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Why it's time to revisit hospital supply chain contracts to start saving money

Taking a disciplined approach to re-negotiating contracts with your top vendors enables hospitals to leverage power they might not know they have.

Jeff Lagasse, Associate Editor

Hospital finance and operations executives can reap big cost savings in existing supply chain purchase service contracts relatively easily and quickly by taking a few basic steps.

Although they are widespread, purchase service contracts often don't get a lot of attention, since they're one of the last things to come to mind when thinking of supply chain spend. After all, something like an elevator maintenance contract or outsourced nutrition services isn't as visible as, say, a knee implant, or a pricey piece of laparoscopic equipment. Even those who actually work in supply chain may not readily focus on such things.

But Tony Bramer, vice president of Quorum Purchasing Advantage, said it should be one of the first areas of focus for hospitals that are in crisis mode and need to achieve immediate savings.

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One of Bramer's recommendations is for hospitals to review their top 10 purchase service contracts and sit down with those vendors and challenge them to come up with changes that can save 10 percent on the contracts. The reason this often works is due to leverage. A hospital can always take the contract out for a request for proposal, and most vendors would rather avoid getting into an RFP situation if they have a longstanding contract. They'll dole out some immediate savings without impacting levels of service.

Whether it's purchase service contracts or medical supplies, data is the straw that stirs the drink.

"The key thing a hospital has to do is understand their data, and make sure their systems will help them understand their spending and understand their utilization," said Bramer. "It has to tie well into the accounting department to determine where the opportunities are and what the spend is."

A lot of those opportunities revolve around physician preference items -- those items that clinicians earmark as being especially effective or comfortable to use. Many develop a preference for certain clinical tools when other tools may be less expensive but equally as effective in a medical setting.

"You've got to take an outcomes-driven approach with the physician," said Bramer. "They drive their selection of a product generally because they get used to certain things in medical school. Maybe it's a piece of laparoscopic equipment, or a hip implant. You've got to build trust with that physician and ask them, 'How does this achieve the outcome you're trying to accomplish?'"

With physicians on board, supply chain can then examine the vendors it's using and pinpoint the ones likely to help reduce costs. But it's important to have physician input in the process.

"Find physician champions in each of these areas," said Bramer. "Some physicians will have an interest in the costs. Find a couple of those who will be willing to work with you and you'll have some credibility with the other physicians. And develop a rapport with the clinical staff. They have a lot of say and power with the doctors to get them to buy certain things." 

A final tip about what not to do: Leave it to staff that are unfamiliar with contracting practices and processes.  

"For many hospitals, it's left to the department manager to negotiate their own contracts. We find hospitals that are doing that miss out on a lot of discipline," Bramer said. "My recommendation is that you should have someone in supply chain -- with knowledge of what's on a contract -- who should be heading up the process to see any purchase service contract negotiations or reviews."

Twitter: @JELagasse
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