It’s Always a Good Time to Clean Up Your Vendor Contracts
- June 15, 2021
Did you know physicians and hospitals obligate themselves financially to vendor contracts every year without fully understanding the terms and conditions of their commitments?
Whether it’s a new purchase or a renewal, some of these contracts renew automatically without permission or approval and come with automatic price increases. In some cases, practices may even be paying for services they no longer use or maintenance fees for support services they no longer need.
Reviewing vendor contracts can be intimidating because the language is often written in a way that requires an interrupter to make heads or tails of intent. For example, vendors will often use language in their agreements that will sound friendly and allows them to escape their obligations.
To illustrate the point, here is an excerpt from a vendor contact covering their liability obligations. Can you spot the issues with this term?
LIMITATION OF LIABILITY. VENDOR’S LIABILITY TO CUSTOMER FOR ANY LOSSES OR INDIRECT DAMAGES, IN CONTRACT, TORT OR OTHERWISE, ARISING OUT OF THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE LIMITED TO THOSE ACTUAL AND DIRECT DAMAGES WHICH ARE REASONABLY INCURRED BY CUSTOMER AND SHALL NOT EXCEED THE FEES PAID BY CUSTOMER WITH RESPECT TO THE SERVICES GIVING RISE TO THE LIABILITY OVER THE MONTHS IN WHICH LIABILITY OCCURRED NOT TO EXCEED TWELVE (12) MONTHS. VENDOR WILL NOT BE LIABLE FOR: (I) SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OR LOSS OF DATA, LOST PROFITS, LOSS OF GOODWILL IN ANY WAY ARISING FROM OR RELATING TO THIS AGREEMENT, THE APPLICATIONS OR SERVICES, EVEN IF VENDOR HAS BEEN NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES OCCURRING.
On the surface, the above terms start with the promise to have a limited amount of liability. However, the less direct statement indicates the vendor’s intent to cap their liability at whatever amount has been paid to the vendor in the last 12 months. In most cases, this will be your monthly maintenance fees, which are generally about 15% of what you paid for the system.
The vendor is also attempting to exclude themselves from being liable for damages in cases where they were notified in advance of the possibility of harm to the practice. You don’t have to be an attorney to know this is not a customer-friendly term. The healthcare provider should not sign this agreement without significant modification to this term.
For example, the vendor should be liable for the amount of the total cost paid for the system, not just the last 12 months of payments. Moreover, while it may be challenging to get a vendor to cover 100% of your damages, they should have an obligation to pay up to their liability insurance limits. This is especially true for gross negligence if one of their employees used customer data to commit fraud or if their software is defective and caused harm to a patient.
Reviewing the Contract and Negotiating the Terms and Conditions
The contract review process should include both a business and legal review. Organizations like Coker Group specialize in vendor contracting and procurement and could offer some assistance in reviewing these contracts.
To prepare for a contract review or negotiations, develop a list of issues you need to inspect and negotiate, define the problems and the desired outcome, and prioritize the list to identify your non-negotiable criteria. It would help if you also sorted your priorities by deal-breaker items, neutral items, and wish list items.
We recommend considering the following points in your contract review:
- Implementation plan
- Software customizations
- Criteria for acceptance
- Data Conversions
- Future Updates and New Releases
- Software End of Life Protection
- Governing Law and Venue
- Liability and Warranties
- Product Defects
- Terms of payment
- Software and hardware maintenance fees
- Price protection on maintenance fees
- Cost of system
- Addition of future providers
- Future recurring fees
- Government mandates
- EHR Incentives
- EHR Certifications
- Interfacing, especially with outside systems
- How to handle problems
- How to terminate and exit the relationship
- Auto Renewals
- Data Blocking
- Disabling Access
- Access after termination
- Returning data in a readable industry-standard format
- Add a simple problem resolution clause in the contract to allow you and your vendor to work through any difficulties
In addition to the above core items, you will want to negotiate the terms and conditions and the contract language. The easiest way to negotiate payment terms is to establish a fee schedule tied to deployment success. We recommend the following in most situations:
- 25% due at signing of the contract
- 25% due after successful and “tested” install of the hardware
- 25% due after successful and “tested” install of the software
- 25% due after successful go live
Your terms should also state that maintenance will be paid after the system is implemented. Most vendors try to collect the annual maintenance at the time of signing the contract.
Modifying the Contract Language
It should come as no surprise to know vendor contracts are exclusively written to protect the vendor or seller. This is not to say the vendor is trying to beat you out of a good deal; it’s because vendors also have a lot at risk and can be easy targets for lawsuits. To some extent, you want your vendor partner to be protected from clients who bring unwarranted lawsuits against your vendor, putting them and the clients they support in jeopardy. It is never, under any circumstances, in a vendor’s best interest to have an unsatisfied client. Most vendors who are serious about staying in business will exhaust all reasonable efforts to keep their clients happy—future sales depend on it.
It’s also important to be very respectful and professional during the negotiations. It is never wise to push your vendor to the point of being unreasonable. Remember, you will be relying on the vendor for several years. Therefore, mutually acceptable terms and conditions should be the end goal.
An expert familiar with vendor contracts and strategies on how to avert risk should inspect your contract for pitfalls and concerns and provide guidance on addressing any issues discovered. Here are just a few reasons why a contract inspection may benefit you or your employer:
- New Purchase of EHR or Practice Management Systems
- Meaningful use guarantees and compliance to federal standards
- How to protect your data
- Vendor performance warranties
- EHR to EHR replacement or conversions
- Cloud Computing / Subscriptions / Pay for visit / License / % of collections
- Software End of Life Protection
- Vendor mergers and consolidations
To request a vendor contract review, submit your contact information with the code CONTRACT21.
Senior Vice PresidentContact