Contracting for capital equipment in a healthcare organization certainly isn’t rocket science for astute and savvy negotiators in Supply Chain, but against today’s backdrop of process reform and reimbursement reduction it may as well be close.
After identifying the need for a device to satisfy a new or existing service, planning and sourcing options for equipment resemble the process used for most other supplies. It’s all about what to buy when, from whom, for how much and how to get it delivered. Where equipment processes diverge involves these steps: How to fit something in and through an existing footprint, how to connect it to the organization’s information technology system and perhaps most importantly, how to pay for it (as in where to obtain the funding).
While most supplies (as in commodities and other consumables) are bought in bulk or in smaller units of measure delivered daily, those supplies turn over much more frequently than the need for pieces of high-end equipment. For example, disposable syringes tend to be used more rapidly than reusable endoscopes, which tend to be used more often than, say, a computed tomography scanner.
Among the differences are that even from a total cost of ownership or total cost of consumption, the disposable products tend to cost much less than the endoscopes and by far the CT unit.
This is what motivates healthcare organizations to seek out experienced contract negotiators to work with equipment planners (if they are not one and the same, which represents an even bigger hiring bonus) to satisfy capital needs, matching them with service options, revenue plans and, of course, patient care.
But how does a healthcare organization find someone like this or even mold and shape an existing employee into learning these skills? Where do Supply Chain departments within healthcare organizations slide off the rails with equipment contract purchasing versus surge forward?
Six healthcare equipment planning and contracting experts share their impressions about what Supply Chain typically does wrong in the process, which can lead to derails and detours.
1. Get involved too late.
“Too often Supply Chain leaders are tasked with executing a capital purchase with little to no involvement on the planning and supplier selection phase of a project,” said Allen Archer, CMRP, Director, System Supply Chain Management, Houston (pronounced “HOW-stun”) Healthcare, Warner Robins, GA. “This situation leaves little to no room for the Supply Chain to do what we do best because usually the supplier is already aware that the purchase is approved, leaving no opportunity for negotiation.”
As a case in point Archer recalls a CT unit he was asked to purchase after the clinical end users already had met with the preferred supplier — a deal that was replete with concerns.
“As proposed the equipment was 10 percent-15 percent higher than market value, did not reference our national GPO and also did not include sufficient applications training for staff,” Archer indicated. “When we approached the supplier for revision, we had difficulty getting the necessary revisions because the supplier knew he already had the deal in hand. We were able to get the applications training. However we were unsuccessful in getting the pricing lowered.”
Five years later after Houston Healthcare moved to a “Centralized Supply Chain-led Capital Budgeting and Procurement model, Archer’s team negotiated a three-CT purchase package across two facilities within the health system. “That same supplier who was unwilling to work with us previously, came to the table with pricing and terms that were best-in-class resulting in a six-figure savings opportunity that actually allowed us to purchase an additional equipment for one of our smaller facilities because we combined the equipment purchases and introduced true competition into the supplier selection process,” he said.
Ric Goodhue, Equipment Planner/Capital Coordinator, CaroMont Health, Gastonia, NC, is all too familiar with Supply Chain being pulled in too late.
“Too often, Supply Chain is the last in the food chain to know that a capital request is happening,” Goodhue told Healthcare Purchasing News. “Supply Chain leadership has to encourage their management peers to let them be involved in the beginning. Once the supplier knows they are the provider of choice, most of the leverage is out the window. Not having a unified front — physicians, clinicians and Supply Chain all operating from the same page — from the inception of discussion puts the organization at a disadvantage from the start.”
Goodhue remembers receiving a call from a supplier’s representative who told him to submit a purchase order for a piece of equipment within two days “to take advantage of this deal the department manager wants.” He called the department manager who told him he saw the product at a conference the previous week, and the rep in the booth said they could swap out the current machines at no cost provided they sign a five-year agreement for consumables. They signed the contract without conducting any research on the offer and were hit with a 95 percent compliance factor for consumables.
Getting involved early with vendor selection and timely negotiations enables Supply Chain to work closely with clinical and design teams, which may avoid post-order changes, insisted Steve Sutton, Director, Planning and Design Group, Belimed Inc., North Charleston, SC. “Delaying this places the project schedule in jeopardy, which may drive up costs for the facility, such as construction change orders,” he said. “Omitting this review can create issues later in the project. The vendor will be able to clarify any questions you have.”
Sutton cites one customer that waited until a construction project was nearly completed to order a sterilizer that required a 14-day lead time for delivery. While Belimed expedited the process as much as possible the hospital’s late purchase order delayed workflow in SPD, he added.
2. Don’t scrutinize before you sign.
“As part of proper due diligence by Supply Chain professionals, review of the supplier’s terms and conditions are critical,” Goodhue insisted. “This takes time. Sometimes, the expediency of getting the order placed would not typically allow this. Further questioning revealed that, ‘we’ve been doing business with this company for years, and the rep has always done us right.’ While having a great relationship with our supplier partners contributes to a positive business relationship, Supply Chain can’t rely on ‘the good ‘ol boy network’ any longer. At the end of the day, it is business and the written word dictates the responsibility of each party. Failing to vet what the terms of an agreement stipulate everything — from payment, delivery, freight, warranty start dates and such to who’s taking out the trash from the install — are all part of the contract.”
Don’t overlook terms and conditions, Sutton advised. They are set up to ensure that expectations and tasks are clearly documented and remain on schedule for both buyers and sellers. “For example, there are clauses in the T&Cs which hold the project team accountable for certain requirements, such as rigging of equipment, if needed,” Sutton said. “If the project team does not see the T&Cs until the kick-off meeting; there may be a lack of budget to satisfy these conditions, causing confusion and challenges to the project schedule. Supply Chain professionals should ensure the project teams are aware of, and approve, the equipment being ordered and the requirements and tasks for which they are responsible before the terms are signed.”
3. Lose your leverage.
In Goodhue’s example, Supply Chain reacted to a high-pressure situation that would not have happened if the organization had a formal procedure in place for how to deal with these requests, and everyone knew and followed the parameters, he said.
Goodhue also criticized allowing the sales rep to dictate when a purchase order is to be issued, likening it to a “tail wagging the dog” transaction.
“Supply Chain professionals are on point to protect the organization from having to respond to these heavy-handed tactics,” he said. “In today’s world of diminished reimbursments, merging suppliers and overall cost of healthcare, the last thing we need to do is rush into an agreement that can’t be properly analyzed and its impact on the organization determined before an order is released — no matter what the suspense is.”
4. Don’t ask the right questions.
“As Supply Chain leaders we are routinely asked to help lead procurement decisions, and usually we are tasked to solicit quotes for equipment,” Archer noted. “In the past we have said, ‘Who do you want to buy from?’ and our end users will say, ‘I need to by Company ABC’s Beds or ABC’s Stretcher.’ From that point we would go forth and solicit the quote and make sure it’s competitive and that it meets the terms and conditions necessary and all is well. What we have found is that when we reframe the question and as, ‘what do you need this [equipment] to do?’ that is how we change the game and really begin to make an impact for our facilities.”
Archer’s team learned that lesson when they were asked to provide quotes to replace ventilators within their facilities. At the initial meeting the end users expressed a preference for a particular ventilator from a particular supplier, according to Archer. “During the meeting we shifted the conversation and ultimately rephrased the question and worked with her team and to identify ‘what do we need our ventilators to do?’” he recalled. “We spent the next two weeks identifying the key specifications and operating modes needed for their ventilators. We took the identified specifications to the marketplace for proposals and set up a supplier fair for staff to review the various ventilators on the market. At the end of the ventilator fair the ventilator that was originally requested was not selected as the supplier of choice and it did not even make it to the clinical trial phase of the evaluation.”
As a result, Houston invested in a ventilator platform that served the system’s adult, pediatric and neonatal patients at a lower cost, enabling Supply Chain to purchase two additional ventilators and reduce overall rental costs, Archer noted.
5. Limit your options.
“Across the thousands of capital equipment transactions taking place in OpenMarkets, one mistake is constant: Supply Chain professionals do not evaluate alternative suppliers of equipment enough,” said Tom Derrick, Senior Vice President and Co-Founder, OpenMarkets LLC, a Chicago-based software-driven marketplace for healthcare equipment. “Our data shows that the inability to introduce alternative suppliers costs healthcare systems 13.8 percent more for each equipment purchase.”
Derrick attributes this problem to a lack of effective research and strategic sourcing, which can be difficult and time-consuming. Typically, they’ll use online search engines and rely on sales reps for information when participating in an online exchange may escalate their efforts, according to Derrick.
Lackluster research can lead to poor decision-making, according to Jeffrey Dunkle, Sourcing Manager, Capital, BJC HealthCare, St. Louis.
Supply chain pros can run into problems when they “focus on replacing equipment with same make/model, not realizing the platform may be obsolete within two or three years due to changes in standards of care, regulations or technology,” Dunkle said.
Further, supply chain pros may not realize the full impact of new technology being offered, he added.
“Disposables may be considered, but the other recurring demand supplies may be overlooked,” Dunkle said. “These include durable items that will only last a year, related goods that will last but will require extensive processing for repeated use and whether parts and pieces will be available from third party sources.”
Cindy Juhas, Chief Strategy Officer, CME, a national equipment distributor, Warwick, RI, emphasizes that too many Supply Chain professionals focus on direct manufacturers without exploring the distributor market. For example, her company is working with a large IDN on a new hospital project that involves 206 vendors. Of those 206, 80 are manufacturer-direct contracts, according to Juhas, leaving 126 other vendors that must be managed. “There are equipment distributors that can consolidate the rest of those vendors and offer very competitive pricing,” she said. “So not only do you save on the amount of POs cut and pricing but also on the management of product flow going to the new facility, which is very important.”
CME consolidated those 126 vendors under one PO and manages the product flow, she added.
6. Concentrate on price.
Juhas finds that obsessing over equipment price is a problem.
“Buying equipment is a tricky business and one must really take into account total cost of ownership,” she said. “Besides the price, there are shipping costs, special handling costs, warehousing, delivery to the room costs, assembling, installing, integration costs and packaging removal costs to name a few. The cost of buying a new piece of equipment is very different than the price of the unit.”
CME recently provided logistics services for a large clinic that covered large medical refrigerators. The clinic asked for a quote from the manufacturer and from CME, according to Juhas. “We saved them over 50 percent and we took care of disposing the packaging,” she said. “Otherwise, these large, expensive refrigerators would have been delivered on pallets to a parking lot with no one and no equipment that could deliver them into the building and into their respective rooms.”
7. Go it alone.
“Finding the right equipment, at the right price, takes an organized provider team,” Derrick insisted. “The clinical end users must be working in concert with the supply chain, finance, IT and biomed [departments] to gain consensus on the right product. All too often this collaboration is avoided because it’s too hard. In these cases, the incumbent supplier has an enormous advantage over others. If a provider does not have the process and the software platform to govern internal collaboration, it is extraordinarily hard for a supply chain professional to proactively evaluate alternative suppliers.”
8. Misunderstand macroeconomics.
Chad Rodine, Service Line Vice President, Capital & Construction Services, Premier Inc., attributes equipment planning and contracting challenges to “the changing demands of the job” more than anything else.
“Increased cost pressures force leaders to seriously examine any investment large or small — to maximize value,” he said. “The evolving landscape of reimbursement means the spotlight is shifting to acquisitions, no matter the size of product, service or piece of equipment. And this creates a whole new set of challenges for supply chain personnel during the sourcing and purchasing process.”
Rodine acknowledges the wisdom behind capping the risk of increasing prices when contracting for supplies.
“Negotiating capital equipment acquisitions is a totally different beast,” he said. “With new technology and competition constantly being introduced in the marketplace, technological capabilities improve while the cost of equipment decreases faster than the ability to negotiate effective, fixed-price contracts. Additionally, it is more difficult to write an effective contract for capital equipment because purchases are episodic, especially for imaging equipment. CT scanners now have improved slices, better image quality and lower radiation dose rates. The newest equipment also has a much lower price tag compared to when the technology first hit the marketplace. Contracting solely from an equipment pricing perspective is like trying to hit a moving target.”
9. Make decisions without pricing transparency.
Price variation remains a major barrier for supply chain pros, according to Rodine.
“A lack of understanding about the current market condition and limited access to pricing benchmarks puts a facility at risk,” he noted. “Most hospital executives realize their team cannot rely on just one source of information to make informed decisions. Supply chain leaders typically tap their own historic data and seek guidance from their group purchasing organization (GPO), equipment consultants or benchmarking services.”
For example, a hospital may only have to replace its CT scanner every seven years, Rodine explained. “Relying on the previous purchase history will leave one with outdated pricing or discount structures,” he said. “GPO contracts often have favorable terms and conditions, but are disadvantaged because these agreements are static and don’t react to pricing fluctuations in the market. These two sources limit education and leave the hospital reliant upon vendors for often outdated information. The good news is organizations like Premier have recognized this issue and developed additional data sources with real-time, streamlined benchmarks to compare the latest information from a wide pool of equipment vendors that is automated and easy to navigate.”
10. Don’t dedicate enough time and tech to decision-making.
When buying equipment, it is important to understand current market conditions and aggregation opportunities prior to the start of price negotiations, Rodine insisted. “Bigger deals can provide deeper discounts, especially when a team has the time or resources to competitively bid out equipment,” he continued. “However, this intelligence requires time-intensive research — which is a lot to ask of already overworked supply chain professionals. Additionally, low staffing and variation in experience can hinder taking advantage of these opportunities. Technology platforms exist to help leaders with the intelligence-gathering required for this process and should be considered when looking to maximize value without overburdening staff.”