New Trends in Healthcare IT Contract Management

When negotiating the sometimes problematic area of healthcare IT contract management, it is good to keep in mind certain trends that are making themselves obvious in the marketplace. Here’s a look at just four of these trends.

Annual Contract Renewals

Many healthcare IT subscriptions or recurring agreements contain evergreen clauses that typically subject the agreement to an annual price adjustment. We often see highly uncompetitive renewal terms with uncapped annual escalation clauses or high fees intended to drive the renewal pricing to an extreme profit margin.

We typically evaluate any renewal based on this percentage fee increase compared to the prior year of coverage. Trending renewals suggest aiming for the lesser of 5% or the rise in the Consumer Price Index (CPI); however, many vendors will agree to the lesser of 3% or CPI changes. Aim for more aggressive and specific terms that limit your exposure in future renewals.

Committed Agreements

Despite the exploding popularity of subscription and recurrent agreements in this space, we somehow as an industry have seemed to lose sight of driving value with strategic vendor partners via committed agreements. This has led to annual renewal terms that have swelled operational expenses to the point where they dominate a typical IT budget, leaving little to no room from a capital perspective to drive innovation or advancement through infrastructure.

With increasing competition and non-healthcare-specific providers entering the market, many traditional players are becoming more aggressive with committed agreement concessions. This is a great tactic to reduce annual renewal increases (many vendors will waive all increases in exchange for a 3–5-year term) and professional service costs. Speaking of professional services …

Rising Professional Service Costs

Professional Services are included within nearly every project scope we review. Integration, data engineering, general labor, training—literally anything. Most vendors prefer to price these fees as a fixed cost (i.e., not to show resource levels or applied labor rates). The good news: this is a surprisingly easy area to drive value solely by requiring transparency from your vendor partners.

A well-defined statement of work that details each resource type, resource allocation plans, and hourly labor rates per each resource type can allow for ease of negotiations in project scope. Professional services can account for as much as 50% of a typical HCIT project scope, so this is an area where it should be unacceptable to provide anything less than complete transparency.

Seek Strategic Partners Over Transactional Dealings

Perhaps the biggest mistake many IT leaders make is not treating vendors as strategic partners and instead focusing on specific transactions and one-off negotiations in an effort to drive value. And who could blame them?

Many hospitals have nearly three-quarters of their annual IT budget tied up in operational expenses, leaving very little for capital expenditure. All the while, pressure to drive innovation through IT has risen, leaving many executives with very little margin for error when it comes to capital expense planning. OEMs and distributors are aware of this and are keen to exchange value for relationships.

Take a top-down approach and seek to drive value from this relationship rather than engaging in last-ditch negotiations at the point-of-sale or throughout the fiscal year; for example, leverage planned multi-year spend, or award a sole-distributor or dual-distribution contract in exchange for enhanced value. Creating value through multi-year strategic relationships is perhaps our best opportunity to stabilize the price index for infrastructure spend.

Tyler Speakman, Healthcare IT Analyst

Tyler Speakman joined MD Buyline in 2017.