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February 15, 2010

IT Vendor Negotiations in the ARRA Era
By Greg Goth
For The Record
Vol. 22 No. 3 P. 14

The advent of stimulus funding has tweaked the way healthcare organizations go about selecting a technology companion.

As the American Recovery and Reinvestment Act (ARRA) and its subset the HITECH Act near the one-year mark, HIT vendors, consultants, and health system technologists are prepared for their effects to grow substantially in 2010. The legislation is expected to greatly accelerate what had been a slow but steady pace to EHR adoption, making it all the more imperative that healthcare organizations take the right approach when it comes time to purchase a system and negotiate with vendors.

“This is almost the perfect storm,” says Chuck Garrity, client services director for Boston-based consultancy Beacon Partners. “The industry was going the way of electronic records anyway, but if ARRA hadn’t happened, it probably would have taken eight to 10 years. Now it’s being pushed into a five-year time frame. And to get all those HITECH stimulus funds, it’s more like two years.”

Ralph Johnson, chief information officer (CIO) at Maine’s Franklin Community Health Network, cites a colleague’s trenchant observation when describing the atmosphere around the stimulus: “If we could wait five years to buy an EMR, we couldn’t make a bad choice because the industry will shake itself down to those that will rise to the top.”

The catch, of course, is that most hospital executives can’t wait five years. They must start evaluating and selecting system components quickly, in almost a land-rush scenario in which vendors and consultancies—some with years of healthcare knowledge behind them and some with little to no experience in healthcare—are entering the market.

Negotiating contracts in these new times will call for a mix of tried-and-true due diligence along with a careful parsing of two elements: vendors’ and consultants’ offerings and the likely tightening of amorphous passages in the HITECH Act.

Build Your Network First
One industry expert says the best way to ensure a smooth contracting process may be to deemphasize the contract. Instead, says Celwyn Evans, founding partner at Greencastle Consulting, a hallmark best practice is to consider the contract a guideline; the real work will be done in establishing strong relationships with vendors and, just as vitally, with nearby peers.

“You can’t manage a vendor with a contract,” Evans says. “In fact, you’ll never win. You have to manage that purchase via a relationship, not a contract. A contract just puts together some guidelines. When you pull out the contract and start using that to modify a vendor’s behavior, you are on a slippery slope, and that is absolutely not the preferred method.”

Evans says one contracting best practice—“which some CIOs do well and some not so well”—that predates the HITECH legislation is to establish and take advantage of a peer network.

“What I mean is reach out to the individuals in your network to see who purchased this particular piece of software. What do they like, how did negotiations go, what sort of concessions did they get? I can’t emphasize that enough from a best-practice perspective. Reach out to folks you know and talk to them,” he explains.

Failure to do so could mean an executive would miss out on the dynamics that a peer has had with a prospective vendor, he adds.

“It’s a common mistake,” Evans notes. “Folks don’t do the good due diligence the way they should. What I mean is to find out where and when this product is installed. The vendor will give you places it went well. It’s important you talk to your network and find out where it didn’t go well. Everybody has challenges, and good vendors, even where they have a problem, work to fix it conscientiously and in good faith. The only way you’re going to get that ground truth is to reach out to your network.”

Evans, who suggests both formal and informal methods when building a peer network, recommends making use of organizations such as HIMSS and attending local roundtable discussions.

Johnson says using a network of like-minded CIOs helped him learn more about what will be a key aspect of HITECH-enabled technology: interorganizational information exchange. He says one vendor did not want to build a two-way interface to HealthInfoNet, Maine’s health information exchange, “because they didn’t want us sweeping their database. I held their toes to the fire and said, ‘We’re going to do this anyway with you or without you. We’d rather do it with you, but if not, we’ll find a third party that will do it.’ And then I got all the other CIOs in Maine who had the same vendor to back me and let me represent all of them.”

The Significance of Meaningful Use
Johnson’s observation touches on one of the most crucial elements of building the HIT architectures necessary to take full advantage of HITECH: the meaningful use clauses that mandate the “electronic exchange of health information to improve the quality of healthcare, such as promoting care coordination” and electronic reporting capabilities.

The exact definitions of meaningful use, the exact method of EHR certification, and the ultimate certifying body have been massaged but not finalized. Linda Reed, RN, MBA, CIO of Morristown, N.J.-based Atlantic Health, says she has asked vendors to adhere to the law as is.

“We still don’t have 100% of what meaningful use is,” she says. “You can infer a lot but until those things come out at the end, nobody’s going to draw a line in the sand, vendors least of all. For example, because of ambiguity in the legislation about the certifying body, vendors are saying, ‘We don’t know who’s going to be the certifying body, so for your protection, we don’t want to put in our contract that we’ll be CCHIT [Certification Commission for Health Information Technology] certified.’

“I’ve told them, ‘OK, I don’t want you to say you’re going to be CCHIT certified. I want you to say you’re going to be HITECH certified.’ I actually did get a HITECH clause in two things that I bought,” she adds.

Steve Fox, senior partner and chair of the IT group at the law firm Post & Schell, says such strategies will be critical to an implementation’s ultimate success. For instance, he says vendors’ guarantees that their platform will meet meaningful use thresholds should be discounted.

“I’d be surprised if [satisfying] the final regulations will be achieved by a vendor doing anything,” he says. “Ultimately, it will be up to individual physicians’ offices or provider organization to achieve meaningful use, and in order to do it, they will need that vendor’s help. I have to laugh when I see those guarantees, ‘If you buy our product, you’ll achieve meaningful use,’ because nobody can make that claim. On the other hand, the failure of the vendor’s product can cause you to fail to achieve meaningful use. That’s why it is so important that you have tight provisions in the contract saying that whatever you want that vendor’s product to achieve, it will meet those particular objectives.

“Many vendors use the phrase ‘We don’t know what we don’t know’ as a way to say they can’t try to comply with future regulations, but our position is if you are in the HIT arena, you have to agree up front to comply with whatever they are,” he adds.

Dig Deep
To get the most from ARRA stimulus funding and to avoid the penalties on the back end for failure to get a sanctioned EHR up and running, it is vital that organizational leaders create a blueprint of anticipated milestones, assess the business process changes that will accompany the new technology, and then approach vendors accordingly. Reed says every organization should have as full an assessment as possible regarding its current software and hardware platforms, interoperability capabilities, and availability of organization staff to evaluate and upgrade its architecture.

“Once you do that, you have to understand whether you’re going after the incentive or just looking to avoid the penalties, and that gives you a time horizon,” she says. “Then you can plot out a road map. Until you do something like that, you’re not operating from the best possible position. That’s the first thing you need to do to think about how you’re going to contract.”

Of course, many provider organizations lack the IT expertise and their clinicians don’t have the time to perform these assessments in-house. Johnson says numerous consultants have approached him regarding ARRA preparations and that commonsense evaluation, such as obtaining references, speaking to customers, and looking for telltale signs a prospect is not particularly well versed in healthcare, can go a long way toward finding a good fit.

“It’s almost like gambling right now among the consultants,” he says. “They’re placing bets by asking themselves, ‘Who’s going to get the stimulus money? Let’s align ourselves to get a piece of it.’ It harkens back to the late 1990s and early 2000s with HIPAA, where consultants all of a sudden became experts on helping us get up to speed on that. People would say, ‘We’ll help you become HIPAA compliant.’ If they spelled it with 2 p’s, I threw it away.”

Once those baseline milestones are calculated, Reed says smart strategizing now could help CIOs find technology bargains they may not need for several years but which vendors may include in a bundled product.

For example, she says vendors’ assessments of Atlantic Health’s technology needs for the next several years included applications she knew were not critical in meeting the initial meaningful use requirements. Some she discarded as unnecessary “bells and whistles” for both short- and long-term needs, but others she used in trying to leverage negotiations.

“There are some things they wanted to sell me up front that I don’t need to buy for meaningful use criteria,” she says, “but I do need to buy them eventually. So my conversation with them then goes, ‘If you sell me these as a bundle, how much of a discount will I get?’”

One such application is a nursing care planning platform that Atlantic Health will need to adopt in a medium-range timeline.

“Do I need it for meaningful use in 2011? Absolutely not,” Reed says. “But is it something I need in the next three years? Absolutely. That’s the game I play with our vendors. I know I need it, I know the organization is supporting some of that, so if I can get it at a better price, I’ll do it now. If I can’t, I’ll buy it later.”

Both Reed and Johnson also say that assessing the length of contracts requires a creative approach. As interoperability becomes mandatory, vendors will have less leverage in trying to lock up long-term contracts for technology that integrates only with other platforms from the same vendor. Signing contracts for five years with renewal or automatically renewed “evergreen” options is becoming popular and allows more flexibility when assessing technology needs in a rapidly changing interorganizational architecture.

Tips to Maintain Leverage
If healthcare executives build a network of peers, gather general information on the available technology, and perform a careful needs analysis, then drawing up a contract shouldn’t produce too many nasty surprises—as long as they’re willing to stand fast in discussions with vendors, no matter how small their organization may be.

“If you are a small hospital, you’re not going to have the same leverage as if you’re Johns Hopkins or the Mayo Clinic because vendors love to have high-profile customers,” Fox says. “But having said that, it is important how you approach negotiations. For example, you don’t ever want to say to a vendor, ‘We’ve done our search and you’re the one we’re going to use, so let’s get started.’ You always want the vendor to know they are your first choice but that you also have a second choice, and you want to be open about it and let both vendors know that’s the situation. And I have a number of clients who have taken that a step further and entered dual-track negotiations.”

Fox says healthcare executives should always ask for contract drafts in modifiable formats such as Microsoft Word (many vendors, he says, send them in formats such as PDF, which subtly inhibit the ability to redline unsatisfactory clauses), request materials such as PowerPoint presentations used by salespeople be included as binding supporting documentation, and reserve the right to halt payment if the technology is not working according to agreed-upon terms. He also suggests that a dispute resolution process be clearly spelled out.

“I always recommend some sort of informal dispute resolution process first,” Fox says. “Specify who will address it. Maybe start with the vendor’s vice president and have it work its way up to the president or CEO if necessary.”

Fox recommends reserving the right to take a vendor to court rather than submitting to arbitration; the courts are publicly accessible and the threat of a public lawsuit can serve as an incentive to resolve issues more quickly.

These types of safeguards predate ARRA, of course, but Fox also says some new cautions should accompany post-ARRA negotiations, such as specifying that failure to help an organization achieve meaningful use will cost the vendor dearly.

“The typical limitation of liability clause will have an arbitrary limit and a claim that the vendor ‘under no circumstances’ will be liable for consequential damages,” he says.

The loss of stimulus funds or the levying of penalties for failure to meet one of the HITECH stipulations could be interpreted as just such consequential damages, “so it’s important that the clients have a lawyer who understands this and is willing to negotiate very hard.” Should a technology fail to meet those goals, not only should traditional penalties be levied, but Fox says the vendor should also be compelled to pay some or all of what its client lost in ARRA incentive payments as a result of that failure.

“That will be tough negotiating but important to look at,” he says.

— Greg Goth is a freelance journalist in Oakville, Conn., specializing in technology and healthcare policy issues.