When it comes to contracting, David Forbes knows how to get it done.
Forbes, who is director of contracting at Mercy Health Services in Baltimore, was schooled in the art and science of data analysis and of leveraging pricing opportunities while working at Spend Compass Performance Technologies, part of The Advisory Board Company.
“We leveraged spend intelligence to assist member hospitals in their negotiations,” he says. “Not only did we use supply benchmarks from approximately 150 hospitals from across the country, but we also helped them organize their data via UNSPSC categorization.”
While at The Advisory Board, he helped clients monitor the cost performance of individual physicians, and he helped regional purchasing cooperatives quickly pull categorically normalized aggregate data and identify pricing parity opportunities from within the group.
“In my short time there, I stepped foot in more than 100 hospitals,” he says. “Obviously, I was never deep into the contracting activities of any given organization, but the broad view I experienced of how programs were managed was invaluable.” Most poignant was his experience supporting the company’s international – specifically, United Kingdom – business. “A memory that will forever stand out is seeing how National Health Service-contracted hospitals paid a fraction of the price of any American hospital for drug-eluting coronary stents,” he says.
The position Forbes assumed at Mercy in March 2013 – director of contracting services – was a new one for the organization. “It was designed to formally structure business dealings between Mercy and third parties,” he says. At the moment, Mercy separates purchasing – which is primarily operations/procurement-focused – from contracting, but that may change in the future, with the implementation of a new supply chain information system.
The contracting team
His current team consists of two contract managers and himself. (Forbes also manages a separate data/analytics team). Mercy’s vice president of supply chain is a key participant in larger acquisitions and more complex negotiations, he says. “Each of the four of us are able to draft custom terms and conditions, produce redlines, and negotiate directly with supplier contracting and legal staffs.”
In addition to the typical medical-surgical supply space, the contracting services department manages service, lease, license, and several other agreement types. In fact, only about one-third of Mercy’s contracted spend is related to medical/surgical supplies.
More than one-third of that medical/surgical supply spend is on orthopedic and spine hardware, he says, adding that high-margin, physician-preference market baskets are typically locally contracted. “For what it’s worth, approximately 70 percent of Mercy’s medical/surgical spend is purchased on a contract. If there were an available contract for that remaining 30 percent, or if Mercy were able to convert to GPO-contracted suppliers, then we would gladly leverage GPO paper.”
Across all service and product categories, approximately 90 percent of the annual value of contracts is in Mercy contracts, and only 10 percent in those of a GPO.
“Finally, and not to overstate this, but GPOs typically do not secure the best available price and/or terms in the market,” he says. “This statement is made as one who has worked for a benchmarking firm and is leveraging three different benchmarking databases in my current role. If we are able to negotiate something better, we have the fiduciary duty to do so.”
Hiring the right people
A key piece to managing an effective contracting program is hiring the right people, says Forbes.
“Given the size of today’s contract portfolios, the front-line negotiators must be empowered to make their own decisions. That doesn’t mean they get to do whatever they want whenever they want. It does mean I have to hire people I can trust to make decisions that are in the best interest of the organization.”
Mercy contracting managers must have a bachelor’s degree. (“Ironically, both of our contract managers hold master’s degrees, while I am 18 credits short,” he says.) Potential hires must also perform a writing assessment, to ensure they can draft clear, effective contracts.
“What we do not require is healthcare experience. In-industry experience is a consideration, but we look for strong negotiators with contracting backgrounds first. There is also something to be said about bringing unbiased eyes to an industry in need of dramatic change in how it manages its spend.
“The final and most critical piece to managing this workload is the customer service orientation of my department. This allows us to engage directly with physicians, other clinicians, and department heads to assist in tasks such as vendor identification, qualification, and post-contract vendor management.
“IDNs can be successful regardless of their GPO philosophy,” he adds. “We’ve just happened to come down more times on the side of a local contract. I think our staff and processes are part of it.”
Every term in an agreement is essential – otherwise, it doesn’t belong in the agreement, says David Forbes. “There are, however, a dozen or so absolutes or ‘gotchas’ that we look out for.” Here are a few.
- Firmly defined start/end dates. Mercy does not accept auto-renewals, agreements ending a period of time after an event occurs (such as the installation/acceptance of a piece of equipment), or without-cause cancellations.
- The agreement is written bilaterally. “If one party expects it of the other, then it must expect the same of itself,” he says. For example, if Mercy is asked to indemnify the partner, “we expect them to indemnify us,” he says. “Or, if we commit to buying 80 percent of our widgets from the partner, we require a guarantee that they can supply that much and a cure if they can’t.”
- Local venue. This is much more than lower costs in the case of litigation; there are also material differences in how laws are interpreted state-by-state.
- Rational, if any, limitations on liability. For that reason, Mercy rejects terms such as “liability shall be limited to the amount of money spent against this contract.”
- No “gross” negligence or “willful” misconduct carveouts specific to indemnification.
- Adequate and specific levels of insurance of the supplier.
- Anti-virus protections for software contracts, including software loaded onto equipment or having to do with equipment interfaced remotely to a third party.
- Assurance that any software license associated with a piece of equipment is transferable.