By Thomas E. Loiselle, April 17th 2001

© Copyright 2001-2005, Health Care Business Services, LLC. All rights reserved.. 

Managing Transactions in Med / Surg

Managing transactions and relationships in the Med / Surg sector of the Health Care Industry can be quite challenging. However, the concepts presented below will help you and your company better understand and take advantage of what some industry participants have referred to as a “Turkish Bazaar”.


Contracts: The mother of all transactions!

First of all, the term Contract is kind of a misnomer.  It is more like a gentlemen’s agreement.  A contract may be modified several times throughout its lifecycle and can be terminated with notice from either party.


Contracts oftentimes have many parties or participants.  Sometimes, some of the parties aren’t even aware of their direct participation until product goes out or comes in the door.  The players are Manufacturers, Distributors, Buying Groups (GPO/IHN/IDS), Hospitals, Acute Care Facilities, Clinics, Nursing Homes, Physicians and finally, Consumers. In most cases, contracts are initiated by buying groups or end-users.  In some cases, manufacturers initiate contracts to promote new products, generate new business or move inventory. Nevertheless, it begins with the health care industry’s concerted effort to deliver quality health care products and services at an affordable price.


One of the biggest challenges is keeping all of the trading partners’ contract and end user customer information in sync.  Products are added and deleted, pricing modifications occur, changes in end-user or distributor eligibility can force credits and re-bills, cause general errors and increase the expense of doing business for all of the trading partners. Another complicating factor is when contracts contain the same products with overlapping effective dates.  In this scenario, the question becomes—what price do we use to pay commissions, claims and fees?  Without the correct policies and procedures in place and the right systems to manage the process, it can become quite chaotic!


Standard Contract Types: All Industries

The following list contains some of the standard contract types employed within many industries. Although this list is not exhaustive, it does cover just about every arrangement under implementation in Med / Surg to date.



A Direct Contract is an agreement between a manufacturer/supplier and an end user/customer whereby the customer buys product directly from the manufacturer for agreed upon prices without the aid or involvement of an intermediary (i.e., Distributor).

Cost Plus

A Cost Plus contract is an agreement between the manufacturer/supplier and the end user/customer whereby the customer buys product from a manufacturer via an authorized distributor.  The end user’s purchase price is calculated by adding a distributor fee, usually in the form of a percentage, to the manufacturers net cost (e.g., $100.00 * 1.05 = $105.00).


A Margin type contract is also an agreement between the manufacturer/supplier and the end user/customer whereby the customer buys product from a manufacturer through an authorized distributor.  However, the end user’s purchase price is calculated by adding a distributor fee, usually in the form of a percentage, to the manufacturers suggested retail price (e.g., $100.00 / (1.00 – Margin Percent) - $100.00 / (1.00 - .05) = $105.26).

Net Bill

A Net Bill contract is an agreement between the manufacturer/supplier and a selected distributor.  A Net Bill contract does not involve a specific customer.  Net Bill contract pricing reflects the actual “net price” that the distributor will pay for the supplier’s products.  This pricing often differs from the normal into-stock pricing or acquisition cost that the distributor pays when utilizing their assigned purchase plan(s).  Often, Net Bill contracts are used in promotional programs or to offer distributors special pricing for a limited time period.

Net Only

A Net Only type contract is also an agreement between the manufacturer/vendor and the end user/customer whereby the customer receives products from a manufacturer through an authorized distributor.  With Net Only contracts, the price to the end user is set by the manufacturer without consideration of additional charges set by the distributor (e.g., shipping, handling, stocking fees, etc.).



Buying Groups

Buying groups typically fall into three categories—Group Purchasing Organizations (GPO), Integrated Healthcare Networks (IHN) and Integrated Delivery Systems (IDS).  Buying groups are formed to benefit from collective bargaining, economies of scale and centralized contract administration.  GPO’s are typically independent entities that receive fees from their members and from the manufacturers from which they make group purchases.  IHN’s are groups of providers that have joined together in a tight affiliation with shared ownership/assets.  IDS’s are groups of providers that benefit from greater buying power through larger purchase volumes and reduced costs through shared warehousing programs.



Contract Negotiation & Pricing: Thrill of the chase!

I will refrain from going into the history of how we got here from a pricing standpoint and skip detailed references to the Robinson-Packman Antitrust Act.  I will say, however, that once you understand the principles of how this industry works, you will agree that processes can be controlled and optimized for the benefit of all—especially the consumer!


To explain the inner-workings of the chain of commerce in this industry, we must use practical examples.


For instance, an end-user customer (Provider) or buying group solicits a manufacturer for a bid or quote with an RFP to provide specific products at a set cost with favorable terms.  They in turn promise the manufacturer that they will commit to a minimum purchase volume over the life of the contract.


The manufacturer will respond with a bid to provide all or selected products contained within the request and an agreement will be formed after negotiations have concluded.  The chosen manufacturer will receive the Contract Award and receive a Contract Award Notification from the end-user or group who solicited the bid.


During the negotiation process, a Distribution Agreement is formed.  The Distribution Agreement will identify the distributors who can service the contract, identify end-user pricing and define any special requirements that must be adhered to within the distribution framework.


Product delivery at the negotiated prices and terms (e.g., effective date, termination date, expiration date, volume commitment, freight terms, payment terms, etc.) is initiated via a purchase order from an end-user who is eligible to buy from the properly referenced agreement or contract.


The hidden complexities of such transactions and trading partner inter-relationships begin to emerge after product is delivered to the end-user.


First of all, distributors do not pay the end-user agreement price.  All contract prices are negotiated as a means to control pricing—let us not forget the aforementioned Robinson-Packman Act.


The distributor pays an into-stock price, which is known as the dealer-cost or acquisition-cost. Typically, this price is the same for all distributors.  Oftentimes, the dealer-price is significantly higher than the end-user/contract cost. The distributor makes most of its money through a combination of manufacturer rebates and a contract cost uplift or markup (e.g., cost plus), which is usually calculated from the contract cost on a percentage basis and represented as a delivery service charge.


Contract Cost + Markup

Contract Cost


Markup (Distribution Services)


Invoice Amount


The contract cost is negotiated in the contracting process.  The final end-user invoice amount is calculated based upon the contract cost in addition to a markup—if one exists.



Rebate Calculation

Dealer Cost


Contract Cost


Rebate Amount


Now the distributor has to request a rebate from the manufacturer for rebated items sold on contract.  Electronically, this is done through the use of the EDI 867 transaction set (Transfer and Resale Report) or through an acceptable proprietary data format and structure.


When all transactions have been reconciled and monies have been paid and collected, the trading partners are satisfied—manufacturers have distribution partners and end-users get the products they need at agreed upon prices.



Paper or Plastic

Electronic Data Interchange (EDI) has been in use on a limited basis since the 1960’s.  The 1970’s brought standards of inter-operability and since then, industries and sectors have devised their own subsets with assistance and approval from ANSI (American National Standards Institute).  Even so, universal usage and adaptability have taken a long time primarily due to the cost of implementation, management and education.  However, once implemented, the gains are tremendous.  Many companies could not survive without EDI or an alternative method for data sharing.  Now a new lower cost method of data sharing is emerging.  It is called XML—Extensible Markup Language.  In fact, there is an international movement to create a “Single Global Electronic Market” by combining the X12 (U.S.) and EDIFACT (Europe) EDI standards into one standard using XML technology.  The new standard is called ebXML—Electronic Business XML.  The ultimate goal is to help companies at every level and in every geographical location conduct business more efficiently via the Internet. Ultimately, we believe that XML will drive the standards in worldwide data exchange!



Rebates/Charge-backs: What do I owe you?

Once manufacturers receive rebate claims from the distributor they have the arduous task of verifying their validity and accuracy.  Believe it or not, this requires a great deal of effort. Manufacturers must be able to identify, translate and/or cross-reference all of the data values contained within the rebate claims (e.g., end-user customer, GPO, contract, product, purchase date, pricing, etc.).  They must determine whether or not claims are valid and take appropriate action. Rebate claims that are in question must be further analyzed and corrections must be made.  When all is said and done—correctly that is, the manufacturer can confidently pay rebate claims through a credit memo or simply cut a check.  This final process requires some kind of interface with the accounting system or a report from which a manual transaction can be recorded. Electronically, this is done through the use of the EDI 867 transaction set (Product Transfer & Resale Report) or EDI 844 (Product Transfer Account Adjustment) or some proprietary structured file in a commonly exchangeable format (e.g., MS/Excel, CSV, Tab Delimited, Flat, etc.).


Sales Tracings: Where did my products go?

Tracing sales for rebated items is easy.  Rebate claims are accompanied by all of the information required to identify the consumer and other valuable details to trace the sale.  However, getting sales tracings for products that do not have rebates will typically costs money.  Some distributors charge for sales tracings.  Similar to rebate data exchanges, the distributors send sales tracings electronically via an EDI 867 transaction set (Product Transfer & Resale Report) or some proprietary structured file in a commonly exchangeable format (e.g., MS/Excel, CSV, Tab Delimited, Flat, etc.).


Manufacturers need to trace all end-user sales to accurately pay sales commissions and GPO fees.  In addition, the abundance of data coming in each month from sales tracings can be used for many purposes; data warehousing, sales, contract, pricing and analysis, forecasting, targeting and benchmarking, inventory management and product marketing and management.


Companies need to know how their products are doing in the marketplace.  Sales administration needs to know where and how to focus resources for each product within each geographical location and set appropriate quota’s.  Sales reps need to know where their products are going so they can assist distributors with the process of promotion, sales support and end-user education.  Every facet of a health care product manufacturer’ business benefits from access to supply chain data.  This area is critical to the growth and development of every company in the industry.


Conclusion: Where there is a will, there is a way!

We believe that the most important objective for health care companies to achieve is to have the right product in the right place at the right time for the right price.  This requires a concerted and continuous effort. The result of which is high profile branding, wide-area product usage and ultimately, industry leadership!





Please inquire via the following:


Health Care Business Services

P.O. Box 7914

Cumberland RI 02864

Office: 401.334.6734





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