Medical Gas Contracting Best Practices
On the surface, medical gas may be just another commodity for hospital systems. Yet a lack of research and poorly negotiated contracts can create long-term burdens on a health system.
When discussing medical gas, we are talking about any gaseous substance that meets medical purity standards. This includes gases such as oxygen, compressed air, nitrous oxide, nitrogen, carbon dioxide, and other mixtures that are either administered through cylinders and tanks.
These products are obviously a necessity for a health system, which is why some people get nervous about changing vendors if they have not had a major issue recently. However, medical gas vendors often demand lengthy contracts, expensive extensions, and a multitude of fees that can creep over the years. These factors demand that you review these agreements because there are typically significant savings to be had by switching vendors. I have seen savings that ranged from 8% to 50% by simply renegotiating your contracts and threatening to RFP the category.
Reviewing Contract Terms
Medical Gas contracts are notorious for having some of the most difficult contracts in the healthcare industry. This is primarily because these vendors are used to working in other industries like welding/construction who apparently agree to anything, and they also seem to think they have a monopoly in your area (unfortunately, sometimes they do).
They are also known for being very sneaky in their wording of their agreements by hiding important terms and conditions deep into the fine print of their customer agreement (known as the Rider). These terms might not be in your GPO master agreement. They will be in the one the hospital actually signs, which does not typically get as much scrutiny or legal attention as the master agreement.
Here are the 5 Main Pitfalls:
1. Auto Renew Triggers - A vendor can extend the term if certain things happen.
2. Evergreen Term - The agreement can autoextend without you having to approve it.
- Like if you agree to move a gas line.
3. Excessive Term Lengths - The term is longer than 3-5 years.
- For the length of the original terms, which means another 7-10 years!
4. Lack of Financial Penalty - The vendor has no skin in the game besides the empty threat of losing the agreement.
- It’s ok for bulk gas to be longer but not for cylinders.
5. Undefined Fees/Pricing - An agreement does not clearly define all of the fees, surcharges or pricing for every service the vendors offer.
- You need to include financial penalties if the bulk tank gas runs out for example
• This is very common in medical gas, which is known for having lots of fees
Due to the high cost of buying a bulk tank and having it installed on your own, most health systems amortize this cost across a long term agreement (7-10 years) by paying more each month for the gas or a fixed monthly fee.
Because of this, I always recommend having one agreement for bulk gas and one for cylinders even if it is with the same vendor. This allows you to have more flexibility with your negotiations and pulls some of the power away from the vendor.
By separating these agreements, you can have two different term lengths. A long term agreement for bulk gas and a standard three year agreement for your cylinders. Your vendor will obviously push to have these coterminous but don’t fall for it unless you get significant (double digit) savings with fixed pricing for the term.
Pricing, Fees & Surcharges
Bulk pricing is primarily based on a per CCF (100 cubic feet) price. It’s a pretty simple calculation to figure out what the savings will be if you get a lower price (CCF price x annual CCR usage).
Here are some of the fees you need to negotiate for bulk gas:
- Facility Fee - This can be a flat rate per month or a price/CCF rate
- Typically $500 and up
- Fuel Surcharge Fee - Charged at a price/CCF rate
- Average $.10 - $.20/CCF
- Delivery Charge - Charged at a price/delivery
- Average $35 - $80/delivery
- Medical Compliance - Charged at a price/delivery
- Average $30 - $100/delivery
- Other not as common fees you might run into:
- Telemetry Fee
- Hazmat Fee
- Medical Certification Fee
- Energy Surcharge Fee
- Annual Certification Fee
- Alarm Inspection Fee
These are all negotiable. I’ve seen all of these included in the price of the gas to help with easy budgeting. Don’t be confused with “we don’t charge fees.” They are just including it in the price of the gas.
Cylinders have more moving parts because you are dealing with about 60-70 different types and sizes of cylinders. However, your hospital most likely only purchases around 15-20 on a consistent basis, so make sure to just focus on those prices.
Cylinders will be priced by the Per Standard Cubic Foot. You will also need to know the Typical Volume Per Cylinder because you need to calculate these two numbers to get your Net Price Per Cylinder. This is necessary because some cylinders are priced at a per/cf, per/lb, or per/Ltr rate.
Best practice terms for pricing cylinders:
- Pricing is F.O.B. destination and includes all fees including unloading, tagging, loading of empty cylinders, counting, and any other activity required.
- Fuel costs are based on today’s fuel price (which needs to be included in the agreement). If at any time during the term fuel prices exceed 15% of the today’s cost of fuel, a fuel surcharge may be allowed upon prior approval.
- Get the pricing for the cylinders you purchase each year.
- Add language below the pricing table that covers other gases.
- Ex: Vendor will provide ___% off list prices for all other gases not listed above.
- Make sure to get a discount off list of non-gas products, too.
- Ex: Vendor will provide ___% off list prices for all gas handling equipment, regulators, valves, etc.
- You should also be clear about the pricing of NEW and USED cylinders if you plan to purchase them.
- If you plan to rent your cylinders, get a price per day and a price per month rate.
If these items are not readily found in an agreement, be sure to clarify and add an additional fees section to save the hospital from the surprise of extra fees.
One Last Tip: DO NOT PAY FOR LOST CYLINDERS! The vendor is responsible for counting them at each delivery. They should be notifying you at every delivery if something is missing. If they have not provided you these records throughout the agreement, they cannot make up a number at the end of the agreement.
Medical gas contracting can be quite cumbersome with an immense amount of content and negotiable terms of service. Use this article as a starting point in negotiating with medical gas vendors. At the end of the day, the wisest course of action may be to consult with a professional, as you may end up feeling the results of an unfavorable contract for many years.
Topics: Purchased Services