Post-Surge Vendor Contract Negotiations in Healthcare: Re-evaluating Key Contractual Provisions.
As Covid-19 related hospitalizations have declined, healthcare counsel should prepare for the next wave by re-evaluating the terms of vendor contracts to adapt to the "new normal". In this blog post, we examine some of those terms. [Update: At the time of publication Covid-19 related hospitalizations were declining. Covid-19 related hospitalizations haven risen again and will likely continue to fluctuate.]
As healthcare counsel know, parties to any vendor contract want to retain flexibility for themselves while limiting it for their counter party. This is an inherent tension in any healthcare-vendor negotiation. The pandemic has shifted the calculus for the probability of facing a major disruption in operations. In contracting with vendors, hospitals now see a greater need to lock-in critical supplies and services, while coveting more freedom to reallocate non-essential financial and material resources on-the-fly. Vendors, conversely, want to hold hospitals to capital expenditure commitments and favorable payment terms, while leaving themselves flexibility to manage their own, suddenly-more-uncertain, supply chains and products. Those emerging priorities inform each of the provisions below.
Term: Defined vs. Automatic Renewal vs. Evergreen
Hospitals and other facilities may want to reassess vendor contracts to determine which provide essential supplies and services. For those key agreements, healthcare legal departments may opt to seek fixed pricing and quantity/service guarantees that renew at the healthcare enterprise's option. Healthcare counsel will, in any event want terms that avoid scenarios in which they must renegotiate agreements for must-have supplies and services under duress or during a time of scarcity pricing. No healthcare provider that recently paid hundreds-of-times the normal price for PPE ever wants to face that situation again.
Even while taking steps to protect critical agreements, healthcare legal departments may also require more flexibility to terminate agreements deemed non-essential. Of course, vendors will resist giving termination for convenience rights to hospitals, because those terms effectively force vendors to bear all the risk of a pandemic-level disruption by eliminating a basic claim for breach. Large medical providers may have the leverage to demand these rights in exchange for a modest price increase or an agreed upon prorated rate.
On a related note, healthcare counsel and outside counsel nationwide have taken renewed interest in force majeure or "Act of God" contract clauses, which previously received little-to-no attention in a negotiation. These clauses generally give one or both parties a right to terminate in the event of an unexpected, cataclysmic event beyond anyone's control that renders performance impossible. Should vendor contracts identify a "pandemic" as one such event? Pre-coronavirus, many contract parties might have assumed so. However, now that they have lived through the strain of an outbreak, healthcare legal departments may prefer to exclude "pandemic" from the defined scope of a force majeure excusing vendor performance, especially in essential supply and service agreements.
Business Continuity Provisions
Healthcare legal departments may also want to seek terms that designate certain events or contingencies as ones during which special contracting rights apply. Think of these terms as a potential complement or stopgap alternative to assorted termination rights; covenants stipulating that mission-critical contracts will remain in effect and that vendors will continue to perform under them during times of an existential threat to the healthcare enterprise. Counsel might also strengthen these provisions through stipulated waivers of the hospital's payment defaults when crisis conditions exist, and through specific performance and/or liquidated damages clauses inuring to the hospital's benefit.
Just in Time Critical Supply & Inventory Requirements
Now that healthcare facilities have a newfound appreciation for their most critical supply chains, they could seek covenants from vendors that guarantee minimum supply levels according to benchmarks tailored to demand (such as springing quantity adjustments that are triggered by an increase in patient traffic). Providers also now appreciate that although surplus supply comes in handy at the peak of a crisis, it becomes a burden when demand wanes. To address the potential for dramatic fluctuations in supply needs, hospitals and other medical providers may want to consider seeking put-back rights to return unused or expired supplies. Finally, providers also now appreciate the potentially extreme infection risks of a novel virus, which may entail seeking more detailed and iron clad vendor covenants on sterilization and re-sterilization of goods and equipment.
Support/IT Service Level Agreements (SLAs)
In the same vein, hospital legal departments may also want to give added scrutiny to SLAs to ensure the continued functioning of critical systems during a crisis. The pandemic has forced virtually all businesses to shift to work-from-home and other remote solutions for which many were not adequately prepared. To protect against disruptions owing to this kind of shift in how work gets done, healthcare counsel may, for instance, seek vendor representations and warranties that backups and redundancies are in place to ensure uninterrupted support and service to the provider under a range of crisis scenarios. They may enhance these terms with default waivers and stipulated remedies.
Another lesson learned: a pandemic might cause a surge for one particular department (in this case theEmergency Room and Intensive Care Unit departments), but on the whole, it suppresses demand for medical services, particularly elective procedures that ordinarily represent a key revenue generator for healthcare facilities. Paradoxically, many hospitals have experienced cash crunches in the middle of a health crisis, which is an outcome that administrators might not have foreseen, but will likely never forget. Legal departments that want to avoid any future instance of negotiating payment extensions under the duress of a pandemic can do so by seeking longer-duration or more flexible payment terms, springing payment default waivers, and strong continuity of business covenants (see above).
Finally, many healthcare legal departments now appreciate the daunting challenges of resolving a contractual dispute in the midst of a pandemic. Private dispute resolution mechanisms, like mediation and arbitration, offer parties more flexibility than state and federal litigation alternatives. The majority of vendor contracts already rely on mandatory ADR by default, but post-pandemic, healthcare lawyers will likely press for more-detailed provisions in arbitration/mediation clauses that speed-up the procedural timeline of any litigation, expressly limit and streamline discovery, and consent to remote work-friendly processes.