Risk-Based Contracting Can Be Easier Than You Think

There has been biz for years in supply chain circles how risk-based contracting is the wave of the future, yet no easy formula has been devised to do so – until now. The formula is based on the philosophy that these new risk-based contracts must be a win-win for both parties; they can’t be a one-way street! Here is a four step system to do so:

1. Parties agree to clearly defined metric(s) and measurable outcomes that are memorialized in a written contract. The metrics employed must be built on activity-based costing such as cost per procedure, case, test, etc., before, during, and after introduction of the commodity into your healthcare organization. The secret to the success of these measurable outcomes is to have a baseline number before you start to utilize or contract for the new product, service, or technology.

2. Supplier is required to provide quarterly tracking and trending data on commodity under contract. This report should have, at minimum, the following elements:

  • Activity-based cost per unit of activity on a quarterly basis
  • Month to month, year to year, and year over year trending
  • Drill downs to the departments that are utilizing the commodity

Remember, the data provided by the supplier quarterly is the basis for rewarding or penalizing your supplier for the outcomes of your risk-based contract, so it needs to be accurate.

3. Reward system is developed to reward or penalize supplier or customer for non-compliance to contract. A simple reward system/penalty system could be as follows:

  • 50% shared savings for every dollar saved above X per quarter
  • 50% shared penalty for every dollar loss below X per quarter

4. Quarterly reviews of outcomes with rewards or reimbursement credits provided to the parties. On a quarterly basis, the involved parties are to meet and distribute rewards in dollars to the supplier or reimburse in credits to customer for missed targets to settle accounts for the previous quarter.

The above is a synopsis of how we envision this risk-based contract formula would work. Naturally, it is more complex than we just described, but not by much. For you see, complexity is in the eye of the beholder. So make it simple!