Contracting Perspectives Gained from COVID-19


May 2022 – The Journal of Healthcare Contracting

By Jeremy Samuelson


The past two years have been very challenging, with new obstacles presenting themselves daily. COVID-19 has put an unprecedented strain on healthcare and all parties involved; manufacturers are experiencing higher demands for products and shortages of raw materials, distributors are attempting to supply customers on limited product allocations, and understaffed hospitals are treating an elevated number of high acuity patients than we have seen in recent times. All of these factors are contributing to the ever-mounting pressures that are being applied to sourcing and contracting departments across the nation, as we try to ensure that our healthcare workers have the supplies and resources that they need to stay safe, treat patients and save lives.

Despite the widespread impact that COVID-19 has had on our healthcare infrastructure, we have once again proven to be resilient in the face of adversity. The pandemic has taken so much from so many people, but I think that we all should have gained at least one thing: Perspective.

Perspective No. 1: High Value vs. High Dollar

Managing spend is an integral part of any sourcing and contracting department, especially in today’s economic climate of shortages and inflation. The bottom line is healthcare providers need to maintain a positive ratio of net patient revenue to supply expense to keep the doors open. With intentions set on value analysis and cost optimization, we tend to focus on the areas, products and suppliers associated with the highest dollar amounts (high spend = high opportunity). The problem is that high value is not always derivative of high dollar, i.e.: blood collection tubes.

Within the last year, the shortage of blood collection tubes has been escalated and highlighted at most health systems. It is just one, but perfect example of how a seemingly simple and inexpensive product has the potential to bring patient diagnosis and hospital operations to a screeching halt. It is this example, along with many others, that helps stress the importance of all products, contracts and suppliers regardless of the associated spend. 

Perspective No. 2: Strategic Partnerships vs. Relationships

The supplier needs the customer just as much as the customer needs the supplier. It is under this mutual understanding that supplier relationships, transactional by nature, can evolve into long-lasting partnerships in which both parties benefit equally from each other’s successes and ability to provide high-quality products and care to the patients we serve. A strategic partnership focuses on mutual growth, innovation and most importantly, support, whereas a supplier relationship gravitates toward commitments, penalties and individual benefits.

COVID-19 has helped spotlight what a strategic partnership looks like and who our partners are. They are the ones who have been proactive in communicating supply issues, aiding in conservation strategies, allocating the necessary amounts of products and focusing on needs of the patients, instead of using the pandemic as a means of increasing sales and revenue.

Perspective No. 3: Standardization vs. Sole Source

Standardization has been a very popular trend in healthcare throughout the past decade. It brings a plethora of clinical, financial and operational benefits to not only the health systems that are able to achieve it, but also the suppliers who are able to gain higher percentages of the market share and spend. However, standardization has been mistaken for 100% sole source commitments.

If the pandemic has taught us anything, it is the risk of “having all of your eggs in one basket.” As we progress though continuous and never-ending backorders, we can see the importance of maintaining a diverse supplier portfolio within each of our categories. Standardization and all its benefits can still be achieved with a 90% market share commitment that allows you to maintain secondary suppliers whose products can help supplement the primary supplier’s products in times of need.

Perspective No. 4: Contracted vs. Non-contracted Spend

Time and time again, we have heard that suppliers are not able to support or supply products to new customers due to current product backorders and allocations. This not only stresses the importance of maintaining a certain level of supplier diversity, but it also shows the importance of maintaining contracts for all items that are purchased regardless of quantity, cost, frequency, etc.

In addition to the obvious benefits of cost and risk reduction, contracts can be used as a tool to mitigate future backorders and secure product allocation. If your sourcing department has a high percentage of contracted spend, you may want to focus on secondary contracts for areas with potential risk of future backorders.

Bottomline

We can agree that healthcare and the various challenges presented within the industry are continuously changing. We have seen many times where best practices become old practices, and healthcare contracting is no exception. What we do has a direct impact on our patients’ access, quality and affordability of care so we must continue evaluate what we are doing, continuously improve and transform our thinking and processes along with the rest of the field.

Jeremy Samuelson, M.S. – Strategic Sourcing Program Manager, HonorHealth – 2021 Gartner Healthcare Supply Chain Top 25