Why Rethink Contract & Rebate Performance Analytics in Strategic Sourcing
Negotiating hospital supply contracts is hard work. It can take months to collect and clean up the right data, pull insights from the data, and present those findings to physicians and executive sponsors to get everyone in your organization on the same page. Then you bring these insights into your negotiations with the vendor. Eventually, you hammer out an agreement, and everyone shakes hands.
What happens next is a whole new challenge.
Monitoring the day-to-day compliance and financial performance of the newly signed contract is typically a manual and time-consuming task. It’s really hard to do and, in resource-constrained health systems, the savings and rebate tracking process typically decay over time.
It’s usually when the CFO asks about the contract three quarters later that someone will attempt to measure the savings from the new contract or check whether the hospital is applying for all the rebates it has earned. Only then does the health system discover that, instead of saving $750,000 over the first three quarters, as expected, the hospital has saved only $350,000.
In the scenario described above, a common reason for the savings erosion is that a few physicians shifted to different products. For example, increasing the use of a knee stem component for their total knee replacements. The new part could cost three times as much as the one the physicians used previously or it wasn’t purchased before and not included in the original purchase history analysis. This small shift in utilization has created a massive gap in realized savings vs projected savings.
After conversations with physicians (possibly months after practice patterns change), they may return to the older component, but that $400,000 in expected savings is lost forever.
Falling prey to information gaps
What causes this cycle? The root causes are information gaps between hospitals and their vendors.
First, consider the contracts. Hospitals have scores of supply contracts, all of them written from the point of view of the vendor. Each one has different nuances—no two are alike. While the vendors have hundreds of such contracts, they all begin with their standard contracts. They know their standard contract inside and out, and how negotiated changes affect it. After negotiation, they know the financial pluses and minuses and build their sales strategy to steer customers toward the pluses.
The second gap is between the sales representatives and the physicians. The sales reps know precisely what maximizes profits under the terms of each contract. Physicians, like hospitals, are dealing with multiple representatives and contracts. Even with good communication with physicians on preference items, it is difficult for physicians to know in the operating room what choices are the most cost-efficient.
The third gap comes in monitoring the ongoing performance of the contract. Because it is their core business, device makers have data in near-real-time on contract performance. They mine the data for insights that sales reps can use. For hospitals, it is a time-consuming, manual process done with a custom spreadsheet for each contract. The data needs to be pulled from multiple systems and cleaned up to ensure they are consistent with one another. Enterprise resource planning (ERP) systems don’t have ready-made reports to run on contract compliance.
Creating a new, improved cycle
These information gaps could leave supply chain leaders flying blind. A shift in component utilization for total joint replacements can be easily overlooked. An opportunity to accelerate purchases before the end of a quarter to earn a significant rebate can be missed. Most health systems lack real-time data to bring to conversations with physicians about their preference item choices. In other words, like a pilot lacking instruments, health systems can’t course-correct as fast as they should.
Filling these information gaps requires an intentional and systematic approach to monitoring contract spend and tracking savings and rebates from supply contracts.
- Instead of re-engaging with physicians after three quarters, you should share data every month with physicians. As a result, over time, trust with physicians will build and they will come to you as the source of truth over their vendor reps. You can quickly influence physicians to avoid costly shifts in the utilization of items that don’t bring improved clinical benefit before they become accustomed to using the items.
- Instead of coming to a vendor’s quarterly business review with outdated data, you can show up with details on the actual spend and savings (or lack of savings) and procedure utilization trends of their products. Vendors will take note of your diligence and will be less likely to try to slip anything by you.
- Instead of answering leadership questions about a contract’s performance by promising to look into it, you can proactively send dashboards and come to meetings armed with insights. You will build up organizational trust that can lead to the resources needed for future transformative investments in supply chain management.
- Instead of recreating the wheel of each contract cycle, these improvements in monitoring contract performance also will make the next contracting cycle with each vendor shorter and less labor-intensive. With an intentional and systematic contract monitoring strategy, you, your leadership, physicians, and vendors already know the numbers and can focus on collaborating to determine your goals for the new contract.
So, how do your set up an intentional and systematic process for managing the contract? Well, there’s a manual way and an easy way. Click here to learn more about the easy way.