The Prudent Buyer Principle in Healthcare

Utilize The Medicare Provider Reimbursement Manual with Your Vendor Negotiations

In today’s “tough” healthcare environment, vendors are strongly pushing back in a hospitals effort to reduce costs for their organization by insuring best pricing for products and services they purchase.

Vendors have “pricing committees” that delay cost reductions for hospitals – they hide behind confidentiality language clauses to keep other hospitals from realizing market competitive pricing and I have personally heard vendors say that it is unethical that we provide price visibility to our clients.
Yesterday I was reading the Medicare Cost Report/Provider Manual for another project and I came across this section that Medicare dedicates a significant amount of language to in the Cost Related to Patient Care Section. 
It starts off with a very important sentence that every hospital executive, purchasing professional, physician and all those who participate in the vendor selection and negotiation process should read carefully and utilize in their opening statements to all vendors and it is: “The prudent and cost-conscious buyer not only refuses to pay more than the going price for an item or service, he/she also seeks to economize by minimizing cost.”
In another very important section Medicare details the Application of Prudent Buyer Principle and says:  “Intermediaries may employ various means for detecting and investigating situations in which costs seem excessive. Included may be such techniques as comparing the prices paid by providers to the prices paid for similar items or services by comparable purchasers, spot-checking, and querying providers about indirect, as well as direct, discounts.”
And in another section—Medicare even goes as far as to specifically talk about Blood Procurement utilizing the Prudent Buyer Principle and states” “The development of organizations supplying blood to providers has been such that the charging practices of these organizations vary not only nationwide, but also within limited geographical areas. These circumstances require careful application of the prudent buyer principle.”
I have included the exact language from the Manual in Part 1 Chapter 21 below for you to read and to print out, highlight and utilize in your preparation for vendor negotiations.
VIE has the industry’s only Hospital Vendor Negotiation Planning Manual & System that your executive and clinical team can utilize in all vendor negotiations.  Vendors are trained in skilled negotiation strategies and the most important part is a planning and tracking system with every negotiation. They are utilizing a planning manual and system—are you?
Email Lisa Miller at lmiller@viehealthcare.com to learn more about how your hospital can gain access to VIE’s Negotiation Planner Manual.

__________________________________________________

Part 1 Chapter 21 Cost Related to Patient Care

2103. PRUDENT BUYER
A. General – The prudent and cost-conscious buyer not only refuses to pay more than the going price for an item or service, he/she also seeks to economize by minimizing cost. This is especially so when the buyer is an institution or organization which makes bulk purchases and can, therefore, often gain discounts because of the size of its purchases. In addition, bulk purchase of items or services often gives the buyer leverage in bargaining with suppliers for other items or services. Another way to minimize cost is to obtain free replacements or reduced charges under warranties for medical devices. Any alert and cost-conscious buyer seeks such advantages, and it is expected that Medicare providers of services will also seek them.
B. Application of Prudent Buyer Principle – Intermediaries may employ various means for detecting and investigating situations in which costs seem excessive. Included may be such techniques as comparing the prices paid by providers to the prices paid for similar items or services by comparable purchasers, spot-checking, and querying providers about indirect, as well as direct, discounts. In addition, where a group of institutions has a joint purchasing arrangement which seems to result in participating members getting lower prices because of the advantages gained from bulk purchasing, any potentially eligible providers in the area which do not participate in the group may be called upon to justify any higher prices paid. Also, when most of the costs of a service are reimbursed by Medicare (for example, for a home health agency which treats only Medicare beneficiaries), examine the costs with particular care. In those cases where an intermediary notes that a provider pays more than the going price for a supply or service or does not try to realize savings available under warranties for medical devices or other items, in the absence of clear justification for the premium, the intermediary excludes excess costs in determining allowable costs under Medicare.
C. Examples of Application of Prudent Buyer Principle –
Provider A consistently purchases supplies from supplier R and makes no effort to obtain the most advantageous price for its supplies. Supplier W sells identical or equivalent supplies at a lower cost and is also convenient to A.  Unless the provider can clearly justify its practice of purchasing supplies from R rather than W, the intermediary excludes any excess of R’s charges over W’s charges.
Provider B purchases cardiac pacemakers or their components for use in replacing malfunctioning or obsolete equipment, without asking the supplier/manufacturer for full or partial credits or payments available under the terms of the warranty covering the replaced equipment. The credits or payments that could have been obtained must be reflected as a reduction of the cost of the equipment supplied.
Dr. C, a hospital-based radiologist, purchases radiology equipment which he then leases to the provider where he is a staff member. Costs to the provider in this case are higher than if the equipment had been leased through competitive bidding from an outside source. The intermediary reimburses the provider only for those costs which a prudent and cost conscious buyer would pay. Therefore, those costs which the provider pays for the equipment leased from the staff radiologist which are in excess of costs for equivalent equipment obtained through competitive bidding are denied.
Application of the Prudent Buyer Principle to Blood Procurement
2125. BLOOD
Blood is unique among provider furnished items, because unlike other items, it can be replaced by patients or by persons acting on the patients’ behalf. The development of organizations supplying blood to providers has been such that the charging practices of these organizations vary not only nationwide, but also within limited geographical areas. For example, within a local geographical area, one blood supplier may charge a provider both a processing fee and a charge for the blood, while another supplier may charge only a processing fee. These circumstances require careful application of the prudent buyer principle.
In applying the prudent buyer principle under these circumstances, the provider must look to the net charge for the blood. For example, assume the following facts. A provider has a choice between obtaining blood from Supplier A for a processing fee only of $30 per unit, or obtaining blood from Supplier B for a processing fee of $10 and a charge for the blood itself of $25, a combined charge of $35 per unit. Supplier A allows no credit for blood replaced; whereas, Supplier B allows a credit of $25 for blood replaced on a unit-for-unit basis. The provider anticipates a usage of 2100 units of blood for the upcoming contract period. Experience of local blood suppliers has shown an average of one-third to be the prevailing replacement rate in the locality (i.e., on the average, one out of every three units used is replaced). Putting all these facts together, the provider’s anticipated blood costs for the upcoming contract period would be $63,000 (2100 x $30) if obtained from Supplier A. However, the provider’s anticipated blood costs would be $56,000 (2100 x $10) plus (1400 x $25)1 if obtained from Supplier B. The provider, in seeking to minimize its costs under the prudent buyer principle, would obtain the blood from Supplier B