This year’s pandemic has caused a frenzy within healthcare supply chain departments. And rightfully so. Many healthcare organizations are working hard to source clinical supply vendors for the procurement of adequate supplies (e.g., diagnostic tests and, soon, vaccines) to deal with yet another surge of COVID-19 (“Covid”) cases.
Even under normal circumstances, there are thousands of different supplies that hospitals purchase daily, often inundating the legal department with urgent requests for contract review. Add to that, there are physician preference items, product replacements, product conversions, and emergencies, that require nimble negotiation. Besides having a myriad of healthcare regulations that govern medical devices or pharmaceuticals, each clinical supply agreement contains numerous nuanced operational issues.
Healthcare attorneys need to take both aspects into consideration under lightning speed turnaround times. The pressure is on! So, how can healthcare attorneys deal with the deluge of clinical supply agreements in a timely manner? Simple. Healthcare attorneys can expedite the contract negotiation process for clinic supply agreements by obtaining stakeholder (e.g., clinical leaders, pharmacists and supply chain) feedback.
Before you even pick up the proverbial pen to redline a clinical supply agreement, you should discuss and confirm the following items with your stakeholders: returns, risk of loss, and list of supplies. Throughout this article, I will use an example of clinical supply agreements to purchase Covid diagnostic tests to explain the types of contractual clauses that should involve heavy stakeholder input.
All clinical supply agreements should have language governing the return of products due to: damage during shipment, manufacturing defects, over-shipment from supplier, or excess inventory. The first question I ask myself is – What does the stakeholder need to maintain an accurate inventory? To make this assessment, you need to understand the products themselves and the supply-demand paradigm applicable to those products. Return rights are directly correlated with the specific properties of each clinical supply.
The next question I ask is – when will the need for a return be identified? For example, the need to return a product for damage during shipment may be apparent upon receipt of the supplies. A manufacturing defect, on the other hand, may not be identified until a later stage. Therefore, you should consider the nature of the clinical supply to ask yourself whether inspection and return is even feasible under actual clinical use. In some cases, inspection may be altogether infeasible, making a negotiation about the acceptance period moot. It makes far more sense to focus on transportation, storage or liability issues.
COVID EX: For singular or unique purchases, such as Covid tests, the language governing returns is further complicated by the uncertainty of supply and demand, as well as the inability to truly “inspect” and “accept” these supplies in the legal sense. You may want to reserve the right to align the number of products ordered vs. delivered. Here, you risk ordering too little or too many tests. You should consider which risk is greater and whether you can address returns for excess inventory. In such circumstances, you are better off addressing the issue of excess inventory, and figuring out a creative way to determine whether you can return the product (at cost, at a lower cost or by paying a restocking fee).
Risk of Loss
Risk of loss covers who is liable if a loss occurs and what remedy applies if a loss occurs. In Uniform Commercial Code (UCC) terms, the question to be addressed is whether the risk of loss is designated to be FOB Origin or FOB Destination.
Here, essential questions to ask your stakeholders include: Does your stakeholder want the right to replace the items immediately? Is the supplier willing to undertake this loss? While suppliers maybe prefer FOB Origin in order to book the revenue sooner, try to shift the responsibility of replacement onto them. With clinical supplies, the time lost in replacing the items can be life-critical, such as a missed surgical procedure that has already been scheduled or delaying important immunizations for the local community.
COVID EX: Let’s say the truck transporting the Covid tests tragically falls into a river on the way to your hospital. As the healthcare organization, you want the supplier to send a replacement shipment as quickly as possible on their dime. In return, you can offer to cooperate with them in the filing of their insurance claim to recover the cost for the lost goods without having to pay for the lost items. But make sure the risk of loss was not shifted to the recipient hospital or healthcare organization until the tests are actually received, or you could be on the hook for paying for any replacement tests you order while being left with having to file a claim against the carrier for the loss of the original shipment. Add to this, you and your community are left without life-saving Covid tests which could have helped you combat the expected winter surge. You could also add language that if the supplier is unable to immediately replace this inventory, you are “next in line” before any other clients when the inventory is back in stock.
List of Supplies
Every clinical supply agreement should contain an exact list (or exhibit) of the supplies being purchased. This could be in the form of a “menu” of items that the department can pick and choose from, a list of all products sold by the supplier, or only the specific products that you want to purchase.
I like to have the stakeholder’s feedback on this because of the purchase process for healthcare facilities. Each healthcare facility generally has an onboarding process for new suppliers, which include risk assessment, verifying approvals and finally, set-up in the accounts payable system. Once a supplier has jumped across these hurdles, it is easier for a supplier to sell new products to a hospital, often without the same rigorous oversight that a new supplier would face. As a result, you may have products in your facility that are not listed in the original agreement and thus, not covered by the terms and conditions you painstakingly negotiated.
For this reason, the list of supplies should expressly identify the product type, price and volume of each product. Are you including any “2.0” items in the price list? Are you asking for the same price for newer versions? Are you asking for ancillary items to be available for purchase even though your clinicians haven’t evaluated them yet? Do you have a penalty for suppliers “sneaking items” into your organizations or do you want a free flow of new products available to your clinicians?
COVID EX:For Covid tests, you should list more than just “Covid test” in the list of supplies. Instead, the list should include the particular type of test along with any volume commitment included in the exhibit. If you would like to list the pricing tiers (volume discount), these should be clearly spelled out in the exhibit. If the vendor develops a newer, better test, do you want to have your minimum purchase commitment applied to that inventory? Do you want the ability to switch out products if the technology gets updated in the near term?
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Clearly, this is not an exhaustive list of all issues that a stakeholder should address in a clinical supply agreement – but these are often overlooked. Having a quick conversation with your stakeholders to discuss these issues (and more) will help expedite the negotiation during a pandemic, when every second counts.
Meghna Vink is a healthcare transactions attorney with expertise in privacy and regulatory issues that are unique to the healthcare industry. She works on cutting-edge issues in health-tech, digi-health and virtual health. She has a passion for all things contracting and contract management. Currently, she is in-house counsel for a hospital system in California.