| QUICK TAKE > > > |
| Contracts are the crux of a materials manager’s job. Vendors and hospitals alike use them to protect their interests. But contracts are only advantageous to hospitals when the materials manager understands contractual language and/or knows when to seek legal counsel. Regardless of whether your legal counsel is in-house or outsourced, it is important to establish and maintain a solid working relationship. Otherwise, contracts can become mired in red tape or the language essential to success could be incorrect or insufficient. |
Even though he has successfully shepherded a variety of favorable purchasing contracts for his institution, a materials manager at a medium-sized hospital says he feels increasingly frustrated with his job.
The problem, he says, is his own legal department. Legal review is required of all contracts that bind the hospital in any way—even contracts for GPO-negotiated items and agreements for a 30-day trial period, with no money involved.
It takes from two to six months for legal review of a contract because the legal department has so many contracts and “they’re checking for all sorts of things,” says the materials manager, who asked not to be identified for fear that publicity would strain relations between the two departments.
On the other hand, 225-bed Riverside Medical Center, Kankakee, Ill., has no in-house attorney and David Legris, director of materials management, performs his own legal review for all but a small number of contracts that are sent to outside lawyers.
Legris likes it that way. He gets help from the hospital’s risk management department and “in most cases, I don’t think a lawyer would add a lot of value to the process,” he says. But he concedes that he gets nervous sometimes. “In this job, you spend a lot of time reading the fine print,” he says. “It becomes a habit.”
In many cases, hospitals have either too much or too little legal review, both of which present problems for the organization, says David S. Kaczmarek, vice president at the McFaul & Lyons Group, Derry, N.H., who advises on materials management contracts. He says lack of an in-house counsel often results in too little legal review, and hospitals may discourage the use of outside attorneys because they have to be paid each time. Materials managers at these organizations “need to know their limitations,” he says. “You have to develop a confidence level that when you get above your head with the legal language, you go to a lawyer for help.”
On the other hand, when rules require that even small contracts have to be sent to the legal department, “they are going to find a lot of things that need to be changed, and a lot of them are going to be minor,” Kaczmarek says. Intensive legal review “at best creates delays and at worst can literally scuttle contracts.” For example, if a contract review drags on long enough, the supplier may revise the originally agreed-upon price, he says.
Kaczmarek wants hospitals to find a happy medium for contract review. He thinks that only certain contracts, such as for big-ticket items, should have an attorney’s scrutiny, and it should be up to materials management to decide if they need help on the rest. For this arrangement to work, he says materials managers will need to sign up for classes in purchasing law.
The materials manager who asked not to be identified thinks hospital executives are anxious that materials managers may be allowing unwanted liabilities to slip into contracts. But he thinks setting up strict rules on legal review will backfire because “it is stifling the creativity of materials management.”
For example, to get bigger savings for the organization, he has been switching vendors and negotiating more contracts. But this means that legal has more unfamiliar contracts to ponder and more opportunities to get out its red ink pen. The result of his good work, he says, is even longer delays.
Recently, the materials manager’s legal department initially approved a consignment agreement that he had drafted. It was submitted to the vendors and they made no changes, but when it came back, his legal department read the agreement, which they had previously approved, and asked for more changes. “They wanted to change our own agreement,” he says.
In another case, it took legal five months to approve an office supply contract delivering $14,500 a month in savings, he says. The savings would eventually be realized, but the delay caused budget shortfalls that wreaked havoc on hospital accounts, he says.
Common law
It is possible, however, to have a productive, mutually beneficial relationship with the legal department, such as what appears to exist at NCH Healthcare System, Naples, Fla., a two-hospital network.
Mary Jo Felix, the director of materials management at NCH, says the general counsel, Kevin Cooper, does not place unreasonable requirements about what should be reviewed and allows her easy access to him when she needs it.
“Materials managers are not lawyers,” she says. “You need an attorney with an open door, someone with whom you can collaborate. I’m very lucky. Rather than just saying, ‘Send me the contract,’ Kevin says, ‘Why don’t you come down to my office and let’s discuss it.’”
The legal perspective requires looking at the contract in a new way, she says. “What’s the expectation and do the words back it up?” she says. For example, the vendor makes a promise that the equipment will work a certain percentage of the time. “How do you turn that into contract language?” she says. “What sort of penalty do they have? How do you measure it?”
Cooper values the relationship, too; and his open door makes his job easier as well. “If she sees something that is a potential problem, she picks up the phone and calls me,” he says. “It’s very good and very efficient.”
Felix says about 20 percent of all of her contracts and price proposals are reviewed by Cooper and two to three of her contracts are on his desk at any one time.
The organization tightened its contract review requirement seven years ago, before Felix came on, when an unwanted contractual obligation was overlooked and had serious financial consequences for the hospital. Now all contracts with certain liability elements must be reviewed by Cooper.
“He may not read every word, but he has to be confident that the risk has been controlled,” Felix says. For example, the rules require that a high-value service contract requires review even though it lasts just one year and can be easily exited, but in this case, the review process is not overwhelming. “I might point out some concerns and Kevin will give it a fairly brief overview,” Felix says.
On the other hand, Felix says she may want to spend a lot of time with Cooper on a contract that is not required for review but has some complex or unusual provisions. For example, if a vendor has promised a certain return on investment in the first year, the hospital may want to find some way to measure the ROI and create some penalty in the contract if the hospital does not reach it, she says.
In many hours of talks over the years, Felix and Cooper have devised a contract checklist that includes standard language for all contracts made by NCH. For example, the hospital’s acceptance of equipment comes only after the first five consecutive billable patients.
But she warns that just ticking off a checklist won’t reveal all potential problems. “It is very important to recognize that this is a dynamic process,” she says. “We ask, ‘What did not go right in the past?’ Kevin often comments that we have gotten smarter over time and have adapted and adjusted our standards. It’s a learning experience.”
Felix begins discussing some contracts with Cooper even before a vendor is chosen, so that she can get an idea about Cooper’s concerns early on. Then, when she reads the vendor’s proposed contract and identifies some issues that she wants to review with Cooper, she e-mails him a PDF of the contract.
In her e-mail message to Cooper, she itemizes each contract heading she wants him to review and what she wants to ask him. Felix says Cooper values her promptings. “A contract can be 120 pages long,” she says. “You can’t expect the legal department to pick out everything that concerns you. It’s up to you.”
The e-mail message also asks Cooper for an appointment to review the contract with him face-to-face in the following week, to give him time to digest it.
When they meet, she says, Cooper may decide that he needs to talk directly with the vendor’s attorney and they will arrange a conference call. In these calls, “Kevin and I work together,” Felix says. “We’ll look at each other to see if the other has an objection.”
Legal reach
Felix says she and Cooper fell into their working relationship in the first contract they worked on, but others may have to put a little effort into creating a good relationship with the legal department.
Marcia L. Steiner, purchasing manager at three-hospital Carondelet Health Network, Tucson, Ariz., says she makes a point of cultivating her ties with the legal department.
The fact that her office is 15 miles away from her legal department does not get in the way of maintaining a relationship. “I usually communicate with them by notes or e-mail, she says. “But when I’m in their building for another meeting, I might drop in and say hello.” She says she might ask if she can bring them lunch or something to drink.
“When you first meet with legal, there might be a number of territorial issues,” she says. “But they should always be considered a partner, not an adversary or a red-tape group of people. They should be used as a legal reference and viewed as trusted partners to be engaged.”
She says materials management can cause delays by forgetting to attach documentation to a contract—such as the pricing exhibit or the signature of the CEO, which is required at Carondelet for all contracts worth more than $50,000—before they are sent to legal.
Over the years, Steiner has become an authority on legal issues, serving on a committee for Carondelet’s parent, Ascension Health, St. Louis, to develop standard terms and conditions in contracts for the whole organization.
By the book
Kaczmarek says formal training in contract law can help improve relations with the legal department.
Materials managers with a firm understanding of the law can demonstrate that they know what they are doing and do not need close supervision, he says.
“To the extent that you can become familiar and learned with contract law, the easier it will be to convince these people that some other process is going to be better for the organization,” he says. If materials managers can develop a strong knowledge of the legal needs, “then only the most complex, high-dollar contracts have to get elevated up to legal.”
Some people say the legal aspects of purchasing can be picked up on the job, but Kaczmarek counsels, “On-the-job training is not enough. You don’t learn these things on the job.” While materials managers can become acquainted with contractual clauses on the job, formal classes teach them the theory behind those clauses.
It is easy to find a good course at a local business school or community college because any general course in purchasing law will suffice, Kaczmarek says. The legal issues with contracts basically are the same across industries. The classes are often part of a larger degree program, he says.
In addition, the Association for Healthcare Resource & Materials Management, Chicago, often offers a presentation on contract law at its annual conference.
Some hospital legal departments organize sessions to present their needs to materials management and other staff. For example, Steiner says she and other managers and directors recently attended such a presentation. She believes that even small hospitals should organize such classes—bringing in outside consultants to make presentations, if they need to.
Steiner says courses are necessary because they are facing off against vendors’ representatives who are given a great deal of training in contract law.
“It’s a very valuable investment,” she says.
Leigh Page is a freelance writer based in Chicago.
To respond to this article, please click here.
