Every hospital has experienced a cost impact of COVID-19, but some of those costs may be more difficult to uncover. This blog outlines five steps to better contract management for hospitals and highlights the ways to identify those costs.
The COVID-19 cost impact on Contract Management for Hospitals
When it comes to contract and vendor management for hospitals, it is highly likely there will be terms in your agreements where:
- Costs are being charged, although services haven’t been performed.
- Costs have a volume guarantee structure in order for your hospital to receive a rebate. Those volumes will have been impossible to achieve over the past few months.
Both of these scenarios will have an impact on your hospital’s finances.
Time is running out for health systems to receive a “COVID impact” credit or refund from their vendors and many may not be aware of these charges.
So, where do we start? How does your hospital uncover those costs and receive a credit or refund from your vendor from the COVID impact?
Below, we have highlighted some examples of where those costs might have been incurred, even if the services were not carried out. This list is not exhaustive.
- Profusion services: These services always have a minimum monthly case volume.
- Diagnostic testing: Frequently, in the lab and on the clinical side, these tests are set on a volume. If volumes fall, your organization will fall into a different tier and prices will rise.
- Regulated medical waste: This – and bundled waste streams – are based on historical baselines. Most vendor contracts don’t allow for a reduction of the baseline, only increases.
- Cleaning and environmental services: Most hospitals should have been able to pause or cancel these services, but fees for environmental services are often bundled in with management, labor and supply fees. Again, these are often derived from a historical standpoint, rather than actual utilization. For instance, one of our clients was incurring a regular midday cleaning fee, which we were able to help them remove.
- Physician practice EMR services: While agreements are based on the percentage of what is collected, all contracts include monthly minimum charges that your hospital is probably incurring.
- Purchased services: All categories of your purchased services spend may be affected. For example, in the biomed and maintenance services category, mobile MRIs may be scheduled at your clinic for a specific number of times each month. Your hospital is probably paying for these services, even if they have not been utilized. IT, telecom and telehealth is another key area for review as contracts are generally based on monthly minimums.
In other sectors, companies have listened to their customers and offered rebates. In the car insurance sector, Progressive epitomize this approach.
Identify the costs in your vendor contracts
Start the conversations around obtaining credit or refunds with your vendors while there is still time. The key to strengthening your negotiating position is understanding where to look.
We recommend the following steps to help you to do that:
- Review your invoices: Let’s take medical gas providers as an example. It is vital to capture everything in your invoices related to these items over the past 12-18 months. In this specific case, spend can be categorized into bulk cylinder and services charges, which enables you to map the current agreement pricing to current invoice pricing. At VIE Healthcare®, we often find that pricing on the invoices is higher than agreed contract prices over a number of years. You cannot just benchmark from a contract.
- Review notification letters: Vendors must provide notification letters when they raise pricing. In our experience, this doesn’t always happen, but we can obtain retrospective credits for it. Notifications between six months to a year are common and it is vital to lock those prices down. You can still negotiate in the event of a longer expiration, such as 18 months.
- Build your analysis: We recommend building line item utilization from 12 to 18 months’ worth of invoices. From there, analysis can be expanded to include the entire historical utilization. In the example of medical gas cylinders, you must analyze the delivery schedules, the frequency and the different fees that are being charged, especially if utilization is low.
- Renegotiation: We recommend setting a limit of five years and ensuring a focus on annual price increases. Most vendors will include CPI increases every year. Do not allow prices to auto-renew. This must be a point for negotiation for your hospital. At VIE Healthcare®, we offer negotiation training for all healthcare leaders and can negotiate on your behalf.
- Create a contract management system: I often ask our clients how quickly they can access their vendor agreements. For agreements with minimum terms or rebates, I strongly recommend these are housed in one location. Hospitals that store vendor agreements in one system and one easily accessible location are better equipped to quickly review and reevaluate those agreements. In the current global crisis where hospital finances are under significant pressure, rapid access to that information enables you to obtain refunds or credits.
Understanding and applying best practices in contract management for hospitals also enables your organization to create an effective long-term cost management program.
Click here for VIE Healthcare’s comprehensive list of COVID-19 resources for hospitals.