How To | Cost Reduction

Are you paying more than you agreed to?

How To | Cost Reduction

Are you paying more than you agreed to?

  • Management can help stay on top of contract price limits by developing and following a process of highlighting contract provisions with relevant staff, reviewing contracts at least twice a year, and periodically checking invoices to ensure that procedures are being followed.
  • Current agreements should be stored in a master location so accounts payable staff can easily access contracts as questions arise.
  • No matter what tools or services you use, there is no substitute for regularly comparing vendor agreements with invoices and rethinking current approaches.

Healthcare organizations spend countless hours negotiating vendor contracts. When you factor in various management and legal reviews and time spent pursuing favorable pricing, services and terms, the time commitment adds up.

Implementing best practices will ensure that time and money invested in contract negotiations is not wasted and that your organization will realize agreed upon prices for goods and services.

Implement a consistent process

What happens after an agreement is signed varies from facility to facility and often from department to department. The agreement may be stored away and not shared with accounts payable. Or, more likely, it is shared but not understood. As a result, challenges arise when invoices arrive from the vendor. Implementing the following tips can ensure that contracts are followed and top of mind at critical points:

Set up a master location within the accounts payable system for all current agreements with contract-term and end-date reminders. This allows easy access to contracts as questions arise.

Require that a purchase order that references the key pricing components of the agreement — or has a contract pricing schedule addendum — be attached to approved and submitted invoices.

Maintain accessible documents

The department paying the bills may not know the contracted pricing. Pricing tables are often attached to an agreement in PDF format to help accounts payable with the contract terms. However, documents often are scanned and copied multiple times so that by the time they reach the individual who has to validate pricing, the information can be difficult to read.

Ensure that the original version remains intact by requiring a PDF of the executed agreement from the vendor. Also request that pricing tables or other calculation-focused pricing mechanisms be provided in an Excel or CSV format that will allow staff to input each period’s billing data into the format to review against vendor billing.

Keep up to date on price reductions

Availability of a pricing list may be the easy part. What if the agreement is more complicated? Maybe there are early payment incentives and category discounts. Now, you’re relying on a non-clinical or non-technical person to understand the nuances of every spend category to capture reductions. While you can train non-technical, non-clinical staff, that “know-how” can evaporate over time through employee attrition. Suddenly, items that seemed clear during contract negotiation create confusion during practical application.

Many times, contracts include formulas that may rely on external data such as an index that is costly or difficult to obtain or is buried within the contract. We’ve seen multi-year contracts refer to maximum annual price escalations and when it comes time for the price increases in later years, the vendor may not automatically implement the maximum pricing and the payables department doesn’t know to check that the pricing terms are followed. Maybe certain staff members knew it was there years ago, but it’s lost in handoffs that occur regularly. The result is that organizations end up paying more than agreed to.

In addition, price escalation restrictions may be buried in contract amendments that aren’t shared with the rest of the organization. These oversights happen frequently and can be costly. Management can help mitigate these issues by insisting on following processes that  highlight contract provisions, reviewing contracts at least twice a year, and periodically checking invoices to ensure procedures are followed.

For some spend categories such as medical, pharmacy, office and janitorial supplies, there may be thousands of lines to review each month. Unless you use an automated solution, there’s no way to effectively review an invoice. Instead, organizations may rely on high-level metrics to determine if their spending is reasonable. Their reporting may include a check of trend or total spend by location or category or an applicable metric such as dollars per bed or dollars per employee. In doing so, there’s bound to be leakage as items fall through the cracks. Seriously, how is it possible to know if you’re really paying the correct amount for all of your goods and services?

Automating a solution can be costly as well, especially as contracts and invoicing change periodically and any automated solution needs to be updated regularly.

Some organizations look to outside consultants to provide assurance that their fiduciary responsibility has been upheld. Three examples of such third-party contractors include the following:

1.  Auditors who regularly study agreements and invoices for several organizations have the experience to identify common errors quickly using tools that are maintained on a regular basis.

2.  Group purchasing organizations can provide negotiating leverage.

3.  Outsourcing accounts payable can reduce administrative burden, creating more time to focus on clinical management.

No matter what tools or services you use, there is no substitute for regularly comparing vendor agreements with invoices and rethinking current approaches. Strategic planning can save millions of dollars.

About the Authors

Stephen Carrabba

is president and founder, Expense Consulting, Bloomfield, Conn.

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