Six Steps to Performing a Contract Compliance Audit

This article was written by Lisa Miller.

In hospital purchased services, a contract compliance audit is a comprehensive review to ensure that contractual obligations are being honored by all parties. This article outlines the six steps to performing a contract compliance audit and why this vital review cannot be overlooked.

What is a contract compliance audit?

The everyday operations of your hospital rely heavily on partnerships with various vendors. 

Those vendors provide services that your organization depends on to deliver excellent patient care and superior health outcomes. If your vendors fail to provide the goods or services under the terms of the contract, this has a negative impact on your hospital, including your patients, your profit margin and your hospital’s reputation. 

Your hospital should have a detailed contract in place with each vendor that sets out the terms of the agreement between you and details the expectations within that partnership.

These contracts form the basis for your health system’s relationship with each vendor. 

Objections to a contract compliance audit

At VIE Healthcare Consulting, the most common objection we hear is: “Our hospital does not have the time or the resources to invest in a contract compliance audit.” 

At a time of unprecedented pressure on hospital margins, I understand this objection. However, this is precisely why an audit must be carried out. Almost one in five US hospitals are in bad financial shape or at risk of closure. Many are missing out on the hidden cost savings in their purchased services spend by overpaying for substandard services or by paying for services that are simply not being provided.

This loss of profit places further strain on your organization at a time when hospitals face greater scrutiny and lower rates of reimbursement. Making the time to perform contract compliance audits across your health system is an investment into the future success of your organization that cannot be overlooked.

When an outsourced provider secures a new client they work hard to make a good first impression. However, as time passes, complacency sets in and the quality of service may take a hit. This is why it is essential to revisit the contract on a regular basis to ensure all contractual obligations are being met.

The contract is foundational to the relationship that your hospital has with your vendors and should inform every decision made regarding the services provided to your hospital.

Below, I’ve outlined the six steps to carry out a successful contract compliance audit.

Carrying out a contract compliance audit

Step One: Obtain the complete contract

The longer a contract has been in place, the more likely it is to have amendments and addendums. While these terms are often used interchangeably, it is important to note the difference between the two. 

A contract amendment is created when both parties agree to make changes to an already existing agreement. These changes could include extending the original term of the contract or changing the original pricing or level of services provided by the vendor. 

A contract addendum is used when both parties want to add language to a contract but the terms of the existing contract still apply.

Your ability to renegotiate effectively or make appropriate changes may be severely limited if your organization is auditing a contract with missing pieces.

Step Two: Ensure the contract is not expired. 

Hospitals can lose sight of the sheer volume and variety of contracts as they focus on day to day operational responsibilities. Oftentimes, especially when there are no apparent issues with a particular purchased service, a contract will expire without either party being aware. Missing renewal dates or notification periods can cost your hospital millions of dollars.

Missing contract renewal dates or notification periods can cost your hospital millions of dollars. Click To Tweet

This is the best time to negotiate for better pricing and enables your hospital to avoid being locked in to a long-term contract with unfavorable pricing. At VIE Healthcare we recommend the implementation of a contract management system to alert your organization to auto-renewal dates or when you may need to exit a contract. This will allow your hospital to perform contract compliance audits in a timely manner.

Step Three: Analyze the contract. 

By this, we mean a detailed survey of all that is contained within the contract. In our experience, the temptation for hospitals is to focus solely on either pricing, the appendix or the last couple pages of a contract, but we recommend carrying out a thorough contract review.  

While addressing the pricing is important, there is much more to a contract. You must thoroughly examine all of the language and parameters within the contract and understand any and all commitments, incentives and penalties.

Hospital contracts are now so complicated that they must be handled with care. Keep in mind the following when analyzing your contracts with vendors:

• Ensure that the right people are involved in the process.
• Confirm that language is clear and easily understood by both parties.
• Determine if there are purchase obligations and what the consequences are for failing to meet those obligations.
• Establish whether there is price protection from year to year.
• Know the terms of each contract, i.e. when the contract expires and the notice period that is required for termination.
• Understand the “out language” and any penalties for terminating a contract early.

Step Four: Compare the contract with its correlating invoices

At VIE Healthcare, we gather the line item details for at least 12 months of invoices to gain a historical perspective on whether or not a vendor is charging appropriately based on the current contract. 

This approach also gives us the ability to observe and analyze trends in price movement and any changes that have taken place in the invoices over the past year.

Consistent billing does not necessarily ensure accurate billing. We often find incorrect pricing, double charges, and even miscellaneous charges that are not connected to any particular service or goods. 

There is no way to be sure you are being billed correctly unless you are comparing the line item details of your invoices with the contract over an extended period of time. 

Through this process you will be able to determine on-contract versus off-contract pricing and validate any rebates or credits that may be due to your organization.

Step Five: Evaluate the performance of the vendor based on the expectations detailed in the contract 

Sometimes, it is quite evident that a vendor is not meeting expectations, but more often than not, it takes resources, commitment and in-depth analysis to uncover where or how your vendor is not fulfilling their obligations. Depending on the communication between the decision-makers and the frontline users at your hospital, this can potentially be a very time-consuming process.

Pricing provides a very concrete way of gathering and comparing data, but payment is only half of the equation. 

Performance, which is a more qualitative measure, must be examined in a much broader scope. 

At this stage, we recommend the following:

• Conversations must take place with end users who are directly impacted by the performance of a vendor to ensure that all services outlined in the contract are being provided. 
• The quality of the goods or services provided must also be evaluated to determine if the vendor is meeting, exceeding or falling short of expectations. 

The vendor is receiving payment for goods or services delivered. If those goods or services are not being delivered, they are breaching their contractual obligations and should not be compensated.

Many hospitals are turning to a performance-based contract model where penalties are incurred for not meeting a particular standard but equally, incentives are received for exceeding the standard. 

These expectations are built into the contract, creating what is also called a shared-risk or shared-benefit agreement.

Step Six: Benchmark.

It is impossible to evaluate whether your hospital is getting real value through each vendor contract without having a point of reference to assess your pricing. 

Once you determine what your hospitals is paying for your purchased services, you must compare your cost with that of similar services that are available outside of your current vendor. Geographic location and scale will impact pricing, but you will be surprised to discover the variances that exist even between comparable hospitals within the same city limits. 

Even if all of your invoices accurately reflect contract pricing and the goods and services delivered meet all expectations, you still could be overpaying for your purchased services. 

By taking advantage of VIE Healthcare’s regularly-updated database, you can confirm if your hospital is paying inflated, market-competitive, or best-in-class pricing for its purchased services.

It Is All About the Contract

Many hospital leaders only review a contract with a particular vendor on agreement or when at the time of renewal. This can be a very costly mistake. 

Contract compliance audits are your organization’s best means to ensure that your vendors are meeting all contractual obligations. 

Contract compliance audits are your hospital’s best way of ensuring that your vendors are meeting their contractual obligations. Click To Tweet

The contract must be used as a measuring stick to determine whether or not your vendor is delivering satisfactory, with timely performance and accurate pricing. 

Too many hospitals neglect the value that can be found through periodic contract compliance audits. It is no easy task but it is worth every second of your time and every dollar of your budget.

VIE Healthcare has been helping hospitals perform contract compliance audits since 1999.

To learn more about using hospital purchased services as a leading strategy for cost reduction in healthcare, click here.

Invoice ROI™ from VIE Healthcare empowers your organization to analyze your purchased services trends and track these costs in real time to deliver actionable intelligence.

For a complimentary consultation, call our office today at 1-888-484-3332, Ext 500 or email us at info@viehealthcare.com.