Introduction to Contract Tier Pricing and Why Every Surgeon Should Be Interested

  • Introduction to Contract Tier Pricing and Why Every Surgeon Should Be Interested

    Posted by Laura Velarde-Eyman, R.N., B.S.N., M.B.A. on January 19, 2021 at 12:39 am

    I was made aware today a vendor took me to list price which is equivalent to paying the sticker price on an Aston Martin in the medical world. I’m, unfortunately, driving a beautiful car today I don’t want to drive.

    What is tier pricing? Tier pricing is based on the spend in the product category and for the specific contract. Tiers can range from tier 1 (best price based on utilization) to tier 3 or tier 4 (list price). Essentially tier 3 and tier 4 are typically the same, but there may be contractual nuances between the tiers. When an organization hits the tier metrics in spend and utilization, it provides the ability for the facility to submit for a better tier. Conversely when spend drops in a tier the vendor can move the facility to a less favorable tier. So what I became aware of today is either my facility market share moved without my knowledge or the market share between some/all the hospitals moved and we were unaware. And…vendors don’t typically tell you when they’re moving you to a less favorable tier.

    Some contractual tiers can be tied to facility utilization and some can be tied to a group utilization. We’ll use my example from today which is tied to a group tier in order for me to achieve best pricing and tiers are structured as below (fictional financials), but keep in mind Tier 3 can be the same as Tier 4 if there are only three Tiers to the contract:

    Tier 1: Group achieves spend of 80% or $100,000 in product category (best price)

    Tier 2: Group achieves spend of 75% or $80,000 in product category (okay price)

    Tier 3: Facility achieves spend of 50% or $60,000 in product category (can be okay price or list price depending on how many tiers there are on the contract)

    Tier 4: Facility has access pricing (LIST PRICE!!!)

    Back to the example…. Tier 3 and Tier 4 are offered at the facility level on this specific contract. This means the best pricing the facility can obtain is one of these two. Tier 1 and Tier 2 are tied to a group. A group can be three or more hospitals and there is a required dollar amount or percentage tied to the best tiers. In order to achieve Tier 1 or Tier 2 I need to work with my team and surgeons to convert business to one vendor or the other across the market. The utilization of two vendors hinders the ability to achieve best pricing.

    Why is it important when a surgeon decides to move from vendor A to vendor B in this situation? Because if you have a high volume surgeon that converts to vendor B they’re unaware they’re impacting the cost/case for the other surgeons that use vendor A. The surgeon is also impacting his/her own cost/case. Many surgeons are benchmarked against their peers and can, unknowingly, become outliers as it relates to cost/case. As a surgeon wouldn’t you want to know if your cost/case increased due to another surgeon moving market share?

    The optimal solution is if a surgeon is interested in a product/vendor conversion ideally they need to work with their supply chain team. This allows us time to be pro-active and work on the financials to avoid taking a price hit on a competing contract. It allows us time to work with other surgeons that use the product to determine if they’re willing to convert as well. When supply chain is not notified ahead of time we then move into a reactive mode, take the price hit, and quickly work to determine how to move to a better tier all the while paying list price.

    So what are the next steps? I need to determine what surgeons moved market share, what facility moved market share, and how I can maximize one or both contracts for best pricing. This requires me/my team working with our surgeons to determine what they would like to use and what does the forward thinking financial picture look like.

    Let me just say when folks think of supply chain they tend to think the topic/industry is rather dry, but in fact it’s quite exciting to play in the financial world of supply chain.

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