This article was written by Lisa Miller.
It takes a lot of work to get a high performing contract in place. They don’t just happen from an RFP or a benchmarking exercise or from obtaining terms through your GPO.
A high performing contract is built on four key areas:
- Performance Management
Let’s discuss a contract renewal.
We recommend that you internally run a report or obtain 12 months of invoices and input that data into a spreadsheet for analysis. This analysis gives you the insights and direction you want to focus on for better pricing and utilization improvements for overall cost optimization.When you are reviewing an agreement, it is so important that you analyze the last 12 months of utilization in detail. Click To Tweet
You will also need to analyze your current contract. Are there terms and conditions you want to change? Now is the time to list those out. And finally, you will want to analyze your invoices to the agreement. Are there contracting compliance errors? Many times, in this review, we uncover pricing errors—overcharges that have gone on for the entire term of the agreement. You may be owed money and now is the perfect time to add this to the renegotiation strategy.
The second phase is strategy. In this stage, it is important to take time and really think through and analyze your pricing and terms utilizing benchmarking sources and advisory services—to identify what is the best deal you can obtain.
If this is a clinical item or services, analyzing the costs to the reimbursement is critical. Understanding the profitability and how this product or service is adding to patient care is another aspect of the analysis.
Once you have a solid analysis and strategy—you are ready for your vendor negotiations. I want to mention here that your vendors go through extensive negotiation training. They are highly skilled to keep their margins and their goal is to minimize reductions in their pricing. They will even be “artful” in how they present their numbers and pricing to you. You are competing with vendors who know how to negotiate so you need to know how to negotiate as well. Sometimes, it is a good idea in a contract renewal to bring on negotiation services through a skilled expert who can help you achieve your outcomes. Many times, their services are paid for by achieving results and going beyond industry norms—getting you the best deal!
It’s important that you have a well-defined negotiation strategy in place and one that has hospital support and alignment from the physicians to the executives to the department contract owner. Always remember your internal negotiations as they are the vendor relationships and negotiations that are taking place within the hospital.
There is an entire expertise on negotiations. For this article, I recommend one strategy to focus on which is a highly effective method called The Ackerman Model.
The framework has four steps, all fairly simple to remember:
- Set a target price (the goal you want to get to).
- Set your first offer at 65% of the target price.
- Calculate three raises of decreasing increments (to 85%, 95%, and 100%).
- Use lots of empathy and different ways of saying no (“how do you expect me to do that?”) to get the other side to counter before you increase your offer.
- When calculating the final amount, use precise, non-round numbers. $2,630,200 is better than $2,000,000. It gives the number credibility and weight.
- On your final number/offer, throw in a non-monetary item (that the other side probably doesn’t want) to show that you’re at your limit.
Once your agreement is in place, signed and put into your contract management system—you’re not quite done! In fact, this is just the beginning.
Now, it’s time to make sure your contract remains a high performing one.
There are four aspects of an active contract management. For example, putting them in your contract management system is passive, and most hospitals only use it as an alert system to inform them when the agreements are coming due for renewal.
Utilize this Performance Management Framework and you will have a high performing contract for the term of the agreement:
- Monitor Contract Accuracy—through monthly invoice to contract reconciliation.
- Measure the Quality and Service—through feedback loops from your clinicians, front line employees, and through data.
- Perform Quarterly Business Reviews—where you take control of the meeting. It’s not the vendor coming in with a sales update, but a detailed review of what happened in the last quarter and how the vendor can improve and innovate.
- Provide Analytics—through utilization reviews and price benchmarking even during the term of the agreement. Especially if you have a three or five year agreement (or more)—you will absolutely want to perform quarterly data analytics to see how your contract is performing and compares to the marketplace. You may need to change the terms of the agreement if your utilization or market conditions have changed, and there is a substantial price reduction you want to have now versus later when the agreement term has ended. Maybe something within your organization has changed and your agreement needs to be updated to reflect. There is no reason why you can’t perform an in-term renegotiation of your agreement.
I challenge you today to take one of your purchased services agreements and focus on its performance management. Go through each of the 4 areas above and see the contract accuracy (invoice to agreement review), measure the service you are receiving—are there gaps in performance?
Schedule the quarterly review with the vendor and tell them to come prepared to show you how they can provide additional cost savings and value—but without selling you more. You will need your own data in order to be prepared and to give direction on areas of improvement.
Finally—and very important—analyze the last 3 months of your spend. See where your utilization highs and lows are and identify off contract spend. Benchmark your agreement—even if it is in the first year. It’s important to know how your pricing compares to others in the marketplace. You may have an opportunity in one of your quarterly business reviews to reduce your pricing, identify off contract spend and to standardize.
We recently helped one of our clients with an analysis of their vendor contracts to identify and achieve cost savings and to help them have high performing agreements.
The results: Within 4 months, our client has achieved $2.3 million in annual cost savings. And, we are continuing to work on additional cost savings so we can end the year achieving $5 million in annualized cost savings that will hit our client’s bottom line immediately and that will be fully realized in 2021.
If you would like to end 2020 with additional cost savings—get in touch so we can have a call and support your hospital to achieve your final year-end cost savings goals.