This article was written by Bryan Covert.
One of the most difficult tasks faced by health systems today is how to effectively manage their contract renewals.
Effectively managing the contract renewal process is one of the most challenging tasks faced by health systems today. Often times, this process is viewed just as something essential for day-to-day operations, and not necessarily an opportunity for cost optimization.
Your hospital’s ideal opportunity to right size agreements to actual utilization, explore competitive offerings and negotiate lower existing costs occurs during the contract renewal process.
In order to realize the most value, it is important to not only have your contracts organized and available but also to have a clear process in place for identifying and achieving cost savings.
The sheer task of organizing contracts can be daunting, especially given the growth of IT services, and your end user’s propensity to complete agreements or handshake deals outside of the loop of purchasing.
4 reasons to organize your hospital contracts
It is extremely important to have your contracts available, organized, and noted with key dates for the following reasons:
Most vendor agreements contain defined terms for how renewals are initiated, executed, and how prices can be altered as a result.
Contractual notification dates can range from thirty days prior to a renewal period, all the way up to twelve months. Missing these key milestones can mean being subject to auto renewal.
Auto renewable contract lengths can also vary from month to month, a year, and sometimes up to the initial term of the agreement. For example, it is not unusual for a bulk oxygen supply agreement to auto renew for anywhere from five to seven years in length.
Completing a five-year agreement, then being auto renewed for an additional five years means that your organization is waiting ten years to evaluate costs. Over this period annual cost increases may be taking place, and it is not unusual to lose some level of price protection during a contractual auto renewal period.
If your organization either misses its window to begin negotiations or fails to notify your vendor of non-renewal, you could be locked into a contractual period with no ability to alter price or terms. Instead of being in a position of leverage where your vendor is motivated to close business, and all your options are open, you are now contractually bound to a potentially long term agreement.
Without a system in place, these key dates are difficult, if not impossible, to effectively manage.
Developing a strategy for managing contract renewals
When approaching the renewal period, it is very important to have a strategy in place. We recommend the following steps:
Step 1: Start with a historical approach
At VIE Healthcare Consulting, we always start with a historical approach. There are key important questions to be answered, for example:
- What are the key dates and renewal terms?
- Confirm the effective date.
- What is the initial term of the agreement?
- How are renewals handled, and what are the important contractual milestone dates?
- Does your contract contain credits or built-in costs?
- During the initial contracting period, it is very common for vendors to build in credits for implementation expenses such as interfaces and capital purchases. The renewal period gives your organization a great opportunity to review these terms and ensure they were followed through on.
- Additionally, supply contracts may contain built-in costs to account for a vendor’s capital outlay. These need to be identified, tracked, and negotiated out of renewals.
- Were you charged the correct price for items/services throughout the length of the agreement?
- Were annual cost increases in line and were you notified of them in accordance with your written agreement?
This review should include a spot check of historic invoices to determine if there were any extraneous fees or surcharges added that you were not contractually obligated to pay.
These reviews can lead to credits returned to your organization and put you in a strong position to negotiate the contract renewal.
Recently, VIE Healthcare was able to execute a renewal at a 40% annual cost savings one year ahead of the contractual end date due to the identification of years of incorrect billing. We were also able to navigate the vendor and our client to a mutually beneficial resolution, and the relationship was able to move forward.
Step Two: Engage the system’s end users
This is the most important step in managing your contract renewals. At this stage, your organization will discover the most important information for your negotiation, for instance:
- It is important to determine both the short and long term goals of your end user to enable you to specifically negotiate how the contract is affected by additions or reductions in services.
- Additionally, your end users can help you to determine if your contract is accurately scoped.
For example, it is becoming more and more common for VIE Healthcare to discover IT maintenance renewals for solutions that have become redundant.
Reviewing utilization figures prior to any renewal with your end users is extremely important. Just because your previous agreement allotted 5000 software licenses does not mean that number is appropriate moving forward.
One of the most common unnecessary costs that we see in the healthcare sector today is organizations paying for the maintenance of unused software licenses and unutilized software subscriptions.
Your end users will also provide you with information surrounding quality and service, and renewal negotiations are the perfect time to address these issues. Performance metrics and minimum quality standards can be negotiated into the agreement.
Without the engagement of end users, there is no way for purchasing to answer these key questions.
Managing contract renewals is probably the most important task in purchasing. Avoiding increases and keeping items under contract is not viable as an organization’s only strategy to maximize long-term savings.
Every time your organization’s agreements renew without a thorough review, you are missing an opportunity to improve in both quality and cost of service.
For a complimentary consultation, call our office today at 1-888-484-3332, Ext 500 or email us at [email protected].