When it comes to negotiating physician preference items there is an ongoing issue that is only becoming more challenging. It has to do with the way physician preference items are being negotiated. The issue stems from negotiating contract terms that are heavily dependent on achieving specific savings through spending commitments at specific times throughout the year. Although many hospital negotiators would prefer savings “up front” it is unlikely that they can achieve the most competitive pricing without an incentive tied to performance. This is especially true today as medical device firms implement incentive-based savings to try to reduce the exposure associated with declining average selling prices (ASP). The issues surrounding these types of agreements have less to do with the agreements themselves and more to do with the hospitals’ inability to properly track and maintain these agreements using just spreadsheets and outdated tools.
To help illustrate this point we will use an example of a five-hospital system trying to maintain rebate compliance for just one specialty area, among several competing medical device companies. The challenge begins when each company may have a different rebate timeline. Some of medical device companies may structure a quarterly rebate program, while others may make it semi-annual. In any scenario, you need to be able to track- in real-time – the contract performance for each facility and each medical device company, as well as their products. The time and effort it takes to pull data and run analyses for all the variables involved…in a word, daunting.
Most hospitals today are engaged in multiple vendor rebate programs. Some of the rebate programs can be based on tiered pricing, market share commitment, spend thresholds within a specialty (ex. orthopedics), or across several different specialties. Often, the requirements to benefit from an incentive depend on timing and proper spend/utilization tracking to ensure contract compliance. Proper rebate management requires a well-organized approach that can be near impossible for many hospitals to maintain. One of the main reasons for this is the absence of real-time tracking mechanisms that can correctly compile and analyze complex data sets.
In order to optimize overall savings offered by rebates, there must be automated tracking and integration from both the enterprise resource planning software (ERP) and electronic medical record (EMR). Yet a vast majority of hospitals use basic Excel spreadsheets to ballpark what they “think” their rebate yield should be, leaving it up to the issuing vendor to ensure compliance forms are sent in and a rebate check is actually received. This improvised tracking process puts hospitals in a losing position for several reasons.
First, if hospitals are using more than one vendor for a given specialty area and are running multiple rebates within a specialty – tracking performance becomes almost impossibly burdensome. And because most hospitals can’t properly track all of these moving parts in real-time, the rebate losses can cost hospitals hundreds of thousands or even millions of dollars every year.
Second, rebates and purchases are time-sensitive. If hospitals do not have real-time procedural tracking mechanisms, it is almost impossible to know when rebates are due and what is required to optimize each facility’s purchasing power. This is especially critical when hospitals are part of a larger network and system. When contracts are negotiated across a network, hospital systems must be able to look across multiple facilities and review performance to determine when and if rebate tiers will be achieved.
Third, the ability to track and optimize rebates requires proactive coordination with clinical teams to alert them of potential incentives to help ensure the hospital’s financial goals are achieved. In many situations, supply chain management (SCM) lacks the ability to access real-time or even procedural data and therefore cannot provide service line leaders with information on how to optimize the device usage for rebate attainment. Additionally, many SCM leaders are faced with communication challenges with service line leaders and physicians.
Fourth, even when a rebate is achieved and paperwork is sent to the vendor, hospitals have no time or ability to ensure the results are correct and anticipated savings are achieved. This also puts hospitals in a challenging position with respect to Medicare compliance, thereby creating potentially significant legal exposure.
Finally, without proper rebate reconciliation, future vendor negotiations become more challenging since hospitals cannot accurately determine which vendor is providing the greatest overall value to the organization (i.e. net pricing). Simply put, hospitals struggle with identifying which vendor is providing them with the most clinically relevant products at the best overall price during any given time. Does this resonate? You’re not alone. We’ve been helping hospitals for years get through this. feel free to get in touch.
Cost containment has proven an elusive target in the current era of healthcare reform. Numerous opaque forces in the medical device marketplace have in large part hindered recent health care reform initiatives. The forces at play represent a range of often conflicting interests, including: the absence of alignment between physicians and hospital administrators, rapidly changing technology, asymmetrical information, limited price transparency and physician utilization habits.
Due to the issues outlined above, many health care systems attempt different negotiation tactics to initiate cost savings programs. Some may focus on aggregating costs and driving single or dual supplier medical device agreements, while others may focus on threshold pricing or ultimatums to bring costs under control. Ultimatums inadvertently create defensive negotiation orientations, decreasing the opportunity to drive additional incentives and cost reduction strategies.
Without serious consideration, these types of transactional negotiation tactics have the potential to stymie competition, reduce physician choice and create even more entrenched supplier relationships that will ultimately lead to higher overall costs in the long-run. Subsequently, manufacturers can exploit these dynamics to their advantage.