The financial pressure on hospitals is increasing. Health insurers are becoming ever more critical of hospital expenses and also want to have more of a say on the content and quality of the care provision. Hospitals wish to continue to offer good care and for this they require access to state of the art technology, whilst they often do not have the financial resources to absorb the higher investment outlays required. In this area of tension, the suppliers increasingly offer capital-intensive imaging equipment or laboratory systems on the basis of a monthly all-in price in the form of a MES or Technology Partnership contract. What kind of contracts are these and what points deserve attention from a legal point of view? A further exploration.
Recently, the newspapers have been full of enormous ‘medical-tech deals’ news. For instance, some time ago it was reported that Siemens entered into a ‘contract for medical technology in Spain’ to the value of 132 million euro. Philips has become the technology partner of Karolinska University Hospital in Sweden. GE Healthcare and Toshiba are also entering into such contracts. Closer to home we also see more and more hospitals opting for such partnerships. This includes the Haga hospital in The Hague and the Reinier de Graaf Gasthuis in Delft where recently long-term MES contracts have been entered into.
MES contracts and Technology Partnerships: what exactly are they?
MES stands for Managed Equipment Services. There is no clear definition of what this exactly entails but when looking at the current definitions by the offerors of such contracts (such as Siemens, Philips, GE Healthcare and Toshiba), a common thread can be detected. In this type of contract, the unburdening of the hospital by the supplier is the focus and capital-intensive equipment, such as imaging equipment, is made available to the hospital for a long period of time (usually 10-15 years). Increasingly, the choice is made for leasing instead of buying. The lease payment not only includes the use, installation and maintenance, but also the replacement by new (state of the art) equipment from the partner or third parties. This service provision is often supplemented by services such as consultancy (process optimisation for instance) and/or collaboration in the field of R&D. There is also no fixed definition of Technology Partnership contracts (‘TP contracts’). This term is normally reserved for MES-type contracts, where there is no all-in price for example, or no full unburdening. Often in these types of contracts the use and further development of systems and R&D take a more central role.
Is it really a partnership?
Is this not just a clever way to bind a purchaser to a supplier for a long period of time? A partnership means giving and taking, doesn’t it? These are without doubt justified questions. A partnership assumes a balancing of mutual interests. The interest of the purchaser is basically to obtain certainty and to be able to continue to have access to suitable technology at predictable costs. The interest of the supplier is a long-term commitment and turnover certainty so it can make the necessary investments to continue to develop the technology. I can hear you wondering: in what sense is this different from a supply contract with a maintenance obligation? MES contracts go further than that. A proper MES contract is aimed at a permanent connection of technology and support to the needs to the hospital and that assumes a large degree of cooperation, coordination and flexibility.
Flexibility is essential
The emphasis is on the word ‘suitable’. That the purchaser has access to the latest technology is not in itself the most important element, but more that it has suitable technology which continues to meet its needs. Nobody can predict the future. Entering into a commitment for 10 to 15 years is a very long period, in particular if it relates to high-quality technical products. What technological developments are going to occur during that period? What is going to happen to the demand for care in the future? What needs are going to arise in the hospital? All these questions require that there is sufficient flexibility in place in all kind of fields without this compromising the interests of the supplier and the purchaser. That is where the challenge lies in these kind of deals. It is pointless to devise contractual provisions for all possible risks. That is simply not possible. Of course, clearly foreseeable changes or risks must be addressed in the best and detailed manner possible, always taking the parties mutual interests into account. In the box below you will find a number of examples of risks and how they can be addressed. It is in any event essential to work with a proper governance structure whereby the parties regularly keep each other up to date on the performance of the agreement as well as on developments in the short and long term (roadmaps for example) allowing the agreement to be amended in the interim if required.
Trends can also be observed in these types of contracts. Where a number of years ago these contracts started as purchase on-call contracts, latterly there has been an increase in the use of financed models (lease). There also appears to be an increasing wish to include R&D in the scope of these contracts. It also fits in with partnership idea to have the supplier benefit from knowledge of the hospital. Other interesting developments relate to the financing of property by these types of tech-suppliers (see Siemens in respect of Ommelander Group in Groningen for example). Last but certainly not least, suppliers are paying more attention to big data applications to develop systems which are able to support doctors to an ever increasing degree, which in turns leads to all kinds of challenges relating to privacy (personal data processing).
It may be clear that drafting, detailing, negotiating and performing these types of contracts is never a straightforward matter. MES and TP contracts are complex contracts in which very many different issues and disciplines converge. It is certainly not something to be taken lightly and it is essential that the hospital must have a clear long-term plan to which MES or TP can give substance. Nevertheless, these types of contracts do meet a clear need of hospitals. A clear trend can be seen over the past years where it concerns the increasing opportunities and willingness of suppliers and hospitals to work together towards better and more efficient healthcare. What will be the next step? Enough food for thought.
Important points for attention in MES and TP contracts
- What is state of the art? A good definition is essential as there are different definitions in use such as ‘state of need’ and ‘state of innovation’. Do you want the newest of the new (including prototypes) or actually proven workhorses? Often a combination is chosen whereby a link is sought with the current requirements (key objectives) of the hospital.
- Flexible replacement plan: It is important not to become locked into a replacement plan which is set when entering into the contract and possibly quickly no longer meets the requirements. What if the number of procedures suddenly drops or increases for example? Such market developments must be able to be provided for. It is therefore quite common to come to agreements on the earlier/later/less/yes/no purchase of previously anticipated systems.
- Choosing third party systems: What if all of sudden a competing supplier brings a much better system on the market? It is very common in these types of contracts (up to a certain extent) to be free to purchase this competing system (Clinical Freedom of Choice) and that this system is maintained by the partner-supplier (Multi-Vendor Maintenance).
- Leases are increasingly popular: Lately the choice has been more and more for lease constructions with a monthly fixed all-in price being agreed. Please note that from 2019 the interpretation of the lease (operational or financial) as regards the activation on the balance sheet is no longer important; on the basis of the new international accounting principles (IFRS) all lease obligations must be activated on the balance sheet. Also be aware that a move from ownership to lease may influence existing financing arrangements with the bank as their security will be cancelled and this affects the existing financing ratios.
- Price developments: What happens in the event of price decreases or increases? Hardware has the tendency to lose its value quickly. Will this have consequences for the monthly all-in price? And, how do you determine the price of a piece of equipment in several years’ time? All kinds of agreements and safety valves must be incorporated to this end.
- Come to practical agreements: Nobody is waiting for legal acrobatics. Remember that those who have been at the negotiation table will usually not be involved in the implementation of those agreements. Their successors have to be able to work with those agreements. The contract must be written for them.