Lately, we’ve been outlining the importance of vendor management for your health system and the risks associated with poor vendor management. In our experience, some of the faulty processes in the procure to pay process come from contract overpayments. This can lead to overpaying for certain items and restricting your system’s cash flow.

What are contract overpayments?

It’s common for health systems to negotiate contracts with vendors to receive a set price on an item for a set amount of time. A contract overpayment is when, for a number of reasons, an invoice is created and paid for a higher amount than the one listed on the contract. Think of it less as an overpayment and more of an overcharge.

How do contract overpayments occur?

One of the primary goals of a sourcing department is to generate savings for a hospital, from negotiating better contracts to identifying new vendors to converting items. So the staff in these departments are constantly signing new contracts or renewing their existing ones.

The challenge is that sourcing departments are often working with hundreds of contracts at a time–and contracts take time to negotiate. Let’s say there’s a contract set to expire on 12/31/2018, but your department doesn’t sign a new agreement until 1/15/2019. If you were to place an order for an item during that two-week gap, you may be subject to higher pricing.

Let’s try another example. When a contract is signed or renewed, each item must go through a price change in the master item list. If your system is late in updating those prices, your purchasing department will send purchase orders with the old price. If the old price is higher than the new price, many vendors will invoice at that price and the savings of the new price will not be realized. Additionally, the vendor may also be late in loading the new pricing, which can result in future invoice discrepancies, and if the invoice is approved without receipt of the proper pricing credit, then again the savings will not be realized.

What consequences can come from contract overpayment?

As we mentioned, sourcing departments are all about generating savings for a hospital. However, those savings need to be realized every fiscal year. By continuing to pay invoices at old prices, your system won’t realize any significant savings or maximize its cash flow. That creates accountability issues for the staff involved.

What is TAG’s approach to contract overpayments?

Identifying contract overpayments is a long-term, labor-intensive task, which is why many health systems prefer to work with our team and prevent disruption to their normal workflow. Our process starts by analyzing every line item for every transaction your system has made over the last couple of years and identifying any anomalies in the data. If you historically paid $150 for an item and we see the pricing of the item begin to fluctuate to higher prices, we will conduct further research.

Then, we pull the relevant invoices to validate our work and ensure we don’t go back to the vendor with invalid information. If we’re correct and the difference has not been credited to the account, we’re often able to recover those funds for our clients and improve their cash flow. Afterward, we work with our clients to explain what went wrong and establish processes that prevent contract overpayments from occurring again.

In addition to reviewing the data for anomalies, we will also review each contract to ensure that the vendor is invoicing per the terms of the agreement.

Paying too much for an item here and there may seem insignificant, but the overpayments will add up over time and create cash flow and budget issues for your healthcare organization moving forward. Let us help. Our discovery review process analyzes your accounts payable department from top to bottom and provides the data you need to drive efficiency and accountability for your organization.