When contracting for medical equipment purchases and service contracts, there are lots of complex details hospitals need to review. One of these is the annual “cost of living” adjustment suppliers put in multi-year agreements. Hospitals report growing frustration that these adjustments, that historically were 2-3%, are growing faster than inflation – as much as 10% in some cases. They see it as just another way for suppliers to boost their profits. These adjustments quickly add up if left unchecked and can blow the best planned budgets.
Beware of “hidden” annual price increases – Check the fine print and be ready to push back on increases that are nearly always negotiable. And be sure your budget has the annual increases accounted for so you don’t get an expensive surprise!
One regional health system just avoided a painful lesson in “normal” annual increases and saved $2.1 million in the process. They were finalizing the renewal of software and support agreement for lab systems, that had increased 13% from the prior agreement which had been fixed pricing for 5 years. With financial approval already in hand, prior to signing, a diligent supply chain manager wanted to double check the relevant details. The supplier proposal included a table showing fixed pricing over 5 years that totaled $15 million, but deep in the fine print there was a 10% annual increase that “may apply.” This meant the total cost over 5 years would be $3.3 million (22%) more than the $15 million budgeted. The health system let the supplier know this wouldn’t fly, and ended up agreeing to a 2% annual increase, saving $2.1 million. Don’t let the hidden increases blow your budget.