Reducing Bulk Oxygen Spend Through Consolidation
Pathstone was able to reduce the overall annual cost of bulk oxygen by nearly 25%.
The Challenge
A three-hospital Academic Medical Center experiencing financial difficulties identified current agreements that were coming up for expiration. Through this search, it was found that there were multiple agreements for bulk oxygen across each individual hospital location. One of these agreements was up for renewal offering an opportunity to address both contract consolidation and pricing.
Solutions
Bulk oxygen is unique as it has a facilities function managing the physical storage and delivery of gas and a clinical function involving respiratory therapy. Collaboration between these groups would be necessary for the decision-making process. Through discussion with health system leadership, a cross-functional team was developed to address current and future bulk oxygen strategies. After aligning on the pros and cons of request for proposal (RFP) or price negotiation strategies, it was decided to issue a request for quote (RFQ) to several vendors operating in the region including the incumbent.
After receiving price proposals, each was evaluated, and a new vendor had proposed more competitive pricing than the incumbent by nearly 25%. Typically, this would be an easy change for other product types, however, the storage tanks for this type of gas were owned by the incumbent supplier and attempting to make a change would involve removal of current tanks, installation of new tanks, and other activities which would cause some level of disruption and an overall complex implementation process. The team sought to seek price relief with the current supplier rather than engage in a replacement initiative.
Leveraging the more competitive pricing proposal, Pathstone conducted outreach to the incumbent supplier requesting the pricing per cubic foot to be reduced to the more competitive rate. In addition, Pathstone requested that environmental fees and delivery fees be further reduced in kind. This was incentivized through the competitive process and by allowing the vendor to consolidate three separate agreements with various termination dates under one new 5-year contract.
Results
Through consolidation and pricing reductions, the team was able to reduce the overall annual cost of bulk oxygen by nearly 25% while avoiding the painful process of changing suppliers and all the physical implementation steps that route would entail. Also, by locking in rates for the next 5 years, the organization can be assured they will receive the best available price for the foreseeable future. Additionally, through the contracting process, Pathstone was able to negotiate a 60-day termination clause for the health system allowing for flexibility to renegotiate rates if the macro conditions around the bulk oxygen price would indicate lower prices may be achieved in the future.
Overall, the client was extremely pleased with the result of this initiative as it addressed multiple concerns by utilizing several value levers with little to no disruption to the day-to-day operations.
Key Takeaways
Look Beyond the Numbers
Just because an initial proposal comes in with lower pricing, does not necessarily mean it is the only route to achieving that value, nor does that value come cost-free from a non-financial perspective. In this case, the physical plant had to be considered and how a transition would have an impact.
Leverage is Key
Creating a competitive environment is sometimes all it takes to achieve value. If current supplier satisfaction is high, it is often preferable to engage in negotiations with the incumbent. By soliciting bids from additional suppliers, a sense of uncertainty is developed in the current supplier which leads to price concessions.
Power of Consolidation
By consolidating multiple similar agreements, it is easier to negotiate lower pricing on a single larger agreement. Suppliers see this as a win by gaining a longer term, larger agreement. This benefit is shared to the purchaser by less contracts to manage and enhanced pricing.
