Michael Darling Director, Clinical Supply Chain Services Price Waterhouse Coopers Dallas, TX Lance Robinson Director Price

Waterhouse Coopers Birmingham, AL

Healthcare Advisory Practice

PwC

Presentation to the Association for Healthcare Resource & Materials Management

Agenda

Overview of Contracting Process Data Gathering and Analysis Request for Information Potential Vendors Consensus Building with Key Stakeholders Contract Execution Ongoing Contract Management Key Performance Metrics Roadblocks and Barriers Questions

Overview of Contracting Process

Current Supply Chain Environment
In recent years, there has been a shift regarding the sophistication of the healthcare Traditional Supply Chain
Clinician selected products High inventory levels Discontinuous product flow Paper-based information flow Inconsistent technologies Limited data collection Inefficient, fragmented buying practices High purchasing costs

Supply Chain Implications

Cost/outcome based product selection Increased pressure to remove non-value added costs and activities Increased pressure to improve service quality Need for relevant information sharing Move to continuous, streamlined product flow Critical needs for data accuracy

Overview of Contracting Process

Role of Supplier Management
Recent shifts in elements that are now part of successful contract negotiations in the current environment include, but are not limited to: Increasing demand for greater commitment to and customization of value-added services Ability to effectively gather and share utilization and clinical data Demand forecasting and clinical practice guidelines to develop procedure-based supply distribution and to reduce unused/unneeded inventory in system Ability to link resource consumption to individual patient, physician and diagnosis/procedure to drive clinical resource management Minimized supplier relationships with individual providers (physicians) will be in favor of closer ties to the provider systems Flexible contract utilization E-commerce strategies

Overview of Contracting Process

Role of Supplier Management
A strong contract negotiation strategy plays a key role in the management of a hospitals suppliers / vendors and GPO.

Suppliers Suppliers & & Services Services

GPO GPO
Product Product Categories Categories Contract Contract Negotiations Negotiations Voice Voice of of Customer Customer

Hospitals Hospitals
Product Product Categories Categories Contract Contract Selection Selection

Contract Contract Information Information

Contract Contract Distribution Distribution Support Support Processes Processes & & Value Added Programs Value Added Programs

Contract Contract Signing Signing Contract Contract Utilization Utilization

Utilization Utilization Data Data

Customer Customer Care Care

Purchase of Products Delivery of Products

Overview of Contracting Process

Outline of Effective Contracting / Negotiation Strategy
Phase I- Data Gathering and Analysis Collect Data Validate Data (Minimum two-way validation) Identify Value Analysis Team (VAT)/Stakeholders (Dept Director, MD, etc.) Verify Data with VAT/Stakeholder (Total Spend Validation) Obtain Stakeholder Sign-Off (Stakeholder Acceptance) Assess/ research Marketplace Identify appropriate Benchmarks Prepare Presentation of Opportunity Present Opportunity to VAT/ Stakeholder(s) Obtain VAT/ Stakeholder(s) Acceptance of Opportunity (Sign-Off) Prepare Initiative Packet (Analysis, Presentation, High-Level Implementation Plan)

Overview of Contracting Process

Phase II- Request for Information Identify vendor(s) to participate in RFI/ RFP Develop RFI/ RFP requirements & expectations Develop initial negotiation strategy Prepare for bidders conference Conduct bidders conference RFI/ RFP responses due from Vendors Phase III- Consensus Building Analyze RFI/ RFP responses Completed RFI/ RFP analyzed and reviewed (Contract Administrator/ VAT/ Stakeholder) Develop business snapshot for VAT/ Stakeholder(s) VAT/ Stakeholder(s) review of business snapshot Obtain VAT/ Stakeholder(s) acceptance (Sign-Off) Select vendor(s) to participate in next round of negotiations

Outline of Effective Contracting / Negotiation Strategy, contd

Overview of Contracting Process

Phase IV- Contract Execution Develop final negotiation strategy Establish leverage points and givebacks Engage selected vendor(s) in negotiation Share outcome with VAT / Stakeholder(s) Update leverage points and re-negotiate (if necessary) Finalize negotiation Select vendor Complete legal and financial documentation Submit contract/ proposal for approval and sign contract Develop conversion/ implementation Plan Obtain completed initiatives Stakeholder Acceptance (Sign-Off) Develop product education (vendor supported) (if necessary) Order new supplies/ convert (if necessary) Phase V- Ongoing Contract Maintenance and Key Performance Metrics Develop realization tracking methodology Track monthly realization (On-going monitoring)

Outline of Effective Contracting / Negotiation Strategy, contd

Overview of Contracting Process

Build an Effective Contracting/ Negotiation Strategy

Overview of Contracting Process

Benefits of Effective Contract Negotiations
Benefits of an effective contract negotiation strategy include: Reduced cost for quality products and services Improved vendor response Support use of fewer vendors for each type of supply product Increased contract compliance Enhanced availability of product utilization data Reduction in inventory levels Enhanced opportunities for clinical resource management Improved consolidation and standardization of products Improved supply logistics

Data Gathering and Analysis

Data gathering and analysis is the most critical element in preparing for a successful contract negotiation. The goal of data gathering and analysis is to be as prepared as the vendors. Key Elements to data gathering and analysis: Understand current environment (e.g. market share information) Include all vendor utilization Include all relevant products Appropriate data sources include: Master Item File Requesting data from the vendor Departmental logs Implant logs

A review of benchmark pricing provides an excellent comparison of current pricing and desired outcome of vendor negotiations. Sample sources for benchmarking include: Contacts at peer hospitals AHRMM AORN ECRI Outside professional services firm

Data Gathering and Analysis

Identification of Contract Opportunities: Obtain AP supplier files to identify high-dollar suppliers Conduct a contract Inventory and perform a gap analysis
Identify current agreements available Contact suppliers to determine if they have contract documents, and Identify those suppliers without agreements

Review current rates for high-dollar suppliers, compare rates to GPO, market/industry benchmarks or other sources, and identify rates above reasonable standards Identify contract opportunities based upon:
Suppliers without agreements in place that pose a high risk potential (liability, obligations, costs) Suppliers above market rates with significant cost savings potential and supplier agreements nearing expiration New market opportunity (e.g. new pricing, brand name drug moving to generic) Changes in manufacturer competition Specific requests for review

Data Gathering and Analysis

Prioritization of Contract Opportunities: Identified contract opportunities shall be prioritized for review using a number of criteria to gauge the benefit that will be provided when compared to the difficulty of the implementation of a contract (single-facility or system-wide) Categories Med/Surg, Rx, Capital, Service Agreements, etc. Clinical acceptability Ease of conversion Terms and conditions of contract IT capabilities
Compatibility with current IT systems

Current contract commitments Ability to work with primary distributor(s) Impact to Community
Environmental Diversity

Vendor Credentialing (e.g. Background checks, Bankruptcy, Medicare reimbursement, etc.)

Request for Information- Potential Vendors

Request for Information
A request for information for select vendors should include the following elements: Vendor expectations Anticipated decision criteria illustrated in decision matrix Required terms and conditions This type of data leverages the hospital to enhance its contract negotiations.

Request for Information- Potential Vendors

Vendor Expectations
Clear communication of expectations of vendors illustrates the Materials Management department is clear about what is required as it relates to the future supplier/ vendor relationship. Sample Expectations include, but are not limited to: Any fees or rebates collected as a result of purchases through the supplier/ vendor or GPO agreements will be identified by vendor and shared with the hospital. Based on those amounts, a percentage of the fees will be returned to the hospital in the form of quarterly payments Use of web-assisted programs will be at the discretion of the hospital and will not affect the ability to participate in programs provided by the vendor/ supplier or GPO The hospital will have the ability to appoint a representative to each of the clinical, medical and materials support/ advisory groups within the GPO organization

Request for Information- Potential Vendors

Vendor Expectations
Sample Expectations, continued: Utilization reports with recommendations to increase savings and optimize contracts Additional savings for further commitment to product standardization Ability to create custom contracts for large health systems Early access to new technologies (e.g. industry sponsored trials, input into product design) Contracts geared to physician practices Electronic catalogs Field service representatives assigned to member hospitals Clinical support in specialty areas to assist in implementation of available contracts and further assess needs (Pharmacy, Lab, Operating Room, Radiology) Accounts Payable review Charge master review Participation in benchmarking studies Membership conferences with education sessions

Request for Information- Potential Contract Administration Vendors

Decision Matrix
Business Case Decision Matrix
Product/Service: ____________________________________________ Vendor: ___________________________________________________ Distributor: ________________________________________________ Key Stakeholders: __________________________________________

Date: ____________________________________________________ Purpose : The Business Case Decision Matrix provides a template for presenting the business case for moving forward on contracts or processes. The Decision Matrix is a tool to quantitatively score key information that has been identified as important in the decision-making process of Initiatives. The Matrix provides a standardized, objective, and quantifiable approach with which to analyze contract, service or other opportunities within the system. Methodology: Please enter your rating in the corresponding "Rating" cell on the Decision Matrix. The Decision Criteria are rated on a scale of 1 to 5 as follows: 5 = Exceeds Criteria 4 = Meets Criteria 3 = Neither Meets/Does Not Meet Criteria (Neutral) 2 = Does Not Meet Criteria 1 = Definitely Does Not Meet Criteria These criteria will be used to guide prioritization; not all criteria are required for an opportunity to be pursued. Scoring must be adjusted accordingly. Decision Matrices should then be sent to the Contract Administration Group (as available) for compiling and analyzing the data.

Request for Information- Potential Vendors

Decision Matrix

Request for Information - Potential Vendors

Terms and Conditions
In order to provide a consistent contracting methodology, standardized contract language should be utilized in the negotiation of all purchasing agreements. The purpose is to provide structure and a standardized approach to contracting that assures strong cost management activities and protection of pricing once established. Sample standard terms and conditions may include: Termination clause without cause should be available based on 30 days written notice. Length of up to 90 to 120 days can be acceptable. Market Competitive Clause will be needed to protect hospital based on cost reductions identified in the market place. The clause allows the hospital to go back at any point during the term of the agreement to request cost reductions based on changes in the market place. Negotiated pricing should have a minimum term of one year. This is applicable to agreements outside of those negotiated by the GPO. The GPO should be encouraged to provide fixed multi year pricing.

Request for Information - Potential Vendors

Terms and Conditions
Sample standard terms and conditions, continued: Cost increases during the term of the agreement will not be accepted. Should a cost escalator be needed, it should be based on the CPI urban or CPI Medical which is available from the Federal Reserve. Language should be included in the agreement that commits the vendor to providing vendor resources short-term to implement product changes and or pricing. This should include funds to be utilized for education and in-services for affected staff. Payment terms should be included that provide a financial incentive to the hospital for early payment as the cost of money and cash flow allow. Common terms of 2/10 net thirty should be included. Another financial incentive for the hospital is terminology that allows for additional discounts of 1% to 2% based on utilizing EDI for order placement. For high cost products that change in technology on a frequent basis, a clause that protects the hospital from obsolescence of products is in the best interest of the hospital. Inventory should be set up contractually as a consignment product. The responsibility for the inventory will remain with the vendor, while the inventory amount and replacement process will be determined by the hospital.

Consensus Building with Key Stakeholders

Involving key stakeholders throughout the process of preparing for and conducting contract negotiations is a key distinction for gaining consensus and building an effective contracting strategy. Key stakeholders may include: CEO/COO CFO Physicians/ Clinicians Key Department Directors Plan to involve key stakeholders in the following: Reviewing results of data gathering Validating data Prioritizing options Preparing for and participating in vendor negotiations

Clinicians involvement in vendor negotiations can carry significant influence. We have found great success in presenting data to physicians to gain consensus on desired changes in vendors/ utilization. Clinicians have the necessary knowledge on required use of product and ability to change products as it will benefit the hospital.

Consensus Building with Key Stakeholders

As mentioned, illustrating data analysis effectively to ones audience is a key factor in being successful in building necessary consensus for vendor negotiations. Tailoring the message to match the audiences key interests promotes successful consensus building. Some keys to success to involving clinicians include: Open sharing of all data Fact driven presentation Education of clinicians regarding data Clarification of need for product evaluation Possibility for creative benefits to clinicians from reduce non-labor expense (e.g. cost savings available to department for other projects)

Contract Execution
As part of the completion of successful contract negotiations and contract execution, the following steps need to be considered: Clarification of value added services Required terms and conditions (as specified in RFI) Internal legal review Signature of contract by appropriate purchasing authority Communication with key stakeholders regarding results of contract negotiation Timely change of pricing in system (may require MMIS involvement)
Vendor Hospital

Ongoing Contract Management

Maintaining the results achieved in your successful contract negotiations requires ongoing contract management.

Key elements include: Realization schedule Contract management database (expiration date, terms, contracts are loaded within 5 days of execution) 832 price catalog updates Regular monitoring and tracking of key performance indicators (see next section)

Contract Administration Compliance Process

Monitoring and Tracking Tools : - Key Performance Indicator Reports - GPO Resources - Distributor WBC

Contract utilization measured against baseline

Continuous Compliance Monitoring & Tracking

Maintain contract requirements

(market share, expenditure or volume commitments)

Identify Variances: Regular review of contract compliance with vendors, GPO, and Corporate Proper corrective action taken if needed

Key Performance Metrics

Key aspects of a hospitals monitoring program to ensure sustainable results from contract negotiations include the use of several key performance metrics on a regular basis. These may include: Monthly dashboard GPO resources Distributors web-based consolidator (WBC) Quarterly business reviews Quarterly business reviews are driven by the vendor. For vendors with spend greater than $100,000, the vendor provides total purchases and suggested new opportunities to continue to streamline non-labor expenses. The goal of quarterly business reviews is to ensure: Ongoing accuracy of pricing Shared accountability with vendor for desired results

Key Performance Metrics

Suggested Global (high-level) Key Performance Indicators (KPIs)
Supply Cost as a % of Net Revenue Supply Expense as a % of Operating Expense Supply Cost per Adjusted Patient Day

Suggested Materials Management Key Performance Indicators (MMKPIs)

Quality Average $ amount per PO Average lines per PO # of PO lines EDI # of PO non-stock vs stock % of PO lines with invoice discrepancy Percent of invoices that match on first review Productivity # of PO per FTE $ Received Stock $ Received Non-Stock Dollar value of issues by supply location # of stock issues by location # of stock and patient issues per FTE (distribution) $ Volume by vendor % PO complete on first Receiving (exclusive of T deliveries) Fill rates (internal and external) Financial Inventory Turns (all inventory locations) Inventory Dollars per Occupied Bed Dollar value of items with days on hand (DOH) > 45 days

Roadblocks and Barriers

There are typical roadblocks and barriers that negatively impact a facility/systems efforts to conduct effective contract negotiations: No collaboration with stakeholders outside of Materials Management Materials Management operating in a vacuum Inaccurate data Limited understanding of hospitals overall strategy (e.g. improving margins) Lack of senior leadership support (e.g. CMO, CFO) Inadequate building of context for successful contract negotiations Lack of understanding regarding benefits of GPO contract versus local agreement

Questions

For Additional Information Contact:

Michael Darling michael.d.darling@us.pwc.com 314-422-2931 Lance Robinson lance.robinson@us.pwc.com 205-601-2748