Clayton Hale catches contracts that fall out of the computer.
That pretty phrase describes a blunder in hospital supply purchasing. It means a distributor missed the start of a new contract or failed to log a contract extension, so something bad happens: The provider pays list price.
Take two aspirin before reading further. Hospital purchasing is a tangled web of discounts, freight charge waivers, manufacturer rebates, volume incentives and other special deals. This industry abhors paying list price.
So much so that there's money in auditing hospital purchasing invoices. For example, Hale's Newport Beach, Calif.-based firm, the Hale Group, will ferret out bad bills for a cut of the returns. "This is the most complex purchasing environment I've ever run into," Hale said.
Individual hospitals cut deals for surgical sutures and other supplies. American Healthcare Systems, Premier Health Alliance, VHA and other buying groups cut different deals. No one pays the same price.
Pity the poor distributor. It must track the flow of goods and money or lose its shirt. It buys products for its warehouses at one price and sells them to hospitals at another price negotiated by manufacturers. Its livelihood depends on accurate rebates from manufacturers.
For example, a surgical-supply manufacturer might charge a distributor $1 for a suture but award its hospital customer a 20% discount off the distributor price under a negotiated contract. The hospital pays the distributor 84 cents, including a 5% distribution fee. At the end of the month, the manufacturer rebates 20 cents to the distributor.
The example simplifies reality considerably. Many thousands of transactions, in all variations, actually take place. "In practice, (the rebate system) is a horrendous mess," said Paul Musgrave, a senior director at VHA, an Irving, Texas-based alliance.
The intricacy of purchasing leaves room for error.
Typically the Hale Group audits three years of invoices from the largest manufacturers in its hunt for overpayments. The firm usually recovers about $500 per licensed bed. Very roughly-because occupancy and resource consumption at hospitals vary-that amounts to about 0.5% of an average hospital's annual spending on medical-surgical supplies, according to industry averages. Still, the sums recovered often enter six figures.
Why do hospitals wind up overpaying for supplies?
Most overpayments, about 60%, are misadventures in pricing, Hale said. For example, manufacturers might tell hospitals and distributors of price changes after a round of bills has been sent. Other errors are mathematical matters, such as calculating price by the wrong unit of measurement.
Volume incentives, abundant in the industry, complicate pricing further. Under many contracts, the more you buy from one manufacturer, the less you pay per item. New prices might kick in when spending for one manufacturer's product reaches a set percentage of your spending on all brands of that item. Unfortunately, few hospitals know how many sutures, needles or other common items they buy.
Then, there are sales tax troubles. The monster problem causes about 30% of overpayments, Hale said.
"It's so difficult to keep track of what's taxable," said Larry Mosesson, corporate director of materials management at UniHealth, a Burbank, Calif.-based system. "The old rule was simple: If it was implanted in the body it wasn't taxable."
No longer. Rules change monthly, Mosesson said.
A Hale Group audit found that UniHealth has overpaid sales taxes by $80,000 since July 1994, Mosesson said. During that time, the system of eight hospitals overpaid a total of $250,000 for medical-surgical supplies,including the sales tax errors. Altogether, it spends between $40 million and $50 million annually on medical-surgical supplies, he said.
Distributors do try to prevent errors. For example, the computer of Wheeling, Ill.-based Burrows Co. automatically calls up contracts due to expire in 60 days and 30 days, said Terry Gira, a Burrows' vice president. The distributor then prods manufacturers for notice of a new contract or a contract extension so its hospital customers don't "fall out of the computer."
Hospitals are partly responsible for invoice errors, Mosesson said. The accounts receivable department checks invoices against purchasing orders, but, too often, no one compares the invoice with contract terms.
One reason: Many hospitals load automatic purchasing systems with prices the vendor quoted, rather than prices they've calculated themselves.
Fortunately, checking invoices against contracts could get easier. Many hospitals are adopting better materials management systems.
And their purchasing groups also are adjusting to the information age. VHA, for example, recently began offering a monthly update of its contracts on CD-ROM.
Change couldn't come too soon, said Diana Lyons, a Trenton, N.J.-based operations consultant. "There is much, much, much room for improvement," she said.