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How to Successfully Negotiate a Healthcare Technology License Agreement

October 2, 2014
by Donald S. Burnham, Esq.
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Donald Burnham

Many hospitals, life science businesses and other providers of healthcare products and services routinely purchase sophisticated information technology systems and software, costing in the hundreds of thousands, if not millions.  Many do so without a deep, much less a meaningful understanding of what the purchase contract or license means beyond the basic business terms.

By contrast, many, if not all, IT vendors use a refined template of purchase contract for virtually all of their customer transactions, and in the vast majority of these cases the template is invariably tilted toward the benefit of the vendor, not the customer.  Here are nine key “traps” and “gotchas” in these templates, how to spot them, how to avoid them, and how to negotiate around them, or at least make the template more of a neutral document.

            1.         User Scope.

When buying any technology, particularly technology issued on a licensed basis, you need to understand exactly what you are buying or licensing, who will use it, how many people will use it, and what the stated cost is for additional users.  For instance, many vendor agreements will limit the number of authorized users for a stated license fee.  Any additional users, if allowed, could result in substantially higher license fees unless the per user cost is agreed to up front.  At the same time, with hospital contracts, for instance, there may be different license terms for different classes of authorized users, e.g., physicians, PA’s, nurses, etc.  Never assume that the aggregate license fee covers all possible users or that a set number of authorized users automatically covers different categories of users. 

2.         Pricing.

Many vendor agreements include an initial license fee (usually tied to the total number of authorized users), as well as implementation fees and training fees.  Beyond these initial costs, however, consider what future costs you might incur.  For instance, if a given department is expanding and additional users are needed, what are the additional per person fees?  At the same time, if additional software modules may be required at a later time, what will they cost and can that cost be agreed to up front? Lastly, are future maintenance costs ascertainable?  Many vendor contracts will have not a cap on cost increases.  Maintenance costs (which usually include support) often run between 15 and 20 percent of the overall license cost of the system.  However, many vendors neglect to limit price increases for future years.  A reasonable cap should be no more than an annual CPI increase or a fixed percentage increase (perhaps 3 percent) per year.  You should also ask whether the maintenance includes new product upgrades and improved products.  Ideally, “true” maintenance will broadly include all updates, improvement, upgrades and modifications to the licensed product, although some vendors will resist including “new” products within maintenance. 

3.         Installation/Testing/Acceptance

Many vendors will refuse to agree to a fixed implementation schedule.  You as the customer should absolutely insist on such a schedule and include it in the agreement.  Moreover, while it seems simple and commonsensical, every agreement with a vendor should provide a mechanism to ensure that the installed system actually works in the production environment.  In other words, the system needs to work within the hospital, within a lab or within a medical office, according to the published specifications.  If the system does not work after testing, you as the customer need to have a practical remedy.  A well drafted contract will provide that scheduled payments be made only according to milestones achieved, such as successful installation, data migration, testing, product acceptance, and either “Go-Live” for individual modules or “Go-Live” for the system as a whole.  The bottom line is that a vendor needs to be incentivized (whether economically or otherwise) to provide the system and services for which it contracted and to satisfy you as the customer. 

4.         Termination.

No one ever wants to contemplate termination of an agreement or a relationship.  However, there are times when some systems simply do not work in a given environment (because of existing legacy systems, for instance) or where a given product’s functionality was oversold to the customer.  Therefore, as a customer, you need to have a mechanism to terminate the agreement in these situations.  Termination can be for convenience (i.e., upon a certain period of notice for any reason) or can be based on the vendor’s performance (e.g., if the product does not work, if implementation does not proceed satisfactorily, or if implementation is not timely).   If termination is necessary, consider whether there should be a refund of the license fee and even a refund of implementation costs.  Additionally, if your installed system includes certified electronic health record (EHR) software, for instance, try to negotiate a “meaningful use” (MU) guaranty.  Many vendors will offer some type of MU guaranty, although they may insist on capping the dollar limits of that guaranty.