May 14

3 New Rules For Performance-Based Hospital Supply Contracting That Work


Our research shows that 26% to 46% of all supply chain contracts that a healthcare organization signs don’t produce the savings that were originally projected. One obvious  reason for this low contract performance is that your suppliers have arbitrarily estimated your contract savings. This situation can only be corrected, in our opinion, with performance-based contracts ( i.e., a savings based on preset measurements) that guarantee the savings to your healthcare organization.  However, three new rules of performance-based contracting  (PBC) shown below need to be adopted for these PBCs to work:


  1. Suppliers need the right data to assess their real-world contract performance: Both the healthcare provider and supplier need to share their product, service or technologies contract data on a monthly basis to measure its performance. This can be accomplished by the supplier providing the hospital, system or IDN with a monthly utilization report on their contract(s) performance based on agreed upon preset measurements.


  1. Suppliers need defined parameters or measurement for their success: For example,  if you signed a new IV set contract, the success measurement could be $4.74 per patient day vs. your current  cost $5.65 per patient day, or a savings of $0.91 per patient day or 16% improvement overall.  These are the utilization statistics that would be reported on a monthly basis.


  1. Healthcare providers should receive their rebates on a quarterly basis: If your supplier isn’t meeting their guarantee on a quarterly basis, the healthcare provider should receive rebates based on the success measurements written into your performance-based contracts.  The reason for a formal quarterly review is that it provides a time for both parties to the contract to revisit the contract and make mid-course corrections if the contract isn’t performing as promised.


We predict that performance-based contracts will become a supply chain best practice in a few years, since arbitrary promises aren’t good enough in the value-based contracting environment that your healthcare organization is entering. Only contracts that can be measured for their performance will be accepted by supply chain professionals over the next decade as they transform the way they do business by measuring everything that can be measured.



If you are looking for innovative VA and Utilization Tools, please sign up for  a no cost no obligation demonstration to see how you can take your program to a whole new level.


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