Points on Pricing

Collaboration by providers, manufacturers and distributors can alleviate hassles and costs associated with incorrect pricing.

By Steve Inacker and Bill Abrams

From hospitals to physicians’ offices and IDNs to surgery centers, providers frequently voice concerns about whether their product pricing is accurate. Although the issue has plagued the industry for years, pricing inaccuracy doesn’t have to be an insurmountable challenge.

Providers have the power to drive more efficient contracting practices that lead to pricing accuracy. We’d like to propose a collaborative approach to work together to rethink our processes and reduce the amount of time and resources we all spend chasing down the right price.

How did the industry get to where it is today?
Everyone wants the best possible price. This has led to complex pricing systems with variable tiers based on volumes and other factors. Unfortunately, the contracting practices that have evolved are often inefficient. In particular, last-minute negotiations are a root cause of many pricing errors. (In this industry, 13 percent of negotiations are actually retroactive – imagine the errors that causes!)

It takes considerable logistics and time to move from an old price to a new price and have that new price reflected in everyone’s item master price file. This is a point in the supply chain process where many pricing errors occur, which create more problems further down the supply chain.
A correct invoice costs pennies to issue, but the money and resources spent resolving the pricing issues is often more than the actual purchase order itself.
While pricing accuracy has always been a large pain point for providers, now providers are facing a declining reimbursement environment and this is causing them to evaluate their backroom operations and make critical decisions about the costs they can control.

What can the industry do?
Fortunately, finding a solution doesn’t have to be an individual effort. Manufacturers, distributors and providers are all “in it together” when it comes to addressing the issue. Below are four steps to get the process rolling.

Understand when contracts are expiring and get in front of them to begin negotiations early. Today’s world includes providers’ organizations that are far more complex with contracting activity that also goes far deeper into their spend than it did 10 years ago. The challenge is to recognize and maintain that reality by paying attention to contract expiration dates. There’s no question that last-minute negotiations – or past due negotiations – add to pricing complexity and possible inaccuracies.

Collaborate with manufacturers to ensure pricing accuracy. Although distributors administer pricing, manufacturers own it. If a manufacturer doesn’t provide the right price at the right time, other parties in the supply chain can’t solve the problem. Providers should work with manufacturers in a timely manner to help ensure that pricing accuracy begins with them.

Push all parties to communicate changes in pricing in a timely manner. Set up a process with distributors in which notification of price changes occur as early as possible so everyone has time to update pricing files before the actual date of the price change. That will eliminate many errors, but some will inevitably get through when the purchase order is issued from the provider to the distributor. In this case, another process should be created identifying mismatched prices before the invoice is created. Accurate invoices yield several benefits to the hospital system, including a significant reduction in AP issues and the time associated with correcting the pricing disputes, as well as increased efficiency in managing and maintaining contracts and pricing files.

Pay constant attention. Pricing accuracy in today’s environment requires vigilance and sustained attention. It isn’t enough to set aside one month a year for contract negotiations and forget about them the rest of the year. Regular communications among manufacturers, distributors and providers is essential because change is an industry constant.

Ultimately, there’s no magic wand on pricing. Rather, it’s a common sense approach of ongoing collaboration and timely communication among the key parties. Providers must insist on this, and they will benefit from much greater pricing accuracy.

Steve Inacker is president, hospital sales & services for the Medical Segment of Cardinal Health.
Bill Abrams is president, distributed products division for Medline.