Top 5 overlooked purchased services contract pitfalls, part 2

Purchased services spending comprises 35 percent of a hospital's non-labor budget.

The vendor contracts responsible for these outlays deserve great scrutiny, which is why we are dedicating a two-part article series to this important topic. The first part of the article, which you can read here, discussed three purchased services contract pitfalls that can trap hospitals into never-ending binding agreements: auto-renew triggers, evergreen language and excessive term lengths.

This part will discuss the fourth and fifth pitfalls, which concern contract elements that may benefit the vendor, but end up costing the hospital additional funds or result in poorer service.

4. Lack of financial penalty
If a hospital has negotiated a contract with aggressive service performance levels, such as a 98 percent fill rate, a preferred delivery window, a 98 percent uptime guarantee, or a less than four-hour repair time, then the vendor needs to be held accountable for fulfilling these requirements. The threat of a terminated contract if the vendor falls short is often toothless considering many services, such as food distribution, are so essential that dropping the vendor would be highly disruptive to operations, and even risky to patient care in some cases.

A better strategy is to negotiate financial penalties into the vendor contract that are immediately triggered if the vendor does not meet the service levels. After all, when a vendor's service doesn't meet expectations, then the hospital can lose money. The hospital's food director, for example, bases the labor schedule around the distributor delivering the food at certain times. If the food is late, the hospital either ends up paying employees to wait or paying for unplanned overtime.

Some examples of financial penalties could be a 1.5 percent charge that will be credited on the following month's invoice if the vendor does not meet performance levels. Or, if the vendor misses the agreed-upon delivery window, it will be penalized a suitable amount based on the contract and organization size. This amount would increase if deliveries continue to be late. If vendors are confident in their capabilities, then they should not object to adding financial penalties if they fail.

5. Undefined fees/pricing
Commonly known as "scope creep," vendors may add fees, price increases, or additional services on an invoice to increase their margin, but may be overlooked by hospitals. Some vendors will increase fuel surcharges, add a delivery or pickup charge, or even add a "handling fee" to the invoice without notifying the hospital.

A good purchased services data analytics platform can help identify these fees by comparing the actual past 12 months of spending to the contract terms. Prime categories to look for excessive fees or pricing include: biomed, housekeeping, waste management, medical gas, elevator maintenance, and laundry services. If spending looks suspicious, purchased services professionals will want to pull a few invoices and determine if additional charges have been added.

For categories such as waste management, linens or any category where payment is based on poundage, the analytics technology should also be able to display the amount paid for the last 12 months with a chart showing total pounds the vendor handled and compare that against the contracted rate. If the actual charges are more than 5 percent to 7 percent higher than expected, the vendor is most likely not honoring the contracted rate at all facilities or added other surcharges that have not been defined in the agreement.

These charges need to be addressed with the vendor, who might have lowered the price per pound to win the bid because they knew that the hospital did not specifically request other fee information in its request for proposal. In some cases, the vendor will price their services at a break-even rate in order to win the business while anticipating making a profit from the additional fees and surcharges.

Technology empowers and alleviates oversight burden
Holding vendors accountable for these two contract terms, and avoiding the previous pitfalls described in the first part of this article, requires that hospitals closely monitor their purchased services spending and contract expiration dates. With hundreds of purchased services vendors at each hospital, data analytics technology is available and should be implemented to alleviate that burden from sourcing professionals.

Available analytics technology is able to track more than 1,200 purchased services categories and deliver real-time spending reports that can be compared against contract terms. An advanced analytics platform should also be able to benchmark the hospital's performance against hundreds of other health systems around the country to help professionals determine if the contract terms are competitive in the industry. Benchmarking capabilities should also be available for any relevant unit, such as price per pound, for a true apples-to-apples comparison.

With this level of insight, hospitals can ensure that vendors are honoring their contract terms, while they are empowered to negotiate the most competitive purchased services contracts available in their market.

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.​


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