Vendor Relations
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| Once you and a vendor have agreed upon a price for a certain product or service, there’s still much that needs to be done to ensure the contract is financially viable for your hospital. When assuming terms and conditions are a “boilerplate” section of the contract, you may be missing critical information that can be costly. There are five key areas that materials managers should consider when negotiating contracts: payment terms; term and termination; confidentiality; jurisdiction/enforcement; and duties, covenants and obligations. |
The success and performance of a strong, valuable relationship with a vendor is dependent on more than just the negotiated price and the duration of a contract. The quality of an entire contract is critical to ensure that both parties experience win-win results. A mutually beneficial contract will provide a hospital with value through efficient savings and benefits. And, a vendor receives value by making an overall profit. A contract is the foundation for defining how a hospital-vendor relationship will work, including the duties and obligations of each party. Too often, organizations overlook the terms and conditions of contracts, which can have a significant impact on a contract’s effect on an organization.
To ensure that an organization achieves the desired contract advantages, executives must develop an appreciation for the importance of terms and conditions—often derisively named the “boilerplate” or “fine print” in agreements—and how they can affect their organization. Frequently, executives view the terms and conditions as boilerplate and only pay attention to price, quality and service. However, the terms and conditions may contain obligations and restrictions that can be costly if they are not caught and amended. While there are some areas in the terms and conditions that are benign, there are five key areas that require special scrutiny to avoid undesirable surprises such as payment terms, term/termination, confidentiality, jurisdiction and cov-enants/duties.
Payment terms
Generally, the primary component of contracts is focused around the final price. However, once a price is agreed upon, the work is not done. How you pay your vendors is often as important as what you pay them. Review the following areas within payment terms to avoid unpleasant surprises and unnecessary spending:
Payment-in-advance or arrears clauses. Oftentimes, contracts will require payment in advance with an adjustment on the back end to settle any ‘over’ or ‘under’ charges, particularly within service contracts and some pharmaceutical contracts. The most preferred payment option is paying after the fact based on actual use. However, you may need to negotiate this term. When a vendor requests a full year’s payment up front, you should negotiate monthly payments based on use to avoid large, lump-sum outflows of cash.
Late charges or finance fees. Late fees and finance charges with hospital contracts can make standard consumer credit cards seem like a bargain. Be aware that a tactic some vendors use to pick up extra fees is mailing out invoices very close to the due date.
This almost always causes a hospital to pay late, thereby incurring late fees. Here is an opportunity to negotiate fees to a reasonable level, both in dollars, or percentages, as well as the number of days allowed before payment is due.
Inflator clauses. Vendors often will add automatic increases in their costs within their contracts. In some cases, where the vendor’s cost of providing the product or service may increase each year, this may be a reasonable practice, but in other cases, it may not. Your contract reviewer must determine if the rate of increase is acceptable and reasonable or if any increase is acceptable.
Invoice acceptance. To protect vendors against their own errors, acceptance language often is added to their contracts. Acceptance clauses state that if a hospital does not protest invoice accuracy within a given period, usually 30 days, the invoice is conclusively presumed to be correct.
This could mean that if a vendor routinely overcharges your hospital and the hospital does not discover this until months, or years after the fact, there would be no recourse to collect overpayments.
Term and termination
Although the start and end dates are the primary components of term and termination, hidden clauses often bring unpleasant surprises. The ultimate goal of vendors is to keep your business and maintain a continuous revenue stream. By creating expensive barriers to termination, vendors can achieve their best interest goals and leave you with undesirable options for termination. Pay close attention to two primary areas:
Evergreen clauses. Some contracts contain ‘evergreen clauses,’ which are commitments for a hospital to continue with an existing contract in perpetuity if the hospital does not convey its intent to terminate the contract, in writing, within a certain period of time. These notification requirements are as long as nine months in advance, and are tied to a specific date. If a hospital misses the deadline, it is obligated for another term of service. Vendors count on hospitals missing these deadlines.
Early termination fees. Another danger spot is early termination fees. Early termination clauses are written so that even if a contract has an ‘out clause’ of 90 or 120 days, the hospital must pay egregious termination fees. Often the two clauses are placed in separate sections of the terms and conditions. Generally, the 90-day out clause appears first, leaving an organization with a false sense of being able to break the agreement without penalty. Early termination fees may be warranted if a vendor must invest significantly to fulfill their contractual obligations, either through the provision of equipment, expensive software or the purchase of another major asset. The fees, however, should be reduced over time or eliminated as the value of the asset(s) decreases. If ‘set up’ costs to the vendor are absent, then termination fees definitely should be eliminated.
Confidentiality
A recent trend has been for vendors to place extremely restrictive confidentiality clauses in their terms and conditions, and then aggressively litigate when those clauses are violated.
For example, a recent court case was brought about by an implant maker against a consulting firm on the confidentiality clause in their terms and conditions. The presiding judge ruled that the wording of the clause precluded the hospital from sharing prices with the defendant consulting firm and precluded the hospital from sharing costs with the implant-ing surgeon and patients.
It’s important to pay attention to details within confidentiality clauses. Many vendors create such onerous confidentiality restrictions that they can tie executives’ hands when trying to conduct internal business.
To avoid future problems, the contract reviewer should take the following actions:
- Determine the privacy components of the offered pricing structure. Vendors set forth clauses that prevent clients from discovering price structures that other customers, consultants and pricing services are paying. That way, the prospective client has no benchmarks for comparative analyses on the offered pricing structure. You have the ability to negotiate how much information will be shared in the contract.
- Ensure the language is not so restrictive that it keeps individuals or outside entities from performing their obligations because they require the contract information. This will prevent delays in services and potential legal battles.
- Make certain that the confidentiality language is a two-way street, so that the vendor is bound to keep hospital information confidential as well.
Jurisdiction/enforcement
A common practice for vendors involves leaving their contract mute for which state has jurisdiction over any contract dispute.
That way, if a vendor files suit, it can do so in its home state, thus forcing the hospital to spend time and legal fees arguing over which state has jurisdiction.
The best precautionary method is to ensure that a contract clearly states that your hospital’s home state will have jurisdiction.
And, in the instance of a federal case, the federal courts located in the hospital’s home state will have jurisdiction.
Duties, covenants and obligations
Duties, covenants and obligations are the broadest and most problematic areas. Many contracts lay out the obligations of each party, but they are often written so broadly and without clear definitions that an organization can unwittingly obligate itself to something it may not be able to deliver.
Suggested obligations by a vender should be reviewed carefully and subjected to ‘What if?’ scenarios to understand the implications.
Also, an organization needs to remove any ambiguities or wording so broad that a whole range of obligations could be interpreted as applicable to the hospital.
As an example, one recently reviewed service contract required a hospital to provide its monthly financial reports to the vendor.
The agreement also included the following provision: ‘Client covenants that financial and other information provided to (vendor) is accurate in all material respects. The parties shall negotiate a correction to compensation for any material variance found which shall be retroactive to the effective date.’
The clause did not define what was meant by ‘material variance’ nor did it tie the variance to any impact on the vendor contract. If the hospital wrote down the value of its supply inventories by $100,000, would that constitute a “material variance” and would it give the vendor the right to renegotiate its contract?
Nothing in the contract language would say the vendor couldn’t. An organization needs to ensure that all elements of the obligation are defined and relevant to the contract. This way, an organization can revise the contract to limit its obligations to only those duties it is comfortable assuming.
Knowing what to look for in these five key areas will save your hospital money, effort and headaches.
Michael G. Cadwell, is the senior vice president at Wellspring Partners LTD, Chicago.
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