Understanding The Terms of Your Outsourced Agreements

by | Nov 19, 2020 | Cost Reduction, VIE Healthcare Blogs

This article was written by Lisa Miller.

Understanding the clinical, financial and operational terms is the second of the four mission critical components essential to manage your outsourced agreements and identify vital cost savings for your hospital. 

Most of the time, we find that hospitals instinctively want to begin with benchmarking, but this is the third step in the process. 

The first is gaining access to your line item details to understand your historical spend. 

The second step is to gain a thorough understanding of your operational, clinical and financial terms, essentially to understand any kind of variation trends or anomalies in your contracts. This process can lead to significant cost saving opportunities. 

Challenges to understanding your outsourced agreements 

The challenges most hospitals face are as follows:

  • Outsourced agreements are often complex, comprising many variables. 
  • Some frontline users don’t have access to these agreements, making it difficult for them to gain a thorough understanding of the terms used. Many times when we’re working with hospitals to discuss the details of their outsourced agreements, whether it’s a tiered agreement or one that has a credit, we speak with frontline users who don’t have access to the contract details. 

At VIE Healthcare®, we believe that these contracts are there for your advantage, i.e. to protect your hospital from operational and regulatory risks and secure competitive pricing with your vendors.

While each agreement must be explored on its own merit, in this blog, I have identified some examples where understanding those terms resulted in significant cost savings:

The hidden costs in healthcare IT contracts: Technology is a complex area for healthcare organizations, and contracts are often based on projected rather than current volumes. One of the most unnecessary costs we encounter is hospitals paying for the maintenance of unused software licenses and subscriptions, or purchasing unnecessary software features, the so-called ‘’nice to haves.’’ This expenditure is often overlooked amid complex agreement terms. We also identify contract clauses requiring payment for IT maintenance renewals for redundant solutions. 

For example, reviewing a PACS and lab maintenance agreement, VIE Healthcare® found our client was paying maintenance fees based on the list price of the software. We benchmarked maintenance fees and negotiated a new 5-year contract, with a 26.5% reduction in pricing. Our analysis resulted in $965,000 in cost savings over the 5-year term.

Benchmarking an outsourced EVS agreement: For one client, we were asked to review a large outsourced agreement for a hospital that believed they were being overcharged. In this case, we analyzed their historical spend, drivers and costs. Looking at individual costs is a great way to identify variations in the financial terms of contracts. Our analysis revealed that our clients were being charged a licensing fee, software fee and starting costs. In addition, general liability insurance and payroll process were also embedded in the terms of the agreement. 

Clinical purchased services: Making informed decisions for your clinical outsourced agreements is essential. While negotiating a lithotripsy agreement for one hospital, we analyzed 37 outpatient procedures over three months. Our analysis found that our client was only making a $140 profit per case, based on the payer mix of the patients. It is always critical to retrieve reimbursement information. 

Financial terms: Many outsourced agreements are bundled in different ways, with variability in their structure. In one instance, we found multiple hospitals within the same system were charged different rates under different contracts for record storage. Standardizing pricing in this one example achieved a $25,000 reduction in costs. It was important for this organization to understand there was a variation in pricing across their hospitals. In this instance, there is also an argument to seek a credit, because these types of variations shouldn’t occur in the terms of your agreements. 

Outsourced agreements have many aspects and implications for hospitals. Due diligence is essential, whether you are renewing an agreement, starting a new one or reassessing your terms and processes. Often our clients, want to renegotiate or reset once they understand the implications of the terms of these agreements. 

Additional points to consider:

  • Putting together an RFP (Request For Proposals) for vendors must be well constructed, with clinical, operational and financial aspects that highlight your specific organizational needs. 
  • I also recommend, where possible, that a 30 or 60-day ‘’termination without cause’’ clause is included in outsourced agreements, but this can be a challenge.
  • Do not allow your contracts to auto-renew. 
At VIE Healthcare® we recommend the inclusion of a 30 or 60-day ''termination without cause'' clause in your outsourced agreements. Read more here: Click To Tweet

As part of improving the management of your outsourced agreements and saving your hospital money, I also recommend creating a centralized contract management system, for more rapid access to your vendor agreements. 

Gaining a thorough understanding of the terms of your outsourced agreements is a step towards ensuring the high performance of your hospital’s contracts

At VIE Healthcare®, our customized approach to contract management includes:

  • Providing clarity on complex contract language, including terms and conditions which must be monitored through the entire contract lifecycle.
  • Uncovering contractual inconsistencies and errors to ensure operations are streamlined.
  • Identifying and maximizing potential opportunities for cost savings.

Read more about the first mission critical component of your outsourced agreements here: Access to Line Item Details Saves Your Hospital Money

Schedule a call with Lisa Miller to review the terms and cost savings opportunities of your outsourced agreements.

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