What Do We Need Working With Vendors Today

There are so many changes in the industry today, how we communicate, how we manage and how and who we obtain services from. Many of these changes are inherent with the advent of technologies, others are forced by the consolidation of companies into massive conglomerates limiting the options of whom payers are able to obtain services from. Along with all these changes are also changes in claims and program management philosophies and structures.

The days of working with service providers (vendors) at-will based on their performance and quality has evolved into contracted services and “preferred providers” based often more on cost factors more than any other metric. Much of this was due to some impropriety that began to occur in the industry, business being bought or based solely on relationships which didn’t necessarily translate into the best provider to meet the overall organizational goals or that of their clients. The adoption of the Request For Proposal process by the majority of companies regardless of their size unintentionally further perpetrated the need for this long term contracted services mentality. This process was previously utilized by larger companies and municipal and government entities to ensure fair practice and evaluations of service providers who would be awarded large contracts.

The bidding process itself is a necessary evil in the business and serves its purpose when managed appropriately and is being utilized in the selection of the service provider best suited to meet the organization’s needs. Although, there are inherent flaws in certain aspects of that process as well, this article is focusing specifically on the necessity of the “Contract” itself. Are they really needed when working with commodity services or is the introduction and enforcement of a comprehensive “Service Level Agreement” sufficient once the service provider(s) have been selected.

In order to evaluate the benefit of the Contract versus the Service Level Agreement let’s look at what components each one provides and who it benefits.

Item Contract SLA Winner

Context Setting Info Yes Yes Draw

Detailed Description of Services No Yes SLA

Indemnification Yes Yes Draw

Established Term Yes No SLA

Defined Service Standards No Yes SLA

Defined Tracking & Reporting No Yes SLA

Defined Review Process No Yes SLA

Conflict Resolution Yes (for legal) Yes Draw

Penalties for Non-Performance Maybe Yes SLA

Defensible / Enforceable Yes Yes Draw

In a quick review of these ten elements the Service Level Agreement (SLA) wins by a landslide. Let’s dive a little deeper into why that is.

Context Setting Info

The context setting information is the basic language that explains that the company wishes to obtain specified services from another and the vendor in turn desires to provide those services to the company for defined remuneration. This is language that is not customarily contained in an SLA because traditionally it is contained in the contract which the SLA is subsequently made a party to. Therefore this item results in a DRAW.

Detailed Description of Services

Contracts always have a brief and vague statement of the service(s) to be provided but rarely go into specific detail of the services to be provided. Service Level Agreements by nature are detailed and not only define the services to be provided, but how the client requires them. Because of the detailed nature the SLA is a better tool for ensuring the client gets what they need. WINNER SLA.


This is a very important aspect of a contract and from my experienced having sat on both sides of the table this is one of the more intently reviewed sections. Ironically I have found that clients have been more open to mutual indemnification and some vendors have pushed back wanting to limit their liability. The indemnification clauses similar to context setting info have generally been used in contracts but as your counsel will confirm for you, they can absolutely be incorporate into your SLA. For that reason again WINNER SLA.

Established Contract Term

The contract term is one item that is unique to the contracts. Also one of the biggest points of contention that they face. Contract terms make sense in program where exclusivity is involved. Which leads to the question of what programs/services require exclusivity. In my opinion, exclusivity should be limited to services where utilizing multiple service providers would be detrimental to your program. Examples of this would be pharmacy benefit management, NJ AICRA programs or large Medical Bill Review Programs. However, for commodity services such as Independent Medical Examinations, Surveillance, DME, Diagnostics and alike the need for an exclusive contract or specific contract term does not necessarily prove beneficial to the program. SLA’s don’t require term lengths, they are applicable to the service provider for services provided once they have been acknowledge and agreed to. This could be for ten units or ten thousand over the course of a week, month or year. Contract terms generally benefit the service provider by tying the client to their program for an extended period of time. Therefore again WINNER SLA.

Defined Service Standards

Whereas contracts describe services that are to be provided they do not define them in detail. In over twenty years of issuing and reviewing contracts for ancillary services, I have only seen a few contracts provided by a service provider that had detailed schedules for their services included with their contracts. Generally, the new rule of thumb has been to provide vague descriptions of the services to be provided and they only incorporation details as requested by their prospective customers. Whereas the SLA again by nature is incredibly descriptive. It not only defines the services that are to be provided but it should describe the manner in which they are provided and the requirements and expectations of the client. WINNER SLA.

Defined Tracking and Reporting

As with service standards contracts often not that the service provider will offer tracking and reporting. They may even establish the time periods in which the reporting will be provided be it monthly, quarterly or annually. However, what is commonly left out of the contract is the manner in which the report is presented and the content of the reports. These are often post contracting discussions that management advised of subsequently. When structuring an effective program it is wise to define the terms and expectations for the service providers up front. Reporting and Tracking metrics are more often detailed in the Service Level Agreement. They define frequency, metrics of value to the client and the format in which the reports should be provided. For effective proactive programs WINNER SLA.

Defined Review Process

Consistent and defined performance reviews are essential for determining a service providers effectiveness on any program. Understanding what is reviewed, how they review it and how that data impacts your program like Tracking and Reporting above is something consistent in the WINNER SLA.

Conflict Resolution

Resolution of conflicts is an area that is usually covered in both contracts and service level agreements. The difference is in the areas of conflict that each addresses. Contracts customarily address the manner in which conflicts pertaining to breaches of the contract are to be addressed or define how the service provider must be provided with the ability to remedy their deficiency (non-defined) once notified of said deficiency. There is nothing wrong with that, no one wants to continuously switch service providers. However, where the contracts fall short is in their failure to effectively define what a service deficiency may be. That is where service level agreements excel. The SLA provides for detailed descriptions of the service provisions as they are expected and failure to meet those provisions can constitute the service providers failure to meet the agreed upon obligations to the client. The language of the contract further details the manners in which conflicts are to be resolved either via arbitration or the jurisdictions in which courts they must file for suit. Again these items can be incorporated in the SLA as well. Therefore Conflict Resolution is a DRAW.

Penalties for Non-Performance

This is where the SLA reigns supreme over the contract. Few contracts I have had cross my desk over the years define penalties for non-performance. Whereas, thorough Service Level Agreements have consistently defined penalties for non-performance in multiple areas. One service provider went as far as to build into their SLA’s the latency speed of their system while another built in the number of calls dropped by their call center. The penalties for each were relatively steep percentage based discounts off of their monthly invoices for failure to meet the described performance expectations. These types of metrics and performance guarantees speak volumes for the service provider that promotes them and keeps them on their toes in order to avoid what could be a costly penalty. For the client, these guarantees and associated penalties help ensure you are receiving the quality services you are paying for. WINNER SLA.

Defensible and Enforceable

In conducting research for this article and my presentations which include a discussion on this subject I reached out to industry stakeholders especially our attorneys and claims management executives. The reality of the situation is all agree that both contracts and service level agreements are defensible and enforceable. It came down to a matter of preference and it was split right down the middle. My counselors who were in favor of contracts preferred them because of their structure and just felt more comfortable with defending them. While the other half felt that contracts were not a necessity and sided with the use of Service Level Agreements. On the claims management side, it was not as equally split. The majority of claims professionals felt that contracts with the exception of programs as previously noted were not a necessity at all. In fact, there were several entities who as part of their programs refuse to enter into any form of contract with service providers. Therefore in the area of defensibility and enforceability it is a DRAW.

From my professional assessment, contracts benefit the service providers more than they do the clients (carrier, employer or TPA). With the exception of services in which exclusivity is mandated for program effectiveness, contracts with these providers serve to limit the clients freedom of choice. Failure for contracted service providers to perform customarily lead to slaps on the wrist and some stern warnings because of the clients inability to move from that particular company. This results in program deficits which ultimately pass down to their clients. This does not mean you can’t have a network of preferred service provider. The takeaway is that you want your program to enforce accountability while leaving you the freedom of choice and power to change in the event they do not meet the required performance expectations.

In conclusion, although it is a matter of your company and leadership preference, the goal here was to provoke thought and facilitate some change in how we view and structure our programs. So I’ll leave you with three questions. 1. How is your program structured? 2. Who is the real beneficiary for your current program, you or your service provider? 3. How do you monitor your service providers (vendors) to ensure you are getting the quality and performance that you and your clients expect?