Could Guaranteed Rate Contracts Benefit Your Institution?

 

Cost savings are a major concern for healthcare institutions in today’s economy. Millions of dollars in savings can often be identified through renegotiating third-party supplier contracts and incorporating best practice solutions. Soriant Healthcare is the industry leader in facilitating maximized returns on all aspects of contracts—from the RFP processes to long-term management of final agreements.

A guaranteed rate contract, one of three common types of service industry contracts, guarantees a fixed cost per patient day based on hospital volumes, projected revenues, estimated food costs, number of employees, and several other measures. The operational risk is placed on the provider, while the hospital pays a fixed cost for services based on the number of patient days. “In addition, there is a variable rate that covers both the service provider and the hospital for fluctuations in patient census,” indicates Brian Nugent, President.

These types of contracts are beneficial in terms of reducing departmental costs and increasing revenue streams. A guaranteed rate contract eliminates the guesswork of forecasting such costs and shifts a majority of the financial risk to the provider. Revenue management is transferred to the service provider, and the hospital does not retain any cash under these contracts. As such, these contracts affect profit margins in a very specific way. “Guaranteed rate contract expenses are compared to baseline measurements to quantify the financial implications. The net cost savings negotiated directly impact the bottom-line results,” says Chris Brown, Senior Vice President.

Guaranteed rate contracts are often used when negotiating with an incumbent service provider; the guaranteed rate decreases financial risk for the hospital and places more operational risk on the provider. But the provider often prefers this type of rate to allow them to maximize purchasing programs. According to Mr. Nugent, “At Soriant we confirm that contractual terms are addressed to ensure that hospitals are not paying above market price for services provided.”

With a guaranteed rate contract, the service provider is assured that the budget for controllable costs and revenues will be met. “The transfer expenses that are hospital controlled (eg, catering events, departmental transfers, floor stock) are charged back to the hospital at cost; this is an additional expense not included in the guaranteed rate. Labor costs can be assigned to the hospital or the service provider: either option is guaranteed under this contract type,” states Mr. Brown.

Guaranteed rate contracts can benefit both sides. The hospital receives immediate financial advantages by paying a lower price for services. The service provider will trade off the risk of guaranteeing lower net costs with the potential opportunity to gain additional profits if the provider can increase revenues, and the provider has the opportunity to increase profitability by increasing revenue contributions in retail outlets and other revenue-generating service lines.

The key to a successful guaranteed rate contract is in negotiating a rate that is a stretch goal for the provider in net cost, but allows the provider to benefit from performing better than the stretch goal in retail sales. If the provider is able to increase retail sales beyond the stretch goal, the hospital will benefit from the program improvements implemented to drive those sales. Explore Soriant’s contract management services to assess cost-saving opportunities for your institution.

About the Author:

With over 30 years in healthcare consulting, Brian is known for his ability to lead, cultivate and build teams in times of upheaval. His management style focuses on “Change as an Opportunity” for new processes, new leadership, creative thinking, team building and overall bottom line results.

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