INSIDE THE CURRENT ISSUE

July 2008

Back Talk

Expressing control over agency power

Healthcare facilities must tighten the reins on who contractually commits funding

by David Kaczmarek, FAHRMM, CMRP

One common practice that separates healthcare from most
other major industries is the level of supply chain decentralization.

In general, the healthcare supply chain is much more decentralized than other industries. The reasons for this practice are numerous and varied. Regardless of the reasons, it is a practice that needs to change if we ever expect to reap the full benefits that robust supply chain management can provide. And one of the linchpins is this best practice – having a strong, enforced agency policy.

Agency is the legal concept whereby an individual or organization (the agent) is officially empowered to act on behalf of another individual or organization (the principal). Based on the charter of the agency, the agent can bind the principal to take actions such as paying for goods ordered. Once a valid agent had signed a contract or ordered a service, the principal cannot cancel it just because he or she does not want it. When the agent takes an action, it is the same as the principal taking it. One of the problems with the concept of agency is identifying who is and who isn’t an agent. An express agent, one who has been specifically identified by the principal as his or her representative for certain activities, is clearly an agent.

Unfortunately, there is another kind of agent. A person who acts like an agent – even though they do not have the express permission of the principal to do so – can become an agent with the same powers of an express agent. These agents, called apparent agents, can be found in most healthcare organizations. Every department director who signs a contract, every maintenance worker who calls the local hardware store to order things, every doctor who tells a sales rep to bring in a supply item for them, every one of them are apparent agents of the organization. And each one gains the power to commit the organization to pay for goods whether it wants to or not.

Restrictive agency

Implementing an administrative-level policy delineating express agents is the first step in changing this situation. Please note that this is not the same as the policy that designates signatory responsibility for purchases based on dollar limits. The latter policy indicates who can approve the dollars from the budget. The agency policy indicates who can contractually commit the organization’s funds. This separation between those who can say it’s okay to use the funds and those who can actually commit the funds is a good check and balance.

There is no right or wrong list of agents or their limits. The best practice is to have a limited number of agents, many of whom will have very narrow limits. For instance, the director of pharmacy will typically have agency powers to purchase pharmaceuticals. Likewise, the director of food service will be designated to purchase foodstuffs. The chief supply chain executive (CHE) will normally have blanket agency for most everything else although there may be a requirement for co-signatures at higher dollar levels. The CHE will normally have the power to delegate agency for specific types of purchases. This may include official buyers conducting normal purchasing duties, certain departmental individuals to order off of established contracts, those using procurement cards in line with organizational policy, and other instances where it is operationally effective.

Who to notify

Once the policy is established, the next step is to inform current suppliers of the change. They must be notified that individuals who they may have believed to be agents are no longer such. The communication should include a warning that purchases made or contracts signed by anyone other than official agents will not be honored. Items supplied are subject to return at the supplier’s cost. Items supplied and used prior to identification as an unauthorized purchase will not be paid for. The suppliers should realize that their only legal recourse is to get payment from the individual who made the purchase. This information should be added to your supplier handbook that is provided to every new representative.

Organizational personnel must also be notified of the change. This communication should include the rationale for implementing the policy and the consequences – including personal responsibility for the costs – of not following the policy.

The final step is ongoing enforcement of the policy. Anytime an unauthorized purchase is identified the supplier must be notified in a timely manner of the problem. If it is the first infraction, most organizations will accept and pay for the goods. But the supplier must be notified in writing that the purchase was made by an unauthorized individual, that you have the right to withhold payment, and that you will do so in the future. The individual who made the purchase must be notified as well. Only in this way can you stop these individuals from becoming apparent agents again.

David Kaczmarek, FAHRMM, CMRP, is principal of Healthcare Supply Chain Solutions, Derry, NH. Kaczmarek has more that 25 years experience in healthcare administration and materials management, including director positions at several hospitals and systems. He can be reached via e-mail at mmexec@verizon.net.