Understanding and Effectively Negotiating Contracts Stephen K. Phillips Principal Hooper, Lundy & Bookman, P.C. 1 Los Angeles San Francisco San Diego Washington D.C. What is a Contract? An enforceable set of obligations Can be oral Can be implied through a course of conduct Functions as a rulebook Is an asset of a business Provides structure to business relationships 2 Why Put Contracts in Writing? Clarify obligations and disclaimers Detail rules and terms Define and limit risk between parties (e.g., certain disclaimers must be written) Ensure legal compliance (e.g., law requires certain contracts like BAAs to be in writing) Enhance asset valuation 3 1
Common Types of Contracts Employment Independent Contractor Customer (e.g., patient, third party payor) Clinical Services Supply chain (including technology) 4 Contractual Virtues Clarity Comprehensiveness Accuracy Logic 5 Contractual Vices Ambiguity Omission Inaccuracy Illogic (i.e., conflict between terms) 6 2
Key Contractual Terms Definition/description of services/deliverables Preconditions to obligations Standards of performance Timing and term Compensation Exit rights/termination Risk allocation: reps/warranties, disclaimers, indemnities, LOLs, remedies, insurance Dispute resolution 7 Services and Deliverables To enhance your changes that you have a remedy under the contract for bad performance/behavior from the other party to the contract: Avoid ambiguity Use obligatory language ( shall ) Include performance standards and deadlines for services and deliverables 8 Preconditions Site requirements Implementation schedules Regulatory approvals Training requirements Acceptance or review process for insurance requirements, deliverables and services 9 3
Specific Terms Contracts may require specific terms for legal compliance BAAs require specific terms set forth in HIPAA Privacy Rule Clinical agreements must ensure compliance with Medicare/Medicaid COPs, recordkeeping and inspection requirements Agreements with referral sources may need to be structured to fit within Stark/PORA exceptions or anti kickback safe harbors Legal analysis must first identify and then analyze and revise as necessary any terms required for legal compliance 10 Timing/term Understanding the relationship between term length, termination rights and fees Understanding vendor s break-even point Renewal 11 Standards of Performance Representations and Warranties What s the difference? Why have them? Service levels and performance metrics Professional standards/qualifications 12 4
Compensation Fees often separated for accounting and compliance reasons into discrete fees for specific services and deliverables In supply contracts, separate fees for licenses and product purchases and for implementation services, maintenance services, training, etc. In service contracts, separate fees for professional v. administrative services Fee methodology or formula critical to the business deal and compliance review In employment and service contracts, incentive payments often key to aligning the parties interests 13 Compensation Compliance Issues Most contract compliance issues arise from noncompliant compensation schemes To protect against payment compliance issues, FMV is usually the starting point for corporate practice, fraud and abuse and tax exemption compliance Stark, antikickback and corporate practice statutes often dictate a precise compensation structure 14 Compensation and Corporate Practice Corporate practice doctrine prohibits lay entities from owning fees for professional services subject to the ban (MDs, PAs, chiros, etc.) CPOM prohibits a lay entity from receiving a portion of any profits from the practice of a professional subject to CPOM But percentage of revenue arrangements protected 15 5
Compensation and Stark Stark and PORA similar but not identical Both prohibit physicians and other professionals subject to the statutes from referring to an entity in which they have an ownership or compensation arrangement unless there is an applicable exception to the arrangements The applicable arrangements usually require compensation to be consistent with FMV, unrelated to the volume or value of referrals and in a written, executed contract 16 Compensation and Other Laws For tax exempt organizations, the restrictions against private inurement and undue private benefit require compensation to an insider or private party to not exceed FMV For anti kickback statutes, compensation should not be based on the volume or value of referrals by the recipient of remuneration to the provider of compensation Antitrust laws prohibits collusion among providers against payors CMP Law prohibits patient remuneration that s intended to influence patient self-referrals 17 Exit Rights Termination for cause: difficult and expensive in practice Termination for convenience: highly desirable for have because of the limitations on for cause termination but vendors object Termination assistance: important to have as a customer where a sudden disruption of service must be avoided 18 6
Risk Allocation Representations and warranties Disclaimers Limitations on liability: qualitative v. quantitative Indemnification: Insurance Termination Rights 19 Dispute Resolution Litigation v. arbitration v. mediation Allocating dispute resolution fees Venue and governing law Third party beneficiaries 20 Boilerplate Provisions Venue and governing law Assignment rights Force majeure Order of precedence among contractual documents 21 7
Effective Negotiation Leverage, leverage, leverage Leverage can be orchestrated but only before negotiations begin Leverage requires agreement and coordination among internal stakeholders, which requires effort and determination Deal value creates leverage in supply chain contracts aggregate demand whenever possible. Use MSAs, GPOs. Leverage requires choice maintain at least the appearance of choice 22 Understanding Risk Risk allocation terms require compromise Effective compromises requires accurate risk assessment Understand insurance coverage 23 Understanding Organizational Needs Negotiation aided by understanding where organization can compromise (on timing, deliverables, etc.) and where it cannot (legal compliance) Requires centralized repository of organizational contract knowledge and requirements Usually consists of libraries of contracting policies and contract templates and sometime contracting playbooks 24 8
Ignore (Most) Industry Customs When You re the Customer It doesn t have the force of law It s referenced selectively by vendors to convince you an unfair provision is acceptable It typically is based on vendor preferences not customer operating circumstances or needs It hides a lack of principle or understanding of a contractual term 25 Develop templates and checklists Always try to own the paper Repetitive deals lend themselves to templates All contracts lend themselves to checklists Templates and checklists should set forth your favored terms and a playbook of compromises for terms to guide negotiators 26 Background Checks Background checks should be performed periodically on all workforce personnel and independent contractors You should require your vendors to perform them for personnel on your account Medicare COPs require prohibit hiring or contracting with a person barred from Federal health care program participation. Comprehensiveness and frequency of existing background checks should be reviewed 27 9
Background Checks to Consider Background Check Type Criminal History OIG/GSA Search Sex Offender Search SSN Trace and Validation Employment Verification Reference Interview Professional License Verification Education Verification General Description Search of court records to identify past criminal conduct. Shows both misdemeanor and felony convictions. Identifies individuals listed by the government as excluded from participation in Medicare, Medicaid and other federal healthcare programs. Identifies registered sex offenders (national database search) Lists names and addresses associated with SSN and confirms validity of the SSN. Verification directly from past employers including dates of employment, position & salary history. Through personal interviews, obtains and reviews information regarding candidate s capabilities and work history. Verification with Licensing Board or Agency. Shows status, dates, to whom issued and whether adverse action has been taken against license. Verification of institution attended, dates of attendance, degrees and/or credential earned, and major area of study. 28 Background Checks to Consider (con t) Background Check Type Education Verification Motor Vehicle Records Examination Vehicle Insurance Verification Civil History Federal Civil Search Credit History Examination General Description Verification of institution attended, dates of attendance, degrees and/or credential earned, and major area of study. Shows motor vehicle driving violations, license suspensions, restrictions and revocations and driving related convictions. Varies by state. Verification of vehicle insurance. Review of court records by name, county, or jurisdiction to detect law suits, restraining orders, and other civil court activity. Search of court records to identify bankruptcies, tax liens and other adverse information. Identifies if an applicant has any accounts in collections, open loans, inquiries made by third parties, etc., by accessing credit bureau information. Federal Criminal History Drug Testing / Health Screening Search of federal court records to identify past criminal conduct. Tests for presence of some prescription and illegal substances. 29 Execution Don t invalidate a contract by sloppy execution Fill in all blanks, get rid of brackets, comments, redlines and other non-contractual language Properly execute and date and create several copies of the fully executed contract Document notice and term periods (e.g., for termination before automatic renewal) 30 10
Management Document all your time-sensitive obligations and notify operational team of them Document all failures of other party to adhere to contractual obligations Follow contractual notice and dispute resolution timelines and procedures Monitor service levels if applicable Implement term tracker for contract 31 Questions? 32 Contact Information Hooper, Lundy & Bookman, P.C. 575 Market Street Suite 2300 San Francisco, CA 94105 (415) 875-8508 sphillips@health-law.com 33 11