Performance-Based Purchase Service Contracts

Why price shouldn’t be a factor

My firm occasionally receives requests from supply chain professionals to price benchmark their healthcare organization’s purchase service contract portfolio, only to turn down these assignments since we believe that price shouldn’t even be a factor in determining the intrinsic value of a hospital’s service agreements.

It should be all about results, not transactions!

For years, purchase service contracts’ pricing had been based on transactions (i.e., linen pounds processed, square footage cleaned, snow removal per inch, etc.), which didn’t give your hospital’s contractors any incentives to improve their cost and quality performance. That’s why performance-based service contracting is gaining interest with hospitals, systems and IDNs who want to reframe and reset their relationships with their contractors to achieve new levels of success.

As an illustration, it’s not the price per pound quoted in your laundry/linen service contract you should be fixated on, but instead you should be concerned about the cost per adjusted patient day of your total laundry/linen outsourced operations. This is the cost driver or metric that can and should be carefully managed and controlled by your contractor. Your contractor’s pay should then be incentivized to lower your cost per adjusted patient day based on a predetermined mutually agreed upon target. This enables both parties of the agreement to form a true partnership, shared vision and joint business plans to reduce or maintain your hospital’s laundry/linen cost per adjusted patient day.

This best practice is particularly attractive if you have been in a business relationship with contractors for many years, since a level of trust already exists and a baseline of performance has already been established. Moving from a transactional to a performance-based contract with these trustworthy, reliable and long-standing contractors will enable you to reboot your relationship with them to reach an even higher level of performance than you ever thought possible.

Simply stated, if you want to turn up the heat with your service contractors, you will need to move from a transactional (paid for a completed activity) payment model to a performance-based (paid only for results) model. This latter model uses a mix of performance-driven incentives to increase productivity, improve service quality and reduce the total costs of operating your outsourced function or activity – not your transaction cost. It’s a new way of thinking about how to structure your purchase service contracts, that’s the right methodology, at the right time, if you want to truly lower your purchase service contract cost, not just nibble around the edges as we have all done for years.

About the Author

Robert T. Yokl
Robert T. Yokl is president and chief value strategist of Strategic Value Analysis® In Healthcare, which is the acknowledged healthcare authority in value analysis and utilization management. Yokl has nearly 38 years of experience as a healthcare materials manager and supply chain consultant, and also is the co-creator of the new Utilizer® Dashboard that moves beyond price for even deeper and broader utilization savings. For more information, visit For questions or comments, e-mail Yokl at