4 Simple Steps to Improved Supplier Contracting, Negotiations and Costs at Your ASC

In a Feb. 23 webinar titled "4 Simple Steps to Improved Supplier Contracting, Negotiations and Costs at Your ASC," Andy Davis, director of development for S4, and Chris Klassen, vice president of supply chain for Surgical Care Affiliates and S4, discussed contract terms every surgery center leader should understand and four steps to achieving cost savings in supplier negotiations.

S4 was developed and designed to help independent ASCs of various sizes save on supplies and services. Through S4, non-SCA-affiliated surgery centers can access SCA supply chain to improve pricing on facility supplies and vital services, such as medical waste, linen, anesthetic gas, and others. S4 also provides competitive pricing with an easy-to-use web-based purchasing system and it is designed to improve surgery centers' competitive stance in their marketplace.

Important contract terms

Mr. Klassen began the presentation by explaining that cost control for ASC supplies is important because supplies account for around 30 percent of an ASC's cost structure. On average, SCA centers spend $1.6 million per year on supplies and services — a benchmark that Mr. Klassen has seen echoed throughout the industry. To help ASC administrators understand what they're getting into when they sign contracts with suppliers, Mr. Klassen gave an overview of various terms commonly seen in supplier contracts.

Breach —
Failure of a party to perform a contract obligation.
Damages —
Details within the contract that describe whether parties will compensate each other for loss, consequence of breach or expense of breach
Term — Duration of the contract; the term includes the possibility for automatic renewal, which lets surgery centers lock in price without re-negotiation for multiple years
Price — Price or discount for agreement term; language about price might detail whether prices will increase every year or remain fixed
Payment —
Payment requirements, including stipulations that payments to the supplier will incur a late fee if not paid on time
Freight — Defines who is responsible for goods transfer and who is liable for freight
Inventory consignment — Supplier's agreement to place inventory they own in your center; includes details about how expired/obsolete products are managed, what happens when supplier inventory balancing occurs, liability for lost/damaged/opened products and ownership of physical inventory
Limitation of liability — Limits liability of either party to each other, and should be based on the "worst case scenario" for the surgery center

Mr. Davis continued the presentation by discussing four steps that should be part of any ASC supplier contract negotiation.

1. Identify savings opportunities. Before you move into negotiations with your supplier, you need to understand the ripest areas for cost savings in your ASC. Mr. Klassen notes that many surgery centers use group purchasing organizations for their contracting. SCA and s4 contract direct with manufacturers and utilizes a GPO.  He says it's common practice to perform GPO comparisons and recommends that surgery center leaders consider the other services GPOs offer in addition to pricing. Certain GPO contracts also include data services, reimbursement assistance and other services.

In order to know where you can save money, you need to know where you spend money, Mr. Klassen says. "Don't boil the ocean," he says. "Look at the items you're buying the most and where you're spending the most money. This is your biggest opportunity to offset price increases over time as well as enjoy savings." He says surgery center leaders should gather and document a 6-month purchase history, using last price paid and organizing a matrix that includes manufacturer, part number, description, UOM, quantity per UOM, UOM price, quantity ordered, total and category.

Mr. Klassen says surgery centers should identify highest spend and savings opportunities, particularly for supplies that are not contracted with suppliers or are fragmented between multiple suppliers. "If you're buying drapes and gowns from four different suppliers, I might want to consider pulling that spend into one supplier," he says. He says supplier consolidation should be a priority for all your high-spend items. "Suppliers really want your market share," he says. "If you can demonstrate to a supplier that you can give more business to them and that they can enjoy a larger share of your supplies expense, they will work with you on better discounts on your supplies."

Mr. Klassen says there are several benefits to consolidation: lower price, less storage space needed, and reduced confusion for nursing staff and improved purchasing efficiency. He recommends that ASC leaders create a comparison template to compare competitive bids from different suppliers. To do this, pull six months worth of purchase history and organize by category, then create areas to input information and quotes from other suppliers. Turn that into an excel document and delete the "price paid" section before sending to suppliers — you don't want to share pricing information among competitors. Your suppliers can use this template to fill in their quotes based on your volume.

2. Cost savings analytics. Cost is not just about the purchase price of a particular supply, Mr. Klassen says. There are many other factors that affect total cost, including repair costs, disposables cost, warranty cost, maintenance expense and freight. As you consider analytics, consider all costs that affect your total cost.

Mr. Klassen recommends breaking down costs from your current supplier and then analyzing costs from several competitors. Break down costs into purchase price, repair costs, disposable costs, etc., and compare each supplier to see where costs are driven up for each one. If you can acquire competitive pricing information from several different suppliers, you may be able to convince your original supplier to offer you a lower cost. Mr. Klassen says in SCA's experience, capital can account for surprisingly little of total cost — in his example, capital ended up totaling 27 percent of the total three-year cost, and savings on disposables and services costs actually paid for half the capital.

3. Negotiation planning and strategy.
Mr. Klassen recommends allowing 60-90 days for the sourcing process, since your team and supplier representatives are busy. He recommends engaging surgeons and physicians early to determine if preferences exist for certain supplies. "The best opportunity to negotiate an effective contract is while the supplier is trying to earn your business," he says. Start talking immediately about terms and conditions that are desirable to you and make them important to the negotiation.

He recommends creating a "negotiation plan" for the ASC, or a document that lists the objectives for negotiation. This might include cost targets you want to hit, the length of commitment from the supplier, rebates, payment terms, freight terms and other objectives. For each objective, outline a "best", "better" and "acceptable" scenario so that you know what you're aiming for and know the minimum offer you will accept.

He says collaboration and buy-in from your surgery center team is critical when negotiating a new contract. Surgeons and team members should be involved in product evaluations and should understand your savings objectives and negotiation plan. They should be informed about the timeline of the process and should be included in celebration if you achieve your desired cost savings.

4. Decision/contract award.
Mr. Klassen says the decision about a supply often comes down to product trials. He says when trialing products, concentrate on the supplies that are used most frequently and will cause the most problems if you select an inferior product. As you move through the trial, provide staff members with a sheet to mark off whether the item is superior, acceptable or unacceptable. Also include the question, "Would you convert to this product?" for each supply.

When you receive feedback from your product trials, don't hesitate to share it with your suppliers. "If you communicate as transparently as possible, [suppliers] can be more competitive in winning your business," Mr. Klassen says. "We recommend very candid feedback with suppliers." However, remember not to disclose pricing information among different suppliers.

Once you have gone through product trials, update your negotiation plan and comparison template and make a final decision. Once that's finished, your only task is to finalize contract terms and award the business.

rview of S4
Mr. Davis shared several features and benefits of the S4 program. According to Mr. Davis, SCA has an aggregate of greater than $200 million in surgical spend, and S4 clients benefit from that volume of spend by saving money on supplies and services. The company has 24 supply chain experts on the team dedicated to reducing costs for our partners. "The idea here is that this is a partnership," Mr. Davis says. "We're in this together to solve some of these problems."
S4 uses a web-based system called SmartSystem that lets ASC staff members save time by using electronic ordering and templates for reoccurring orders. According to Mr. Davis, the system has an "Amazon.com feel to it," allowing users to place items in a shopping cart and review ordered items. Users can also compare prices on different supplies. The system also provides robust monthly reporting that shows order compliance and provides continued savings opportunities. When using SmartSystem, ASCs only receive one consolidated invoice rather than having to manage various invoices independently.

According to Mr. Davis, S4 can put together a value analysis savings report and provide a demo of SmartSystem for interested facilities.

Learn more about Surgical Care Affiliates and S4.

Download a copy of the presentation here.

Download an audio recording of the presentation here.

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