The Art of the Deal: Negotiating a Winning EHR Contract Rural Hospital Information Technology Conference October 20, 2010 Austin, Texas Diana J.P. McKenzie Partner and Chair, Information Technology & Outsourcing Practice Group Hunter, Maclean, Exley & Dunn, P.C. 200 East Saint Julian St Savannah, Georgia 31401 Direct: 912-238-2627 Cell: 847-370-1121 Fax: 912-236-4936 Email: dmckenzie@huntermaclean.com 1
Objectives I. Economic Cycles and Contract Terms II. Key provisions in EHR contracts III. Drafting issues in EHR contracts 2
I. Economic Cycles and Contract Terms 3
Economic Cycles & Contract Terms Timing is Everything Contracting is dynamic, not static. As economy improves, vendors are less willing to make concessions. Early 1990s, Mild Recession = CONCESSIONS Late 1990s, Economy Strong = FEW CONCESSIONS Early 2000s, Recession = MORE CONCESSIONS Mid 2000s, Economy Strong = FEW CONCESSIONS Late 2000s, The Great Recession = MANY BIG CONCESSIONS Current = CONCESSIONS TRENDING DOWN 4
Example Average Number of Warranties 1990 8 1999 2 2001 28 2005 10 to 12 Early 2009 35+ Today 16 (and trending down) 5
II. Key Provisions in EHR Contracts 6
Licensed Software Definition of Licensed Software Should include updates, enhancements, modifications, upgrades, and fixes. Scope of License Affiliates, Outsourcers, Consultants, Other Service Providers? Include back-up and archival copies, and copies for testing, staging, development, and similar purposes. 7
Representations and Warranties Representation = a statement of fact upon which another party is expected to rely Must demonstrate materiality Warranty = a party s assurance as to a particular fact Per se materiality Can tailor (but do not limit to) specific remedies 8
Duration? What warranties do you need? Conformity to RFP Performance of software Meaningful Use Compliance with ICD-10 Compliance with Accreditation Standards Compliance with Laws (current and future) Compliance with 42 C.F.R No Data Loss or Alteration No Material or Frequent Defects No Viruses Or Disabling Devices No Beta Software No Vaporware No Open-Source Software No Sanctioned Providers No Sunsetting Warranties All Prerequisites Included 80% Similar Product Frequency and Quality of Updates Ownership/Title Anticipated Growth/Scalability Availability Compatibility/Interoperability Functionality Response Times Virtual Server Adequacy of Documentation and Training Vendor Statements Quality of Services (including Maintenance and Support) Milestone Dates Third-Party Warranty Pass-Through Intellectual Property Specific Remedies? 9
Limitation of Liability Maximum amount of direct damages available to each party Mutual exclusion of consequential (indirect) damages Exceptions to vendor exclusions of consequential damages: Indemnification Breach of confidentiality provisions HIPAA / HITECH Repudiation by Vendor Limits on customer s liability? Most vendors want to limit their liability to contract amount Most will go higher Most will make exceptions Allocation of risk 10
Indemnification Infringement of intellectual property Bodily injury and property damage Use of output Limitations All costs vs. final judgment Procedures Subject to limitation of liability Remedies Beware of customer costs for assisting vendor 11
Acceptance Testing Versus verification? Procedures and criteria Pre-live testing Post-live testing What types of tests: Unit tests System tests Stress tests Duration of testing / time limits for completion of testing Who develops test plans? Vendor failure to achieve acceptance and customer remedies Watch for number of script tests included 12
Implementation Who is involved and what are their qualifications? Minimum personnel commitments Pre-live Post-live On-going? Specific implementation services and timetable Licensee s obligations Compliance with customer s policies and procedures Governance Procedures and Change Orders Provisions 13
Personnel Identify the vendor s key personnel Limits on vendor s ability to replace Background and security checks Pre-qualification if so, how? Right to interview Right to replace 14
Material Breach Typical contract allows a party to terminate for the other s material breach May be difficult to determine whether a set of facts amounts to material breach Solution: Identify key scenarios and provide in contract that such scenarios constitute a material breach Repeated small breaches 15
Payment Terms and Fees Timing of payments Date based; performance based Increases in fees over time Fixed rate Consumer Price Index (CPI) vs. Employment Cost Index (ECI) Holdbacks and true-ups Travel and out-of-pocket expenses (cap) Lower (or no) interest on late payments All fees clause Large options list 16
Related Services Scope of work When scope of work isn t enough Ancillary and Related Software, Hardware, and Services clause 17
Source Code Escrow Escrow Agreement Who is the escrow agent? Verification of deposit Notification of deposits in escrow account When must vendor make escrow deposits (initial and ongoing)? Release triggers insolvency, failure to support/market, sunset, breach Licensee s rights on release Payment 18
Disaster Recovery Disaster recovery plan (back-ups, hot-site, coldsite) Full or partial restores how frequently? Timeframe for returning to service levels Interaction with force majeure clause Require cooperation with disaster recovery vendor 19
Termination rights Termination What constitutes a material breach? Bankruptcy, plus Assignment Convenience Effects of termination Disentanglement Termination assistance Return / destruction of software No termination of support services 20
References Vendor obligation that customer act as a reference Key is to maintain high-level of vendor performance if customer is always a reference for vendor s products and services. 21
Customer Satisfaction Survey Satisfaction surveys to evaluate the quality of vendor s products and services Require vendor participation in process, but be careful If results of survey demonstrate dissatisfaction of vendor s products or services: Meeting with high-level officials of vendor and customer to discuss and resolve the issue Tie performance credit to result of customer satisfaction surveys 22
Disputes Escalation procedures Timeframes Parties to be involved Final step is on-site meeting Choice of Law / Forum Selection Mediation? Arbitration or Litigation? 23
Support and Maintenance Vendor s problem resolution commitments Length of the support term / renewal rights Payment of support fees Frequency arrears vs. in advance Cap on renewal increases / COLA Out-of-scope work price, timing 24
Additional Key Provisions Additional key provisions to consider: Force majeure Assignment Insurance requirements Order of precedence State customer objectives in entering into the agreement (adds substantial benefit to warranty of conformance to RFP) Detailed description of functionality (adds substantial benefit to functionality warranty) 25
III. Drafting Issues in EHR Contracts 26
Levels of Effort Reasonable efforts Diligent efforts Good faith efforts Commercially reasonable efforts Best efforts Best commercially reasonable efforts Tier one efforts 27
Words to Scrutinize Carefully Solely Estimate Shall vs. may Goal / Endeavor / Attempt 28
Use of formulas Make sure they work Written algebraically 29
Questions? Diana J.P. McKenzie Partner and Chair Information Technology and Outsourcing Practice Group Hunter, Maclean, Exley & Dunn, P.C. Office: 912.238.2627 Cell: 847.370.1121 dmckenzie@huntermaclean.com www.huntermaclean.com 30