Let's face it, vendor contracts are difficult to understand, which is why lots of people don't read them very closely. For medical supplies, implantable devices and capital equipment, vendor contracts have become standardized thanks to group purchasing organizations and dozens of other available resources to control those costs for providers.
Contracts for purchased services, which can comprise 35 percent of a hospital's non-labor budget, however, are still highly variable. Sometimes vendors will bury language into agreements that benefit their business, but it may end up being a costly problem for healthcare organizations over the term of the contract.
There are five common pitfalls in purchased services contracts, and this article will examine the first three. The next article will address the last two frequently overlooked contracting issues, plus more specific information about how hospitals can leverage technology to identify and monitor purchased services spending across the enterprise.
1. Auto-renew triggers
Often seen in contracts for services such as medical gas, an auto-renew trigger is language in the contract that amends the effective start date of the agreement if there are any services performed outside of the contract.
For example, if an organization is in the sixth year of a seven-year medical gas agreement but needs to have the vendor move a gas line, they need to check their terms. Moving a gas line typically carries a nominal extra fee of $5,000, and if an auto-renew trigger is in place, the vendor could reset the seven-year agreement to start on the day the line is moved. This simple $5,000 job could end up costing hundreds of thousands of dollars, since the organization has to re-contract with that vendor for effectively another seven years.
To avoid auto-renew triggers in a situation such as this, you should locate the medical gas (or other service) agreement(s) and look for any language that specifies if "customer requests relocation or modification of the system" followed shortly by "the term of this agreement will be extended to a new initial term of the same length." The easiest fix for these types of terms is to add a simple line to the end of the above language: "with customer's written approval." This will eliminate any accidental auto-renew.
Outside of manually managing and updating terms, organizations should consider implementing data analytics technology specifically designed to manage purchased services spending. One feature of this type of technology can alert organizations about contracts that include an auto-renew trigger for any vendor across the enterprise, so the organization can act on these alerts to avoid unwanted renewals.
2. Evergreen terms
Evergreen language is similar to the auto-renew trigger, however, the key difference in this case is that organizations do not need to take action for the contract to automatically renew.
Healthcare executives overseeing purchased services are extremely busy, and are often pressed for time and resources to monitor the hundreds of contracts they manage across dozens of major categories. If the window to terminate is missed—typically 90 days prior to the end of the term—the organization will likely be forced to continuing working with that vendor, pricing and service levels for an additional year. As with the auto-renew trigger, data analytics technology for purchased services can also avoid evergreen term pitfalls by alerting professionals about when contracts are approaching termination notice deadlines.
The easiest fix is to send termination letters to any vendor with this type of evergreen language in their agreement. After all, contract terms dictate that vendors need to receive a termination notice at least 90 days prior to the term. Sending a notice immediately after the contract is signed simply protects organizations and offers more options if the contract expires before a new agreement is completed.
3. Excessive term length
Not all vendor agreements need to be a maximum of three years, which is the industry standard. In fact, we have seen elevator service agreements as long as 20 years—so old that the contract was created with a typewriter. Elevator agreements aside, we frequently see 8 to 10 percent discounts included in purchased services contracts with five to seven year agreements; however, that should be the absolute maximum length in any category. In information technology, anything longer than two to three years is excessive.
Once an organization has identified contracts with long-term commitments, it is likely time to search the market for new solutions and better pricing. A good rule of thumb is for the term of the agreement to match the length of time that the vendor will agree to firm pricing. While it may not be applicable for every category, if you are making a commitment to a vendor, the vendor should reciprocate.
Implementing data analytics technology that offers visibility over purchased services vendors and spending is rapidly becoming a necessity for contract management. This type of technology is helping organizations save on the millions of dollars that, until recently, has had very little enterprise-wide oversight or standardization.
The next article in this series will describe how healthcare organizations can earn financial compensation when vendors do not fulfill contract requirements and how to identify hidden fees and pricing schemes that can cost the organization more than expected. It will also explain how organizations can leverage data analytics technology to visualize purchased services costs as well as benchmark spending against peer organizations nationwide for overall savings improvements.
About the author:
Chris Heckler is president and chief executive officer of Valify, an analytics and benchmarking solution for managing hospital purchased services.
The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.