The COVID-19 pandemic has wreaked havoc on the healthcare industry, exposing significant flaws along the way. One of the most notable issues is how supply chains are managed. Widespread shortages of personal protective and vital medical equipment plagued a vast number of hospitals and health systems across the country.
The pandemic also exposed how unhealthy vendor relationships can contribute to health systems’ and hospitals’ absorbing substantial, and at times unnecessary, costs. Sometimes this is just a function of contractual arrangements that have gone unquestioned, but these can and should be modified. Other times, vendors have exploited their personal relationships with health system purchasers and influencers to take advantage of the crisis.
While significant hardships have been created for many hospitals, for those that look beyond the current crisis, the pandemic offers a unique opportunity for healthcare organizations to reimagine aspects of their business and position themselves for success in a post-pandemic world. Restructuring vendor relationships is one important opportunity that can result in healthier relationships and, more importantly, stronger bottom lines.
Requiring more professional, transparent vendor relationships enables organizations to achieve significant cost savings now and in the years ahead. Understanding where relationships go wrong is the first step to establishing healthier relationships.
The dangers of getting too personal
Historically, vendor representatives establish long-term relationships with their hospital contacts, including influential physicians. While the relationships may be genuine and mutually beneficial, vendors know that a real or perceived friendship can make hospital contacts reluctant to demand full transparency or push back on costs, terms, and equipment options. Even when health system purchasers understand a vendor relationship is problematic, they often shy away from insisting on certain contractual terms because of the perceived cost of damaging the relationship and starting anew with someone else. Large, powerful organizations can also be vulnerable to this dynamic. They assume their reputation gives them the power to always get the right price, but often this is not the case.
While the reasons for these unnecessary costs can vary, they reflect a failure to thoroughly vet purchasing decisions for everything from capital equipment through consumables, services and physician preference products. Typically, this less-than-adequate diligence is linked with health system purchasers becoming too friendly with a rep. Rebalancing the relationship can bring back full-throttle due diligence resulting in a significant, even dramatic contribution to improving margins.
How to keep a relationship healthy
Any relationship worth preserving is based on openness, but some vendors have knowingly taken advantage of the pandemic’s chaos to push unfair quotes that supply chains — hampered by a thousand competing needs — have accepted at face value. This is especially common in organizations where the supply chain is not involved until there is already a verbal intent in place to purchase. As a result, organizations get locked into bad contracts for the next five to 10 years.
Organizations can counter this dynamic by conducting due diligence that ensures a legitimate, executable quote. This requires timely, reliable benchmark data. Quotes should be scored on a variety of measures, including list and component price, part numbers, reason for discount, quote issue date and number, and warranty terms. When preparing a quote, even in this moment of crisis, push for termination-without-cause language to limit the risk of being locked into inflated pricing long term or insist on language that allows renegotiation of pricing post-pandemic.
Due diligence must also include true value analysis that examines total lifecycle costs. This includes assessing such items as market dynamics, clinical efficacy, configuration through post-warranty service, the cost of proprietary consumables required to operate a capital solution, and reimbursement reviews. Extensive value analysis and benchmarking are most reliable when impartial and verifiably supported by data that reflects a broad and deep range of contracts and expertise.
Another often overlooked relationship is general purchasing organizations (GPOs). GPOs play an important role for healthcare organizations, but they don’t always give clients the best possible price. Too often, health systems and hospitals leave money on the table, because they don’t understand the importance of validating GPO pricing. As valuable as GPOs are, they are not fully independent. They have their own ongoing vendor relationships that can compromise contractual arrangements and blind them to savings opportunities. In addition, for capital purchases, since a GPO cannot guarantee the vendor’s actual purchases, the pricing that a GPO has negotiated is only a starting point. Hospitals and health systems are free to negotiate for even deeper discounts; benchmarking information and negotiating expertise will greatly increase the likelihood of success.
The role of internal relationships and processes
Conducting true due diligence that creates transparency is one essential component of establishing a healthy vendor relationship. A second is presenting a unified front to vendors, one that reflects the concerns of an entire organization.
Healthcare organizations should focus on building trust among a coordinated team of C-suite executives, physicians, and department directors across multiple units. Consistent messaging from the vendors’ potential contacts helps vendors understand the rules of the game for an organization, thereby creating another level of openness and transparency.
It’s especially important to engage physicians, who typically have the closest relationships with vendor representatives and strong feelings about specialty products. Their voice is extremely valuable; however, physician preferences don’t always reflect big-picture concerns. Nor do physicians always have the broad view of which equipment offers true clinical advantages and may instead be working out of comfort and habit. Therefore, it’s essential that supply chain purchasers build working relationships with physicians in which honest conversations about the greater organizational good can take place.
Keys to rebalancing vendor relationships
COVID-19 provides a giant “reset” button for vendor relationships, as many purchases are temporarily on hold. As hospitals work to identify ways to enforce transparency in pricing and create a united internal team, a comprehensive analysis will help to determine vendor relationships that need to be corrected and potential areas for restructuring contracts. And while costs are vital, they tell only part of the story. Another timely consideration is which vendors have been good partners during this crisis (and which took advantage of the situation).
Now is the time to restructure guarantees for future emergencies. On the capital equipment side, supplies for items, like ventilators, infusion pumps, and hospital beds, were exhausted quickly during the pandemic, forcing prices upward. Restructure contracts to reduce future risks, such as including surge clause language if it doesn’t currently exist. It’s also important to check rental agreements made in a rush during the crisis. Is there an automatic renewal that isn’t needed? Is the pricing right?
Additionally, for consumables, pricing is often based on a specified spend; when elective procedures went to zero during the initial phases of the pandemic, so did spend. Consequently, some facilities have faced huge penalties. Moving ahead, consider a market share backup. Also consider including spending tiers that grant a price reward if anticipated performance is exceeded.
Once an analysis is complete — and spend workflow has been reimagined in ways that reflect the concerns outlined above — you have created a new normal. Greater oversight and control are the goals: from setting boundaries in clinical settings to expectations about benchmarking, transparency, and full analysis of any contracted purchases.
Validate and verify to build trust
While it may seem counterintuitive that vigorously questioning a vendor about pricing and contracts would build a stronger, healthier relationship, often this is exactly what happens. Presenting a clear and unified message to vendors — so that they understand the professional parameters an organization requires, supported with outside benchmarking and stricter boundaries about where and how they can operate — yields true benefits. The vendor’s role becomes simpler, while an organization realizes significant savings that relieve margin pressures dramatically exacerbated by the novel coronavirus. In turn, hospitals and health systems emerge from this crisis much healthier organizations. HPN
Barry Dyer, PMP, is Senior Vice President of Professional Services at TractManager, a leader in strategic sourcing, contract lifecycle management and provider credentialing. Barry has more than 25 years of experience in management consulting, system implementations and process improvement. His experience includes serving as Vice President of Strategy with Oracle Cloud Applications Consulting.