Healthcare CFOs should ensure their organizations’ contracts are well administered to avoid financial risk exposure

Nathan Hershkowitz

Administering contracts is a core activity for healthcare organizations. A health system’s contracts collectively reflect the organization’s business obligations, including all assets, relationships and terms it is required to manage. As such, effectively managing contracts is a critical concern for the CFO because noncompliance with business obligations can have negative financial consequences for an organization.

Finance executives also should be aware of the extent that contract administration as a function has evolved in the face of unprecedented external and internal pressures on the industry. Disruptive factors over the past decade — including the rise of the COVID-19 pandemic, the need to prepare for post-COVID planning, the fluidity of federal and state regulatory requirements and rising merger and acquisition (M&A) activity — have made it imperative for health system leaders to reassess the effectiveness of their organization’s approach to administering contracts. (See the sidebar “Adverse trends have exacerbated challenges health systems face in administering contracts” below.)

Yet health systems historically have tended to decentralize contract management activities to multiple owners (e.g., legal counsel, supply chains, service lines, third-party vendors, etc.). Owners create, execute and manage their respective contracts in their own system. This means each owner is operating in a silo and without alignment to a broader contract ecosystem, which introduces significant risk to an organization. Unknown or unmanaged contract activities can go unnoticed, business obligations can remain unfulfilled and reporting requirements can lapse. Each of these scenarios sets the stage for potential financial penalties upon audits. 

Addressing the problem is important, but it also requires considerable organizational resolve. A health system’s ability to centralize contract administration depends on executive leadership and commitment to change, with an understanding that it cannot be achieved overnight.

As regulatory requirements shift and reporting standards change, legacy contracts must be updated to ensure they remain compliant. And in a large health system, these contracts can number in the tens of thousands. Nonetheless, given the potential liability these contracts represent for an organization, the business obligations inherent in each contract must be assessed for risk, terms and various other conditions. Individual department contract “owners” should not be expected to perform this process in a vacuum.

Organizations should make it their goal to gain full visibility into their aggregate contract assets from a single point of entry. Most important, such visibility can enable them to proactively identify and reconcile possible issues of noncompliance before they prompt an investigation.  

A 3-phase process

Health systems can best achieve the requisite culture of visibility, accountability and risk mitigation around their contracts by adopting the following three-phased approach that aligns their people, processes and technology for administering contracts.

Phase 1: Centralize contract assets to a unified repository. By centralizing contracts to a single repository, organizations can gain full visibility into the scope of their business obligations. This centralization creates a unified source of truth and minimizes the rogue contract management activities that may occur across the enterprise.  Organizations often will find that multiple contracts exist with the same vendor. Bringingthose agreements together can enable an organization to obtain volume-based discounts whilereducing the time required to manage the separate contracts.

Having a unified repository also helps contract administrators plan and anticipate reporting requirements by ensuring alignment around purchasing activities within the organization and bringing to light problems that may exist within evergreen terms. It also gives executives a clearer line of sight into the full range of the organization’s business obligations.

Recommendation: Consider investing about two to three weeks during this phase to identify and address key pitfalls. For example, helpful prelimiary steps include defining key contract classifications before migrating information into a software contract lifecycle management tool and identifying any contract ownership responsibilities for managing key terms and conditions.

Phase 2: Standardize contracting processes. The second phase of the journey is to establish a shared operating model for contract management. Organizations aiming to improve staff productivity and enhance stakeholder engagement should implement a common, transparent and accountable system for the contract lifecycle. From request through signature and all the way to downstream management, the model should specify key roles, the people charged with fulfilling them and considerations and requirements.This is a great time to  contemplate the organization’s authorization process, including who should be allowed to interact with the workflow at various stages of contract approval. By embedding these procedural standards in a designed workflow, organizations can streamline contract management efforts, identify process or personnel bottlenecks and create a sense of shared accountability across distinct departments and parties.

Recommendation: Plan to allow about two to three months for a series of  review sessions  during this phase focused on  identifying the organization’s size and number of users that will be participating in various structures. This time should be used to  ascertain approval procedures, signing authority, and requestor permissions for initiating a contract workflow.

Phase 3: Optimize the contract asset with analytics. A common saying among healthcare contracting experts is, “Junk in, junk out.” Even as organizations mature the storage and operations of their contract management lifecycle, they still must manage tens of thousands of already approved business obligations. For even the most robust contracting teams, labor and expenditures required to manage these activities compliantly can pose a budget-busting challenge. Although certain risks can be easily identified, it’s very easy to miss that single needle in the haystack that may result in huge fines or unwanted media attention. When considering business-associate agreements and evergreen agreements, for example, it is important to have in place alerts to intervene before risks become a challenge, such as possible violations of HIPAA privacy regulations.

The solution for this challenge lies with emerging analytic tools that employ artificial intelligence (AI) to track such risks.^a Such analytics can enable healthcare contracting teams to rapidly comb through the contract assets, identify potential challenges and unearth contracts that require reconciliation. The benefit of such tools is their ability to exponentially reduce the manual effort required to review and identify noncompliance contract assets in the database. The possible applications for this technology also are diverse. An organization might deploy these capabilities before a merger to identify possible risks embedded in contracts, or it might mine its own database before a third-party audit.

Recommendation: This phase should be seen as an evolution that begins after the groundwork is laid in Phases 1 and 2. The organization should allow for an initial three to four months to define its analytic goals. With the goal of facilitating comparisons of similar agreements to determine which benchmarks shoud be tracked.

One size does not fit all!

As organizations aim to move along the maturity curve of contract lifecycle management, they should recognize there is no all-purpose, ready-made solution. No two health systems are the same, so the methods and solutions for operationalizing the three-phased approach discussed above will differ from institution to institution. Although best practices exist, their deployment and configuration matter as much as the process for aligning executive and stakeholder support to new ways of contract management.

One consideration is universal, however: Contract management should not be an unstructured, chaotic administrative function that operates under the radar of administrators and C-suite executives. As healthcare undergoes tremendous change, the strategic importance of managing contract assets is rapidly being thrust into the spotlight. Without transparency and the ability to both identify and mitigate risks through the entire contract management lifecycle, healthcare organizations cannot fully optimize their business operations or administrative requirements or achieve meaningful gains in financial and operational productivity. With the right people, processes and technology, and support from the administrative and executive team, contract lifecycle management success is attainable.

Adverse trends have exacerbated challenges health systems face in administering contracts

Recently, a number of adverse trends have materially impacted the contracting lifecycle within healthcare systems. These trends have created unanticipated risks for healthcare organizations:

• Since 2016, the U.S. Department of Justice and the Office of Inspector General have ramped up investigations into possible Stark or Anti-Kickback violations. As a result, more and more health systems are coming under scrutiny for possible mismanagement of physician agreements. High-profile health systems incurred significant fines totaling more than several hundred million dollars in 2019.
• Given their administrative nature, healthcare contracting teams may be a focal point for organizations’ cost-reduction activities. Many governance, risk and compliance (GRC) teams around the country are being asked to lower operating costs and help support dwindling operating margins.
• The financial implications of COVID-19 will further erode already hampered operating margins for most healthcare systems. This increased strain on the cost-side economics of hospitals will prompt them to pursue larger expense-reduction initiatives, particularly in operations and administration. Whole organizations and departments will aim to use technology to drive productivity while minimizing human capital.
• Mergers and acquisitions pose a unique contracting challenge because the risks of one organization suddenly become the risk of both. And healthcare M&A has been at an all-time high; according to a KPMG forecast, investors expect robust M&A activity in the healthcare sector to continue through 2021 and beyond.
• Noncompliance is no longer an institutional problem. Instead, individuals and executives associated with noncompliance are now held personally responsible and accountable for their mistakes. Personal fines and the possibility of prison time are no longer distant threats; they are realities.

These examples describe just a few factors that have made administering contracts a more complex challenge for health systems. As with many other areas of growing complexity in healthcare, innovation holds the key to meeting these challenges.

Footnote

a. With the continually evolving use of AI analytics in healthcare, these tools can be expected to proliferate as a growing number of products emerge in the marketplace. The ability to make effective use of AI analytics can help differentiate a healthcare system from its competitors. It is therefore incumbent on senior finance leaders of hospitals and health systems to familiarize themselves with the principles of AI analytics to understand their capabilities and track their development.