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February 18, 2011 News 2 Comments

EHR Contracting Redux – Balance is Better

Hospitals and physician groups should review, research, and compare proposed vendor agreements during the EHR selection process. Too often, this critical step is left out of the selection process. Some prospects believe themselves to be too far down the road to back up and review their selection in light of unfavorable contract terms. Commencing review of contract terms after selection is extremely disadvantageous to the prospective customer.

Sometimes, however, it is not a factor of time or diligence, but rather market position, perception, or recognition that leads to the casual (non-diligent) review and treatment of a technology contract. For example, the small physician practice looking for EHR software may consider itself to be “mooing along with the other cattle," lining up for contracts and services from the EHR vendor selected by their affiliated hospital. They do not sweat over the EHR contract language because they assume the hospital and big practices have done the work, or if not, they are at least all in the same boat, which in my opinion is borderline negligent.

Next, some prospective customers do not raise important objections due to the “bigness” of the vendor involved. It is sad to agree that in many cases the little customer receives little attention. Important issues often get brushed aside with the somewhat careless, “We are too small to get concessions from the vendor” thought process.

Small HIT companies take similar risks in contract negotiations. They aren’t negotiating — they are jumping when the big prospect flexes. Some small-vendor executives courting the giant provider entities walk right over their poor sales folks’ backs on the way to the signing table, seemingly willing to sign anything asked of them.

Balance would be better. I’ve seen it too often when the big side does little or nothing contractually for the little side, yet cooperates when the other side is also a big player. Capitalism at its best? Survival of the fittest? Maybe so, but I dare to say that with the advent of HITECH and the injection of billions of dollars in reimbursement, this is not an absolute true free market at the present time. That’s OK, but from where I sit, the term “partnership” gets tossed around way too much without a corresponding balance in contract terms.

Commanding one of the most unusual perspectives in the HIT world through representation of hospitals, physician groups, and vendors, either directly or with select consulting firms, I find myself occasionally stepping back and taking a good hard look at the HIT acquisition process. This is one of those times.

Putting the above “Balance is Better” position into a practical example, let us consider the ever-popular “Limitation of Liability” language.

First, a quick lesson:

Indemnification (or “Hold Harmless”): This is when a party takes on legal / financial responsibility for a certain circumstance. For provider customers, determine what, if any, indemnifications are provided by your selected vendor (what they are agreeing to cover, or protect you from). Then determine what, if any, indemnifications the vendor requires from the customer (what they expect the customer to cover, or protect them from). Whichever side is providing the indemnification is legally on the hook for the costs if the circumstance comes to reality.

Limitation of Liability: Not the same as indemnification. Simply put, this is a declaration by a party that states, “I am not responsible for XYX.” Watch these carefully — VERY carefully. The heading for a contract section may read “Limitation of Liability” and include such limitations (often in ALL CAPS), but sometimes an indemnification of the vendor by the customer is also included, and as we all know, one of the things attorneys add at the end of a contract is a section titled “Headings not Controlling” (which to this day makes me chuckle … I sometimes ask to delete the title, which makes for an interesting conversation … but I digress).

Now, for the contract reviewer, look first at limitation of damages. Determine what the vendor disclaims. You will have no recourse from the vendor for these situations. Then look for indemnifications required from customer to vendor. These are critical, because it is not simply a matter of having no recourse, but rather an affirmative obligation that the customer is taking on. Finally, look for indemnifications from the vendor to the customer, which represent areas where the customer gains protection(s).

Prospective customers reviewing limitation of liability language will typically find an exclusion of all consequential, special, indirect, exemplary damages (think “over and above” the baseline direct damages). First question – is it mutual? If not, that is your first demand. Make the exclusion mutual. There is no reason not to request this. Fair is fair. There is also probably a limit on direct damages, which for perpetual licenses is usually the value of the contract, and for SaaS models, the value of one year of subscription fees.

If it were that simple we would be done, but it is not. Direct damages are fairly straightforward. It is the exceptions to the exclusion of all consequential damages that takes the time and expertise.

Carving out exceptions to the blanket disclaimer of consequential damages is part of the bargaining process. Arguably, whatever is good for one side should be considered for the other. The best example would be damages for a breach of confidentiality provisions, which the provider customer expects to be carved out from the disclaimer by vendor – meaning the vendor would be responsible for these damages.

Now here comes the balance part. The exclusion should then also be applied for customer’s breach of confidentiality regarding vendor’s material. Intentional acts or omissions and willful misconduct could collectively merit a mutual exclusion as well. Not all situations will be mutual however, and the best example would be damages for copyright / patent infringement, in which case the vendor should be willing to carve out an exception to the disclaimer on consequential damages.

In situations involving exceptions to disclaimers of consequential damages (which means where a party does agree it is responsible for these damages) it is important to note that intermediate levels of responsibility can be introduced. It does not have to be unlimited. Levels of applicable insurance coverage are often used as limits. This is all part of the negotiation process.

Once you have found all the limitations and indemnifications, map them out. Do the same for each vendor. Then compare. This should assist greatly in the selection process.

Projecting the total project cost is essential in any acquisition. It is critical that you note the potential additional costs (also known as risk) that you are taking on. This is an unavoidable exercise and enables IT leaders to make informed business decisions prior to executing the final agreement. Damages for which you may have no recourse and indemnifications for which you will be responsible are both critical components to risk assessment.

Now, if you’ve made it this far, here is your reward.

Amazingly, after a quick review of projects with which I have been involved over the past two years, I am stunned to report that the fairest (most balanced) contract terms regarding liability were those belonging to mid-sized HIT companies! Surprisingly, the very small companies and the behemoths act most alike in their attempts to disclaim most everything. The small because they have to, and the big because they can. Granted, this is by no means a comprehensive analysis of a majority of vendors in the industry, but it is an interesting slice.

What I think this means, to be philosophical about it, is that the medium companies have recently “made it.” They are very happy to be where they are and have not forgotten how they got there. They appreciate their position in the market and their balanced terms reflect their understanding and appreciation. Maybe I’m wrong, but it certainly made me feel good.

William O’Toole is the founder of O’Toole Law Group of Duxbury, MA.

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Currently there are "2 comments" on this Article:

  1. A fascinating analysis.

    I guess two rules apply in any case:

    1. Negotiate aggressively.
    2. Have a good lawyer review details at all times.

  2. Some managers and directors don’t seem to understand that they can negotiate with vendors. If they could just learn how to negotiate contracts and protect our organization from the vendor’s inability to deliver.

    For example, our vendor was selling us a package that was guaranteed to perform a function 80% of the time (in most cases). It was fairly expensive, so I said, “Let’s tie the success of the package to the price. What if it only works only 20% of the time? Write it in the contract that we only pay for the percentage that works.” In this case the numbers would have been pretty clear. The response from management was, “We can’t change the way the contract is written.”

    Secondly, it would be nice if management would run some of these contracts by the technical people before signing. We have saved a lot of money recently by having the techies asking, “What do we need this for?” It’s a lot better than having your techical people asking you a few years later, “Why did you buy this?”

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