building an effective contracting strategy

7/27/2019 Building an Effective Contracting Strategy

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Michael DarlingDirector, Clinical Supply Chain ServicesPrice Waterhouse CoopersDallas, TXLance RobinsonDirectorPrice Waterhouse CoopersBirmingham, AL

Michael DarlingDirector, Clinical Supply Chain ServicesPrice Waterhouse CoopersDallas, TXLance RobinsonDirectorPrice Waterhouse CoopersBirmingham, AL


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Healthcare Advisory PracticeHealthcare Advisory Practice

Presentation to theAssociation for HealthcareResource & MaterialsManagement

Presentation to theAssociation for HealthcareResource & MaterialsManagement

PwC


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Agendagenda 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


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Overview of Contracting Processverview of Contracting ProcessIn recent years, there has been a shift regarding the sophistication of the healthcare

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

Traditional Supply Chain

Cost/outcome based product selection

Increased pressure to remove non-valueadded costs and activities

Increased pressure to improve servicequality

Need for relevant information sharingMove to continuous, streamlined productflow

Critical needs for data accuracy

Supply Chain Implications

Current Supply Chain Environment


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Overview of Contracting Processverview of Contracting ProcessRole of Supplier Management

Recent shifts in elements that are now part of successful contract negotiations in thecurrent environment include, but are not limited to:

Increasing demand for greater commitment to and customization of value-addedservices

Ability to effectively gather and share utilization and clinical data

Demand forecasting and clinical practice guidelines to develop procedure-basedsupply distribution and to reduce unused/unneeded inventory in system

Ability to link resource consumption to individual patient, physician anddiagnosis/procedure to drive clinical resource management

Minimized supplier relationships with individual providers (physicians) will be in favorof closer ties to the provider systems

Flexible contract utilization

E-commerce strategies


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Overview of Contracting Processverview of Contracting ProcessRole of Supplier ManagementA strong contract negotiation strategy plays a key role in the management of a hospitalssuppliers / vendors and GPO.

Suppliers &

Services

Suppliers &

ServicesGPOGPO HospitalsHospitals

Product

Categories

Product

Categories

Contract

Negotiations

Contract

Negotiations

Contract

Distribution

Contract

Distribution

Product

Categories

Product

Categories

Contract

Selection

Contract

Selection

Contract

Signing

Contract

Signing

Contract

Utilization

Contract

Utilization

Contract InformationContract Information

Voice of CustomerVoice of Customer

Utilization DataUtilization Data Support Processes &Value Added ProgramsSupport Processes &

Value Added Programs Customer CareCustomer Care

Purchase of Products

Delivery of Products


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Overview of Contracting Processverview of Contracting ProcessOutline of Effective Contracting / Negotiation Strategy

Phase I- Data Gathering and Analysis

Collect Data

Validate Data (Minimum two-way validation)Identify Value Analysis Team (VAT)/Stakeholders (Dept Director, MD, etc.)

Verify Data with VAT/Stakeholder (Total Spend Validation)

Obtain Stakeholder Sign-Off (Stakeholder Acceptance)

Assess/ research Marketplace

Identify appropriate BenchmarksPrepare Presentation of Opportunity

Present Opportunity to VAT/ Stakeholder(s)

Obtain VAT/ Stakeholder(s) Acceptance of Opportunity (Sign-Off)

Prepare Initiative Packet (Analysis, Presentation, High-Level Implementation Plan)


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Overview of Contracting Processverview of Contracting ProcessOutline of Effective Contracting / Negotiation Strategy, contd

Phase II- Request for Information

Identify vendor(s) to participate in RFI/ RFP

Develop RFI/ RFP requirements & expectationsDevelop initial negotiation strategy

Prepare for bidders conference

Conduct bidders conference

RFI/ RFP responses due from Vendors

Phase III- 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


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Overview of Contracting Processverview of Contracting ProcessOutline of Effective Contracting / Negotiation Strategy, contd

Phase IV- Contract Execution

Develop final negotiation strategy

Establish leverage points and givebacksEngage selected vendor(s) in negotiation

Share outcome with VAT / Stakeholder(s)

Update leverage points and re-negotiate (if necessary)

Finalize negotiation

Select vendorComplete legal and financial documentation

Submit contract/ proposal for approval and sign contract

Develop conversion/ implementation Plan

Obtain completed initiatives Stakeholder Acceptance (Sign-Off)

Develop product education (vendor supported) (if necessary)Order new supplies/ convert (if necessary)

Phase V- Ongoing Contract Maintenance and Key Performance Metrics

Develop realization tracking methodology

Track monthly realization (On-going monitoring)


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Overview of Contracting Processverview of Contracting ProcessBuild an Effective Contracting/ Negotiation Strategy


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Overview of Contracting Processverview of Contracting ProcessBenefits of Effective Contract Negotiations

Benefits of an effective contract negotiation strategy include:

Reduced cost for quality products and servicesImproved 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


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Data Gathering and Analysisata Gathering and AnalysisData gathering and analysis is the most critical element in preparing for a successfulcontract negotiation. The goal of data gathering and analysis is to be as prepared as thevendors.

A review of benchmark pricing provides an excellent comparison of current pricing anddesired outcome of vendor negotiations.

Sample sources for benchmarking include:Contacts at peer hospitals

AHRMM

AORN

ECRI

Outside professional services firm

Appropriate data sources include:

Master Item File

Requesting data from the vendor

Departmental logs

Implant logs

Key Elements to data gathering andanalysis:

Understand current environment (e.g.market share information)

Include all vendor utilization

Include all relevant products


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Data Gathering and Analysisata Gathering and AnalysisIdentification of Contract Opportunities:

Obtain AP supplier files to identify high-dollar suppliers

Conduct a contract Inventory and perform a gap analysisIdentify current agreements available

Contact suppliers to determine if they have contract documents, and

Identify those suppliers without agreements

Review current rates for high-dollar suppliers, compare rates to GPO, market/industrybenchmarks 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, obligations, costs)

Suppliers above market rates with significant cost savings potential and supplier agreementsnearing expiration

New market opportunity (e.g. new pricing, brand name drug moving to generic)

Changes in manufacturer competition

Specific requests for review


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Data Gathering and Analysisata Gathering and AnalysisPrioritization of Contract Opportunities:

Identified contract opportunities shall be prioritized for review using a number of criteria togauge the benefit that will be provided when compared to the difficulty of theimplementation of a contract (single-facility or system-wide)

Categories Med/Surg, Rx, Capital, Service Agreements, etc.

Clinical acceptability

Ease of conversion

Terms and conditions of contractIT capabilities

Compatibility with current IT systems

Current contract commitments

Ability to work with primary distributor(s)

Impact to CommunityEnvironmental

Diversity

Vendor Credentialing (e.g. Background checks, Bankruptcy, Medicare reimbursement,etc.)


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Request for Information- PotentialVendorsRequest for Information- PotentialVendorsA 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


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Request for Information- PotentialVendorsRequest for Information- PotentialVendorsClear communication of expectations of vendors illustrates the Materials Managementdepartment is clear about what is required as it relates to the future supplier/ vendorrelationship.

Sample Expectations include, 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. Based onthose amounts, a percentage of the fees will be returned to the hospital in the form ofquarterly payments

Use of web-assisted programs will be at the discretion of the hospital and will not affectthe 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

Vendor Expectations


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Request for Information- PotentialVendorsRequest for Information- PotentialVendorsSample Expectations, continued:

Utilization reports with recommendations to increase savings and optimize contracts

Additional savings for further commitment to product standardizationAbility to create custom contracts for large health systems

Early access to new technologies (e.g. industry sponsored trials, input into product design)

Contracts geared to physician practices

Electronic catalogs

Field service representatives assigned to member hospitalsClinical support in specialty areas to assist in implementation of available contracts andfurther assess needs (Pharmacy, Lab, Operating Room, Radiology)

Accounts Payable review

Charge master review

Participation in benchmarking studiesMembership conferences with education sessions

Vendor Expectations


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Request for Information- PotentialVendorsRequest for Information- PotentialVendors

Methodology:Please enter your rating in the corresponding "Rating" cell on the Decision Matrix.The Decision Criteria are rated on a scale of 1 to 5 as follows:

5 = Exceeds Criteria4 = Meets Criteria3 = Neither Meets/Does Not Meet Criteria (Neutral)2 = Does Not Meet Criteria1 = Definitely Does Not Meet Criteria

Contract AdministrationBusiness Case Decision Matrix

Decision Matrices should then be sent to the Contract Administration Group(as available) for compiling and analyzing the data.

Product/Service: ____________________________________________

Vendor: ___________________________________________________

Distributor: ________________________________________________

Key Stakeholders: __________________________________________

Date: ____________________________________________________

Purpose: The Business Case Decision Matrix provides a template for presenting the businesscase for moving forward on contracts or processes. The Decision Matrix is a tool to quantitatively

score key information that has been identified as important in the decision-making process ofInitiatives. The Matrix provides a standardized, objective, and quantifiable approachwith which to analyze contract, service or other opportunities within the system.

These criteria will be used to guide prioritization; not all criteria are requiredfor an opportunity to be pursued. Scoring must be adjusted accordingly.

Decision Matrix


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Request for Information- PotentialVendorsRequest for Information- PotentialVendorsDecision Matrix


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Request for Information - PotentialVendorsRequest for Information - PotentialVendorsTerms and ConditionsIn order to provide a consistent contracting methodology, standardized contract languageshould be utilized in the negotiation of all purchasing agreements. The purpose is toprovide structure and a standardized approach to contracting that assures strong cost

management activities and protection of pricing once established. Sample standard termsand conditions may include:

Termination clause without cause should be available based on 30 days written notice.Length of up to 90 to 120 days can be acceptable.

Market Competitive Clause will be needed to protect hospital based on cost reductionsidentified in the market place. The clause allows the hospital to go back at any pointduring the term of the agreement to request cost reductions based on changes in themarket place.

Negotiated pricing should have a minimum term of one year. This is applicable toagreements outside of those negotiated by the GPO. The GPO should be encouraged toprovide fixed multi year pricing.


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Sample standard terms and conditions, continued:

Cost increases during the term of the agreement will not be accepted. Should a cost escalator

be needed, it should be based on the CPI urban or CPI Medical which is available from theFederal Reserve.

Language should be included in the agreement that commits the vendor to providing vendorresources short-term to implement product changes and or pricing. This should include funds tobe utilized for education and in-services for affected staff.

Payment terms should be included that provide a financial incentive to the hospital for earlypayment as the cost of money and cash flow allow. Common terms of 2/10 net thirty should beincluded. Another financial incentive for the hospital is terminology that allows for additionaldiscounts of 1% to 2% based on utilizing EDI for order placement.

For high cost products that change in technology on a frequent basis, a clause that protects thehospital from obsolescence of products is in the best interest of the hospital. Inventory shouldbe set up contractually as a consignment product. The responsibility for the inventory willremain with the vendor, while the inventory amount and replacement process will be determinedby the hospital.

Request for Information - PotentialVendorsRequest for Information - PotentialVendorsTerms and Conditions


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Consensus Building with KeyStakeholdersConsensus Building with KeyStakeholdersInvolving key stakeholders throughout the process of preparing for and conductingcontract negotiations is a key distinction for gaining consensus and building an effectivecontracting strategy.

Key stakeholders may include:

CEO/COO

CFO

Physicians/ Clinicians

Key Department Directors

Clinicians involvement in vendor negotiations can carry significant influence.

We have found great success in presenting data to physicians to gain consensus ondesired changes in vendors/ utilization. Clinicians have the necessary knowledge onrequired use of product and ability to change products as it will benefit the hospital.

Plan to involve key stakeholders in the following:

Reviewing results of data gathering

Validating data

Prioritizing options

Preparing for and participating in vendor negotiations


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Consensus Building with KeyStakeholdersConsensus Building with KeyStakeholdersAs mentioned, illustrating data analysis effectively to ones audience is a key factor inbeing successful in building necessary consensus for vendor negotiations.

Tailoring the message to match the audiences key interests promotes successfulconsensus building.

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. costsavings available to department for other projects)


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Contract Executionontract ExecutionAs part of the completion of successful contract negotiations and contract execution, the followingsteps 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


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Ongoing Contract Managementngoing Contract ManagementMaintaining the results achieved in your successful contract negotiations requires ongoing contractmanagement.

Contract Administration

Compliance Process

Contract utilization

measured against

baselineContinuous Compliance

Monitoring & Tracking

Monitoring and Tracking Tools:

- Key Performance Indicator

Reports

- GPO Resources

- Distributor WBC

Maintain contract

requirements(market share,

expenditure or volume

commitments)

Identify Variances:

Regular review of contract

compliance with vendors, GPO,

and Corporate Proper

corrective action taken if needed

Key elements include:

Realization schedule

Contract management database(expiration date, terms, contractsare loaded within 5 days of

execution)832 price catalog updates

Regular monitoring and tracking ofkey performance indicators (seenext section)


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Key Performance Metricsey Performance MetricsKey aspects of a hospitals monitoring program to ensure sustainable results from contractnegotiations include the use of several key performance metrics on a regular basis. These mayinclude:

Monthly dashboard

GPO resources

Distributors web-based consolidator (WBC)

Quarterly business reviews

Quarterly business reviews are driven by the vendor. For vendors with spend greaterthan $100,000, the vendor provides total purchases and suggested new opportunities tocontinue 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


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Key Performance Metricsey Performance MetricsSuggested Global (high-level) Key Performance Indicators (KPIs)

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 Average $ amount per PO Average lines per PO # of PO lines EDI # of PO non-stock vs stock % of PO lines with invoice discrepancy

Percent of invoices that match on first review

Productivity # of PO per FTE $ Received Stock $ Received Non-Stock Dollar value of issues by supply location # of stock issues by location # of stock and patient issues per FTE (distribution) $ Volume by vendor % PO complete on first Receiving (exclusive of T deliveries) Fill rates (internal and external)

Financial Inventory Turns (all inventory locations)

Inventory Dollars per Occupied Bed Dollar value of items with days on hand (DOH) > 45 days


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Roadblocks and Barriersoadblocks and BarriersThere are typical roadblocks and barriers that negatively impact a facility/systems effortsto conduct effective contract negotiations:

No collaboration with stakeholders outside of Materials Management

Materials Management operating in a vacuum

Inaccurate data

Limited understanding of hospitals overall strategy (e.g. improving margins)

Lack of senior leadership support (e.g. CMO, CFO)Inadequate building of context for successful contract negotiations

Lack of understanding regarding benefits of GPO contract versus local agreement


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Questionsuestions


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For Additional Information Contact:

Michael [email protected]

314-422-2931

Lance Robinson

[email protected]

205-601-2748

building an effective contracting strategy

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