Purchased services contracting: Change is in the air

Supply chain executives are paying increasing attention to purchased services. The Journal of Healthcare Contracting submitted a series of questions to HealthTrust executives about the challenge and opportunity of controlling purchased-services costs while improving quality. Here are their responses.

Participating were:

JHC-June2015-PurchasedServices-AdamCampbellAdam Campbell, manager of clinical services contracting in ServiceTrust, the purchased services consulting division of HealthTrust. Previously, he was cath lab and surgery purchasing manager at Williamson Medical Center in Franklin, Tenn. Campbell has worked in a variety of roles in the healthcare industry over the past two decades. He received his bachelor’s degree in nursing from East Tennessee State University and his master’s in healthcare administration from the University of Alabama in Birmingham.


JHC-June2015-PurchasedServices-ChristinaKatamayChristina Katamay, assistant vice president of ServiceTrust. With 32 years of healthcare experience, she has served in roles that have included facility supply chain director, market supply chain director, division director of contracting and corporate director of national contracting for 170 hospitals. She has used this experience to develop ServiceTrust. Katamay received her bachelor’s degree in business administration from Nova Southeastern University.


JHC-June2015-PurchasedServices-TrevorRotondoTrevor Rotondo, manager of environmental contracting services. He has 20 years of experience in multiple environmental services categories and industries that include healthcare, hospitality, retail and education. Rotondo currently is working on projects for multiple IDNs in the fields of janitorial, waste, linen and pest control. Previously, he served as director of operations/area manager for Service Management Systems, with $10 million in budgetary and operational accountability. Rotondo earned his bachelor’s degree in psychology from New York University.


Journal of Healthcare Contracting: Describe briefly the service category with which you are most involved.

Campbell: Scope and instrument repairs. It’s a service provided by original equipment manufacturers (OEMs) and third-party repair companies. The service includes on-site and off-site repairs and instrument sharpening.

Katamay: Blood products and blood delivery services. The category includes the purchase of all blood products for patients and services provided by blood suppliers, such as reference testing.

Rotondo: Linen and laundry services, which encompass everything from sheets on a patient’s bed to scrubs on a surgeon in the ER. It’s an intricate category, with several variations. Hospitals may be on a COG (customer-owned goods) program, where they buy their own linens and operate their own laundry center internally or outsource the cleaning of soiled COG to a third party; or they may be on a linen rentals program and lease clean linens from a supplier. Occasionally, some hospitals combine COG and rental programs.


Journal of Healthcare Contracting: Who are the people primarily involved in using the service?

Campbell: Repair of scopes and instruments touches materials management, surgical supply chain, the sterile supply manager or coordinator, surgical director and nurses, endoscopy lab techs and nurses, physicians and patients.

Katamay: Blood products and services are primarily managed by the lab, but impact patient care, staff and physicians.

Rotondo: The environmental services (EVS) department is generally accountable for a hospital’s linen program, from sourcing the supplier through receipt and facility-wide distribution. The nursing staff has the greatest voice when it comes to the quality of linen, since it touches virtually every patient.


Journal of Healthcare Contracting: How have hospitals and IDNs traditionally approached contracting for the service?

Campbell: In the past, hospitals and IDNs would send the scope or instrument to the OEM for needed repairs. During the initial purchase, they would sign a monthly or yearly repair service contract with the OEM. Also, if an instrument broke or needed sharpening, it would be replaced.

Katamay: For many years, hospital lab directors and facility leadership independently negotiated local agreements. In more recent years, hospitals and IDNs have recognized the value of aggregating volume and have begun working with regional purchasing groups or their GPOs to assist with negotiation.

Rotondo: More often than not, hospitals renew year after year. The typical stated reason is that the current supplier “was here when I got here and we just never changed.” Suppliers generally dissuade hospitals from putting out an RFP by offering a reduction in price in exchange for an extension of the contract. GPOs and IDNs are driving change away from this behavior by pushing for RFPs that aggregate linen volume to a limited number of suppliers, which results in far greater cost savings.


Journal of Healthcare Contracting: In your opinion, what are the most significant shortcomings – if any – of that approach?

Campbell: The fees OEMs charge for repair service contracts are typically very high compared to what facilities would spend with third-party repair companies. Replacing instruments that break or need sharpening also drives up costs.

Katamay: As hospital groups move toward a more collaborative contracting process, many smaller regional blood providers are forming affiliations with providers to compete with the larger national suppliers. Hospital blood management programs have driven down the price of blood products, and additional savings can be reaped by the use of benchmark pricing in negotiations with suppliers. ServiceTrust, the purchased services consulting division of HealthTrust, has successfully negotiated contracts for blood products and services utilizing bench market intelligence for over 250 hospitals.

Rotondo: Launching an RFP for linen services is a time-consuming exercise, so it’s understandable why so many hospitals simply renew with existing suppliers. However, the 5 percent savings guarantee they might get for renewing effectively distracts them from seeking the fair market value for this service, which could easily be 10 percentage points or more lower.


Journal of Healthcare Contracting: What has been the traditional role of the materials manager or supply chain team in negotiating for the service?

Campbell: In my former role as a surgery supply chain manager, it was supply chain’s responsibility to negotiate the scope and instrument repair contracts with direct assistance from surgery leadership. That’s customary.

Katamay: Little to no involvement, as the blood products and services category has traditionally been managed by the lab. Typically, it would renew with the same supplier year after year, provided service was not an issue.

Rotondo: The materials manager and supply chain team generally have limited contact with linen as a whole. The EVS director is a supplier’s main point of contact, since that department owns linen distribution and collection. Typically, EVS will conduct the majority of the sourcing project.


Journal of Healthcare Contracting: In your opinion, what should the role of the supply chain team be?

Campbell: Supply chain should be the main point of contact for negotiations for scope and instrument repairs, if only because they’re more familiar with GPO contracts than department heads. They should also stay aware of any service or quality issues that emerge and dig for root causes.

Katamay: Supply chain should always be involved with contract negotiations for all purchased service categories, including blood products and services. It brings a third party into the mix who can offer input based on experience in dealing with hidden costs, such as stat delivery charges and return fees, and contractual terms and conditions (Ts & Cs).

Rotondo: Supply chain should be orchestrating linen RFPs and delegating responsibilities to the team, with EVS collecting the linen data and finance the spend data, prior to the sourcing event. It can help vet the pros and cons of different program types (e.g., COG vs. a rental program). Supply chain also needs to help identify all potential suppliers locally, regionally and nationally; inform EVS of suppliers currently on contract through their GPO; and assess prospective suppliers’ true costs to ensure a level playing field. Most of all, supply chain has the credibility to help departments enthusiastically embrace any supplier and product changes that are ultimately made.


Journal of Healthcare Contracting: What are the opportunities (including cost-savings) to be realized by improving the contracting process?

Campbell: ServiceTrust is routinely able to shave 15 to 20 percent off clients’ spending on scope and instrument repair by having a third party provide repairs in lieu of the OEM. It also helps facilities manage inventory more effectively, reducing delays in procedure starts and turnover times; and maintain the instruments to extend their life and lower capital outlays. Some suppliers incentivize their employees to minimize the need for repairs, adding further to savings and timely procedure starts.

Katamay: Using benchmark pricing, ServiceTrust has been able to generate 6 to 15 percent savings for clients on blood products and services. Since this is such a large category of expense for hospitals, the savings has a significant, visible impact on the bottom line. By reducing multiple contracts to one or two, IDNs have enjoyed the added benefits of improved contract management, firm pricing for term and value-adds, such as a blood management program.

Rotondo: A five-year linen contract that is allowed to automatically renew for another five years may have picked up as much as a 5 percent price bump that compounded annually. More likely than not, that price increase exceeds the consumer price index that would have accrued over the same time period, putting the cost for the service well above fair market value. A full-fledged RFP could thus yield high savings, often in the range of 15 to 20 percent for linens. Additionally, IDNs have an opportunity to consolidate suppliers. This allows them to align best practices regarding washing temperatures, chemical ratios and linen touches across the organization, helping reduce the risk of hospital-acquired infections.


Journal of Healthcare Contracting: Can you name two or three ways in which successful hospitals and IDNs are, in fact, improving the way they contract for purchased services?

Campbell: Taking a closer look at current contacts is proving to be a useful exercise for hospitals and IDNs. Due to time constraints, many are successfully using purchased services consultants who specialize in specific areas such as scope and instruments repairs. Specifically, they’re reaping the benefits associated with using third-party suppliers for repairs and scope and instrument inventory management.

Katamay: Market benchmark pricing is key, because it tells them what they should be paying in their market. Hospitals can also see significant savings through volume aggregation, robust contracts and by strengthening their commitment to suppliers.

Rotondo: The more successful hospitals and IDNs are increasing net profits by using purchased services consultants to reduce cost centers, such as linen and laundry service contracts. Supply chain generally doesn’t have the resources internally to pull and analyze the data necessary to conduct a full RFP, nor does it have access to benchmark pricing for
comparing proposals.


Journal of Healthcare Contracting: Considering the contracts themselves, can you name two or three ways in which the terms for this service differ from the terms of a contract for med/surg supplies? What are some terms and provisions supply chain executives would be wise to include in the contract?

Campbell: Scope and instrument repair needs can differ widely year to year, so contracts will typically include a savings guaranteed program (e.g., the hospital pays upfront, based on a percentage off expected total repair costs for the year, but if the actual spend is less, it gets credited back the difference). Third-party suppliers will sometimes provide inventory management software at no charge and OEM repairs at no charge or at a capped rate. They will often cover freight charges for return delivery of repaired instruments or have a local rep help expedite their return. Ideally, terms should also include a complete list of inventory covered under the agreement and instruments that are carved out, a maintenance schedule and firm pricing for term.

Katamay: We often see evergreen clauses and pricing paid that varies greatly from contract pricing. Blood suppliers are willing to provide firm pricing for longer terms, and out clauses without cause with reasonable notice and, most important, include savings on all service fees as well as the blood products themselves. Supply chain executives would be well advised to incorporate language allowing renegotiation when market pricing changes, so that a contract can be terminated without penalty if the supplier is unwilling to adjust its pricing to reflect market rates.

Rotondo: The biggest difference between purchased services and med/surg is that pricing on the latter can live on a national contract with relatively no cost differential region to region. With purchased services, pricing can vary by region and even by hospital – and IDNs are best served to negotiate contracts this way, with pricing based on a hospital’s proximity to the supplier. Delivery and fuel surcharges, linen loss and early contract termination fees also have to be factored into the base price when evaluating contract proposals. ServiceTrust has had success negotiating firm pricing for up to three years by adding in contract language addressing “just in case” costs (e.g., the price of cotton or fuel rises) with suppliers vs. baking in those costs up front with annual increases.


Journal of Healthcare Contracting: If services are provided primarily on a local basis, to what extent can the hospital or IDN make use of a nationally negotiated GPO contract? How about a regional one?

Campbell: HealthTrust has national agreements with multiple third-party scope and instrument repair companies. Although providers typically negotiate local agreements, they can drive best pricing by aggregating volume with their GPO.

Katamay: For blood products and services, there are very few national GPO contracts available other than master agreements, which leave price negotiation to hospitals and IDNs. They would need to look to their GPO for market pricing and contracting expertise to broker the best possible local and regional deals.

Rotondo: Linen and laundry services may be provided by local plants, but often they roll up under a corporate entity or even a consortium of local owners. By virtue of their larger size, it thus becomes possible for them to offer better pricing to GPOs with members across a region.


Journal of Healthcare Contracting: Please talk about monitoring the performance of the service provider in the months/years after the contract has been signed. Any “best practices” to share?

Campbell: It’s important to conduct quarterly business reviews, checking for increases in instrument repairs and resolving any issues. Routinely offer educational seminars on the proper care and handling of scopes and instruments to sterile supply coordinators, managers and directors, and nursing staff. Suppliers should provide these continuing education opportunities at no cost, together with an instrument tracking system and a guaranteed savings program.

Katamay: Suppliers should be providing blood management programs at no cost and monthly utilization reports, in addition to conducting quarterly business reviews. At least once per year, hospitals should check to be sure they’re paying market rates.

Rotondo: Measure supplier performance using cost per adjusted day or, better yet, request that your supplier provide a volume and spend report at least once a year. Comparing previous costs against current volume is the best measure of savings; quite often, spend is higher because volume is up. Remember to also regularly reassess suppliers’ level of support to your facilities. Did they help adjust automatic replenishment levels to minimize shelf stock? Did they assist in identifying excessive loss items and work with you on how to limit that loss?


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