts to conduct effective contract negotiations: No collaboration with stakeholders outside of Materials Management Materials Management operating in a vacuum Inaccurate data Limited understanding of hospital’s overall strategy (e. improving margins) Lack of senior leadership support (e. CMO.

Questions .

d.com 205-601-2748 .pwc.robinson@us.com 314-422-2931 Lance Robinson lance.darling@us.pwc.For Additional Information Contact: Michael Darling michael.

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