How to Ensure Vendor Compliance at your Health System

Ensuring vendor compliance at your health system may seem like a daunting, impossible task that never ends. You’re not wrong. Managing thousands of vendors and holding them accountable is complex and requires attention to detail and a timely dedication your Procurement and Accounts Payable (AP) staff may not have.

The results of not doing so can be catastrophic to your health system’s bottom line, costing the healthcare industry $1.7B* annually. To battle this, your health system must create a comprehensive vendor compliance management policy and process.

What to Consider in your Vendor Compliance Process

Bring AP and Supply Chain Departments (Sourcing, Purchasing, Shipping & Receiving, etc.) together to design your compliance policy and process. Also, consider bringing in a third party that brings industry best practices and collective intelligence of experiences and issues with vendors.

Information to Include in your Vendor Compliance Policy

• Health system/hospital goals of delivering patient care alignment
• Organization’s customer service standards and best practices
• Contact information for all departments involved such as AP, Procurement, Receiving, Materials Management, etc.
• Compliance with procure to pay (P2P) systems such as your ERP system, ASN, purchasing systems, GHX, etc.
• Item pricing and contract matching
• Product handling guidelines such as checking incoming shipments for the correct product and quality
• Labeling policies
• Information packaging with incoming shipments for all departments involved
• Returns procedures and credit handling
• Non-compliance fines such as:
• Incorrect PO numbers
• Incorrect labels or label placement
• Incomplete packing list, incorrect placement of packing list, or no packing list
• Unapproved product substitution
• Late delivery (with or without associated backorders)
• Out-of-spec packaging
• Early shipment without approval
• Damaged products (not caused by carrier)

Considerations to Ensure Vendor Compliance at your Health System

1. Think Strategy

As mentioned above, the policy should have input from all departments throughout the P2P process including AP and Supply Chain. With these departments represented, assign roles and responsibilities ensuring clear communication on tasks and the end goal.

Perspectives from end users can also be helpful. Review the new policy with select end-users, such as Clinical Departments, HR, Facilities, and Marketing before finalizing and implementing suggestions.

2. Focus on the most Compromised Areas of Non-compliance

For hospitals and health systems, there are four main areas that vendors are repeat offenders on non-compliance whether intentional or not.

Contract Duration for Price Protection

Price protection should translate to consistent pricing for a predetermined period of time, often a minimum of one year. However, vendors often charge for items or services at their normal rates forgoing the agreed-upon price and repeatedly get away with it.

For example, during one of TAG’s Discovery Reviews, a health system had a contract in place for dialysis products guaranteeing their pricing for two years. However, after the one-year mark, the prices increased as a result of a data entry error on the health system’s side – the contract was entered into their ERP system as a one-year contract by mistake – costing nearly $250,000 in overpayments.

Once TAG, identified the error in the health system, the vendor did not want to comply or refund the overpayments. Eventually, the vendor fell into compliance with the threat of contract cancellation moving forward. While mistakes will never be avoided, the vendor should be held accountable for monitoring contracts for pricing building trust between the two parties.

Freight Handling

Erroneous freight charges can add up quickly, and vendors often use this area to increase their revenue at the expense of your hospital. Freight charges are rarely negotiated in contracts with health systems allowing for vendors to “pad their pockets.”

For example, a health system client of TAG’s was charged freight for an order of IV pumps and solutions on a GPO contract. The contract stated that freight would not be charged for hospitals at tiers 3 and 4. The hospital received the correct tiered pricing, but the freight costs were charged in excess of $500,000 over the course of two years. TAG identified the erroneous charges during a specialty Item Pricing Recovery Audit and worked with the GPO vendor to refund the charges.

TAG TIP: When possible, your organization should push for freight to be paid for by the vendor and do an annual audit to ensure all charges from the past year were charged on contract terms.

Prompt Pay Discount Compliance

Vendors often overlook contracted prompt pay discounts and invoices based on the normal contracted rates. Since contracts are typically negotiated at the item or department level and not at the vendor level, it is easy for prompt pay discounts to get overlooked.

For example, a TAG health system client negotiated cash discount terms for diagnostic products of 4% for paying in 30 days or less. The terms were not noted on the invoices and AP was not made aware of the terms before payment was made. Therefore, the health system did not receive the terms they had negotiated and overpaid by more than $40,000 over 18 months.

TAG TIP: Contract terms (pricing, handling charges, freight, cash discounts, etc.) must be transparent and easily accessible for both Supply Chain and AP in your health system’s ERP system for quick reference before invoices are paid.

3. Adopt Transparency

For clarity and compliance, clearly communicate your compliance policy with your vendors and make it a requirement for doing business with your health system.

TAG TIP: Consider implementing a vendor scorecard at your health system to ensure your vendors are meeting the quality measures that are most important to your operations. Watch our on-demand webinar to learn more.

4. Monitor and Perform Audits

Review your current processes for process gaps that allow vendors to repeatably offend your compliance standards and new policy.

Auditing and analyzing your P2P data are essential to keep vendors accountable and compliant with your health system’s negotiated contract. For large, complex health systems, consider running a continuous audit focused primarily on P2P and reducing exposure to risks from vendors.  

TAG TIP: Utilize third parties for an unbiased audit that compares all contracts with past transactions and works with your vendors and internal departments to recover the funds owed to you.  

*Figures based on TAG, Inc.’s analysis and benchmarking metrics from past and current healthcare clients.