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Outcomes-Based Contracting

Mike Langlois | Friday, April 2, 2021

Very early in my healthcare supply chain career, I reported to a very talented, but old-school purchasing director. His passion during his work-life was making a supplier representative dread having to meet with him. Joe was a great guy if you were on his side of the table, but he viewed anyone he negotiated contract pricing with as his “adversary.”

As a young buyer, I often used the threat of having to “bring Joe” into our negotiations as a way of getting to the price points that I was looking for.  Reps just did not want to meet with him.  Joe was an extremely tough negotiator, to say the least, and would revel in his accomplishments, including bringing these reps close to tears in many cases. I still have suppliers that he dealt with many years ago, ask me “how is Joe doing” as they indicate that he was the most difficult negotiator they had ever dealt with. 

It took me a while to move from this style of negotiating to a more collaborative method of getting to the pricing I needed. I found out quickly that sincere and honest competition was as effective as “a threat of losing the business” that Joe used often. Negotiating internally to have our service-line leaders consider the use of multiple brands of products often leads to a truly competitive bidding war amongst those suppliers.

Frequently, this approach led to the pricing we were hoping to achieve with a specific product or service line. Supplier reps did not dread negotiating with me, but they knew they did risk losing the business if they did not offer competitive pricing.  The key here was the successful internal negotiations rather than negotiations with the supplier reps.

Although this competitive bidding process has been prevalent for many years now, especially in the world of GPOs, Outcomes-Based Contracting has received much more attention in recent years.  As we have escalated the value of “Total Delivered Cost” for products and services, including the price of the product, delivery costs, payment terms, return policies, and disposable costs, we have seen a shift toward the evaluation of effectiveness. 

My first exposure to this type of outcome-based contracting was many years ago with a new silicone-coated catheter that was higher priced than the standard catheter but promised to reduce hospital-acquired Unitary Tract Infections (UTIs). As a result of using these silicone-coated catheters, our supply cost would go up, however, our cost to manage UTIs would offset this increase and provide better patient care by eliminating the UTIs.  After involving infection control in this conversation, it was determined that we did not have a hospital-acquired UTI problem. However, at the time, I thought the concept was novel.

Fast forward to today, many efforts, in conjunction with IDNs and suppliers, are trying to negotiate for products and services based on clinical outcomes.  Many registries have been set up to track outcomes of certain clinical protocols and supply utilization, separately and together.  Our focus now is not necessary on the lowest priced product (although healthcare supply chain departments are still very much evaluated on total supply and purchased services spend) but on the impact of total cost and clinical outcomes. Does a product lead to lower lengths of stay, lower mortality, the need for less clinical intervention, less patient pain, less pharmaceutical use, etc.?

This has led to the need for more clinical expertise during the contracting process, whether it be hiring clinicians into the contracting department, utilizing GPO clinicians and data, or implementing a clinician lead Value Analysis program.  Whatever process is used, the focus on outcomes now has to be prioritized during the contracting process. 

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