What Is a Shared Savings Agreement

A Shared Savings Agreement: What is it and how does it work?

In today`s fast-paced world, businesses are always looking for ways to maximize profit margins while minimizing costs. One approach that has gained popularity in recent years is a shared savings agreement (SSA).

A shared savings agreement is a type of contract between two organizations, where one organization (the customer) agrees to pay for a service or product based on the amount of savings the vendor generates for them. In other words, the vendor is incentivized to provide cost-saving solutions, and the customer only pays for those savings.

For example, imagine a hospital that wants to reduce energy consumption and therefore, cut down on its utility bills. The hospital can enter into an SSA with an energy service company, who will analyze the hospital`s energy use, identify areas where the hospital can cut back, and implement energy-saving measures. The energy service company will then receive a percentage of the total savings generated by the new measures. If the measures do not save money, the hospital does not pay the energy service company.

The agreement may also have a minimum savings threshold, which means that the vendor will only receive payment if a certain amount of savings are achieved. This protects the customer from paying for a service that does not provide significant returns.

SSAs are beneficial for both parties. For the customer, it provides a risk-free arrangement, as they only pay for the savings generated. On the vendor’s side, it incentivizes them to provide cost-saving solutions and gives them the opportunity to earn a percentage of the savings they generate.

SSAs are most commonly used in the healthcare industry, where healthcare providers can partner with vendors to implement cost-saving measures, such as reducing unnecessary tests or procedures. However, they can also be used in other industries where cost-saving solutions are needed, such as energy, transportation, and manufacturing.

In conclusion, a shared savings agreement is a contract between two organizations that incentivizes the vendor to provide cost-saving solutions by paying them a percentage of the savings generated. This type of agreement provides a risk-free arrangement for the customer and benefits both parties, making it an attractive option for organizations looking to reduce costs.