Effectively contracting for purchased services—that is, any service provided by an outside vendor—can be difficult. Although such services are required to meet ongoing needs of a healthcare facility, designing contracts for them can present challenges for facilities that lack centralized oversight of service providers, effective supply chain management, and standardized approaches in dealing with service providers, and have limited use of technology to manage and track supplier performance.
Purchased services also often are perceived to be more complex to deal with than purchased physical products because of lack of specifications (i.e., services don’t come with part numbers), lack of attention or support from senior leadership, presence of political and cultural challenges, and undocumented or unknown work performed by the suppliers.
As a result, with purchased service contracts, there is a high level of variation in how well the contracts are executed, and facilities tend to a rely heavily on consultants because they lack sufficient levels of subject matter expertise. This situation contributes to a lack of transparency and trust between buyer and supplier, which can lead to increased costs for both parties. Such an outcome can be circumvented by giving special consideration to several key areas of concern during the contracting process.
Clauses to Watch For
Although effective contracting is a skill that takes considerable time and experience to acquire, particularly regarding what to watch for regarding contract terms and conditions, it is possible here to highlight a few of the most important clauses to be on the lookout for in contracts for purchased services.
Statement/SOW. Creating a detailed statement/scope of work (SOW) is critically important because buyers often unknowingly drive up costs by being overly specific about the services they want, while, on the other hand, suppliers typically prefer to under-specify the services they will provide to thus allow themselves flexibility to improve margins.
Contract term. Organizations should eliminate “evergreen” and auto renewal clauses, as such clauses can lead to noncompetitive pricing and service levels over time. Instead, organizations should clearly define contract start and end dates with the option to extend for additional one-year terms, with prior written approval.
Termination notice/out clause. To protect the interests of the organization against unsatisfactory work, it is imperative to include unburdensome, favorable termination language, such as: “The agreement may be cancelled without cause or penalty at any time by giving the other party 60 days prior written notice of termination.”
Confidentiality. Service providers request confidentiality language to restrict their clients from participating in price benchmarking and sharing information with their group purchasing organization or third-party consultants. It is in a healthcare organization’s best interest to strike such language from the contract. If unable to do so, the following can serve as an alternative: “Notwithstanding any other provision of this Agreement to the contrary, the Customer shall have the right to disclose pricing and other terms of this Agreement to Customer’s attorneys, accountants, group purchasing organization, and other 3rd parties retained by Customer.”
Although its understood that businesses must protect themselves from unforeseeable and uncontrollable circumstances, such a clause should not include workforce strikes. A business partner should be able to govern its workforce to prevent service interruptions.
Regarding pricing, two important clauses must be negotiated and defined in any agreement. The first is that pricing should be firm for the duration of the agreement. This clause can be framed as follows: “The Vendor shall not increase any Product pricing throughout the term of this Agreement.” The second is that pricing should be competitive: “Pricing, terms and conditions offered will be at least as good as those offered to another customer that is similar in market segment and class, with a similar product mix which purchases a comparable volume.”
Other important clauses that must be clearly defined in any agreement, if applicable, include the following.
Payment terms. Organizations should confirm that their Accounts Payable departments can meet the proposed payment terms. It also may be possible to negotiate early payment discounts.
Consistency of pricing and terms. These items should be consistent across the integrated delivery network or system.
Shipping terms. Such clauses should include terms for third-party freight.
Guarantee of delivery under emergency conditions. Such a clause might say, “The Vendor will use commercially reasonable efforts to fill orders during the duration of the Emergency Condition.”
Replacement parts for equipment capital. Language for such a clause might be, “Replacement parts will be available for no less than 7 years following the date when the Vendor ceases to sell the product or the expiration of the warranty period.”
Indemnification. Here is sample language for such a clause: “The Vendor agrees to hold harmless and indemnify each customer and their affiliated organizations, directors, officers, employees, contractors, insurers and agents against all losses, judgments, claims, expenses, penalties, fines, and other legal liabilities.”
With purchased services categories being so diverse and touching every department in an organization, it is imperative to apply the same financial rigor, analysis, and centralized process as when purchasing medical supplies. When a rigorous contracting process is used to carefully examine and assess a service provider’s contract, the results can be impressive and represent an untapped source of sustainable savings across the entire healthcare supply chain.
Craig Shoukimas is the founder of NM2 Healthcare Consulting, LLC in Stratham, NH.