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Time for New Rigor on Vendor Contracts

May 23, 2013
by Mark Hagland
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At a time of intensifying demands on providers, healthcare IT leaders need to push vendors hard to get favorable contracting terms

Mike Archuleta is director of IT at Mt. San Rafael Hospital, a 25-bed critical-access hospital in Trinidad, a small Colorado town located near the border of New Mexico; Brian Patty, M.D. is vice president and CMIO of the four-hospital, 14-clinic HealthEast Care System in St. Paul, Minn. The two healthcare IT leaders’ organizations are vastly different in size and scope, yet they share two very important things in common: both Archuleta and Patty are incredibly busy IT leaders these days, and both of their organizations are operating in an environment in which optimizing clinical IS vendor contracts is becoming ever more-critical.

At Mt. San Rafael, Archuleta and his colleagues are in the final stages of preparing the go-live on an inpatient electronic health record (EHR) from Healthcare Management Systems (he and his team went live in January with athenahealth in their two physician clinics). Meanwhile, Patty and his colleagues are preparing for a switch from their current core inpatient EHR vendor and core outpatient EHR vendors (two different companies) to Epic Systems Corp., with the hospital go-live set for June 2014, and the clinic go-live set for December 2014.

Mike Archuleta

While Archuleta readily concedes that, with an IT staff of three including himself, managing not only the implementation of an EHR but also the contract process, is always a challenge, Patty notes that “Obviously, we’ve had to nail down our contract with Epic, and with Deloitte, our main implementational partner. Now,” he says, “it’s a matter of contracting with 20-odd third-party vendors, pertaining to our Epic implementation, most importantly our vendors for evidence-based order sets, ICD-10 and other data sets, and all sorts of smaller third-party.”

Brian Patty, M.D.


Archuleta and Patty both say they’ve been fortunate in their vendor contract processes, so far. But, say industry experts, the pressures facing healthcare IT leaders around the management of clinical IT vendor contracts, are set to accelerate in the current operating environment, for a variety of reasons.

Without a doubt, among the biggest factors right now is the mounting set of pressures related to the meaningful use process under the Health Information Technology for Economic and Clinical Health (HITECH) Act, says Steven J. Fox principal, and chair of the information Technology group, at the Washington, D.C.-based Post & Schell law firm. With providers rushing to get EHRs implemented under pressure from the HITECH Act’s requirements, things are “even more pressure-packed” than in the recent past, for providers, Fox says, which means that CIOs and other healthcare IT leaders have got to become far more rigorous in reviewing the contract terms proposed to them by EHR and other IT vendors.

Steven J. Fox

“Starting about a year ago,” Fox reports, “I noticed that in contract negotiations, because clients said it to me, ‘This has to work, because failure is not an option. And all those vendors know that I don’t have the one option that I always had, which is, if this doesn’t work out well, we’ll walk away and go with our second choice.’” In other words, vendors are starting out with a double set of advantages over CIOs and other healthcare IT executives. First, vendors have tremendous experience in contract negotiations with customers; and second, provider executives are under pressure to get EHRs and other core clinical systems implemented quickly, and the vendors know it. As a result, vendors more and more are trying to bully CIOs into signing contracts without really knowing what’s in them, Fox says.

Fox goes on to tell what he considers a very cautionary story. “I had something happen about a year and a half ago,” he says. “I won’t say who the vendor was, but it’s one of the largest in the industry. And what happened is that, after one client hospital had hired me to work on the EHR contract, the general counsel called me in to review the details of the contract. Then, the vendor called the CEO of the hospital to say, ‘If you’ve hired Steve Fox, you’ve made a mistake, because he’ll make things difficult.’ So the CEO called me up and said, ‘We haven’t met yet, but the vendor just called me to backstab you, and if they called me to warn me about you, you must be the best!’ That hasn’t happened often, just a few times in 20 years,” Fox says. “But once, it happened a second time with the same vendor, and I called him and said, let’s talk. And I sat down with him and said, ‘You’re risking a lawsuit, because there’s a tort called intentional interference with a contractual relationship. And you’re interfering here.’”

More commonly, Fox says, vendors pressure hospital and medical group CIOs and other executives to sign clinical IS implementation contracts that severely disadvantage the patient care organization customers and strongly favor the vendors. Among the biggest mistakes involved: when a vendor pressures a CIO to sign a very long-term contract (such as a 10-year contract), given how quickly conditions are changing these days; and when a CIO fails to insist on including a clause that requires the vendor to ensure that the vendor’s solution will continue to be certified through upgrades and later versions.

More generally, Fox emphasizes, “The vendors are simply much more sophisticated than most of their customers; they establish relationships, and take people out to dinners and golf. I’ve had the experience where I suggest specific elements of language in a contract, and they say, ‘Oh, we don’t need that language, I know the salesperson’!”


More broadly, says Fran Turisco, a Boston-based principal in Aspen Advisors, a Denver consulting firm, the emergence of new reimbursement forms, organizations, and collaborations in healthcare, such as accountable care organizations (ACOs), bundled-payment contracts, and patient-centered medical homes, is set to change everything.

“I’m working for an organization that’s setting up an accountable care organization right now,” Turisco reports. “I’m working for the hospital, and they’re going to be a member of this new ACO. They brought us into the infrastructure, and it has required a huge process just to identify what the IT pieces of this would be, because the leaders at that hospital couldn’t identify what the required processes were. We asked them, how are you going to do quality reporting, performance measurement, incentives and contract management, cross-organizational care management? They didn’t have any answers. So we put together for them a four-year roadmap of what the technology should look like, which was no small feat. They said, OK, now we need to put together an RFP [request for proposal] and send it out to vendors.”

Fran Turisco

Here’s the key point in all this, Turisco says. “We sent out 18 RFPs and got 16 responses back. Of the vendors that had the majority of capabilities needed—patient portal, provider portal, health information exchange, EMPI, rules engine, cross-care management, business analytics, quality reporting, and ACO/back-office accounting/contract management—all of them had to partner to be able to offer all those capabilities; it was unbelievable. One vendor had six partners it needed to provide those offerings.”

In short, Turisco says, “If you’re an integrated delivery network and are trying to set up an ACO, you’re going to be dealing with multiple vendors. Some have not even executed any of this yet; they’ve just gone out and bought the pieces. They don’t even have references to give you for their umbrella solution, so what does that tell you?” In other words, Turisco says, “This is the wave of the future. I think we’re in a really volatile time, where healthcare is getting shaken up, and so the vendor world is totally getting shaken up. Unless you’re putting in a core EHR system or core revenue cycle or core ERP, you’re really trying to find a vendor partner, because a lot of them don’t have a lot of installs; they’re partnering with someone else to bring you a solution, and they’re also looking for sites where they can put their stake in the ground.”


As a result, say Patty and Archuleta, obtaining and enforcing good contract terms at a time of experimentation and instability, when relationships with vendors going into the new healthcare will necessarily require real partnerships, will be more important than ever. “Obviously, you want to have a good working relationship with any vendor you enter into any partnership with,” Patty opines. “That being said, you always want a good contract backing you up, in case the relationship goes bad. We have always relied on legal firms that have significant experience in the healthcare IT contracting market. There’s no way I can know everything about those details. I’m really seeing the need now, as we disentangle ourselves from our current vendors. In some of the contracts we had signed with the vendors we’re leaving now, our vendors have the upper hand, because some of the terms were more favorable to the vendors than to us. That reinforces to me how important it is to hire really good legal counsel.”

Archuleta agrees with Patty. “First of all, of course, you have to understand the fine-print legal issues,” he says. “If you don’t read those and stay focused on what needs to be accomplished, and what the vendor is trying to do, you, can’t be successful. The vendor wants to help us but also help themselves; but they can’t take advantage of us, either, because you can really impact a hospital’s business operations.” In addition, Archuleta says, “In terms of vendor selection, you need to justify expenses, you need to understand the priorities, estimated time costs, internal labor, cabling interface, annual supply costs, etc. You really need to break it down, and drill down, in order to get the bigger picture.”

In the end, in these turbulent times, it all comes down to something a recent president said regarding nuclear weapons management: “trust but verify.” As Post & Schell’s Fox puts it, “I’m not trying to bash vendors, but a lot of vendors are telling customers the same story, which is, ‘Oh, you don’t need a lawyer, and it’s a standard contract, don’t worry about it.’ And they put pressure on the hospitals to sign these standardized contracts, which are really bad, and there are risks here. Look at what just happened in the last week, with that decertification of that one EHR vendor. I always put it into a contract that not only will you, the vendor, be certified when it’s implemented, but if you don’t achieve certification, you’ll provide a refund. The remedies are there if things fall apart, but none of the choices are good.”

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