"PART THREE OF A SERIES"

Pricing Models and RFP Terms For Web Orders and Results

Secrets For Negotiating Win-Win Agreements

CEO SUMMARY: Browser-based systems for lab test ordering and results reporting are now offered by a growing number of vendors. Early adopter labs are successfully acquiring these systems and offering them to their physician-clients. In this third installment of our special series, Cory Fishkin explains how to develop effective RFPs (Request For Proposals). He also explains the three common pricing models offered by vendors, along with their benefits and disadvantages. With an insider’s perspective and experience, Fishkin offers valuable information on how to negotiate for the right browser-based system at the right price.

PART THREE OF A SERIES

EDITOR’S NOTE: In the first two installments of this series, Cory Fishkin, President of Mostly Medical, Inc. of New York, identified and explained the operational requirements for an effective browser-based lab test results reporting system, followed by the same for browser-based lab test ordering. (See TDRs, July 23, 2001 and September 4, 2001, respectively.)

COMPARED TO PURCHASING traditional LIS software, the acquisition of a browser-based lab test ordering and results reporting system has unique differences which should be incorporated into the request for proposal (RFP).

“The concept of ASP (application service provider) systems requires a different relationship between the lab customer and its vendor of choice,” stated Cory Fishkin, President of Mostly Medical, Inc. of New York. “Whether the lab hosts its own server or allows the vendor to do the hosting, the nature of the day-to-day business relationship has changed between the two.

“The success of this new type of business relationship starts with the RFP,” he explained. “Moreover, a well-prepared RFP is key to negotiating the most effective price. Vendors see lots of RFPs. They recognize the good ones from the bad ones.”

Fishkin believes a lab enjoys two benefits from a well-structured RFP. “One, the RFP communicates to the ven- dor whether or not the laboratory will be a good customer with which to work,” he stated. “Two, the better the RFP, the more likely it is that the lab will negotiate favorable terms and prices.

Secrets Of The Good RFP

“That’s why it is important that the lab understand how to craft a detailed RFP,” continued Fishkin. “It forms the basis for developing a win-win relationship with the chosen vendor.

“This installment will first address the essential elements of an effective RFP,” noted Fishkin. “Then I’ll discuss the three common pricing models used to sell browser-based lab test ordering and reporting systems.

“Writing an effective RFP for a browser-based lab testing ordering and results reporting system is actually a fairly simple process,” he said. “The first secret is not to create the RFP from scratch. Review RFPs your lab has used in the past to purchase LIS software. Organize your RFP in much the same way and borrow sections as appropriate.

“Your RFP should query the vendor about its past experience with the specific LIS software products used by your lab,” observed Fishkin. “You want the vendor to provide a list of customers with the same LIS for which the vendor has created an interface. Be particular about which LIS versions have been interfaced successfully, because interfacing to different versions of the same LIS software can require radically different resources.

Critical Success Factor

“Next, it’s equally important for the lab to identify the most significant practice management systems (PMS) used by its physician-clients,” added Fishkin. “A good interface between the physician’s PMS and the browser-based order entry module is a critical success factor.

“This requires the lab to survey its clients to determine the most prevalent PMS products used in the community,” he said. “As part of the RFP, vendors should identify the specific PMS systems to which they have written interfaces and list their experiences with these systems.

“Requirements for training and instal- lation in physicians’ offices must also be addressed in the RFP,” Fishkin stated. “Can these functions be outsourced to the vendor? Does the vendor have the resources to do this properly? This can be an issue for hospital laboratory outreach programs.

“Frequently, there is only one individual responsible for marketing, customer service, troubleshooting, and the like,” he added. “Asking this same person to also install and train physician-clients in how to use the test ordering and results reporting system may overload them. That is why it might make good business sense to outsource these responsibilities.”

Fishkin also recommends developing an RFP which is “vendor-friendly.” “Too often, labs issue RFPs which require the vendors to repeat, in text, information which is already available in marketing and collateral literature,” he commented. “Or, the RFP may pose broad questions, like ‘explain your implementation procedures.’ In both cases, vendors must spend more time and energy providing detailed written responses on topics for which better documentation already exists.

Three Pricing Models For Browser Systems

ALONG WITH the introduction of browser- based systems for lab test ordering and results reporting came a new pricing model, the per-transaction model. Cory Fishkin, President of Mostly Medical, Inc. of New York explains the three common pricing models now found in the lab industry.

1. TRANSACTION MODEL:
This model charges a fee for every transaction between the lab and its clinician-clients. Pioneered by claims vendors, this pay-as-you-go model is suited for use with the introduction of application service provider (ASP) software offered on a remote host basis.

2. PER-USER MODEL:
In this pricing arrangement, the laboratory pays either a monthly, yearly, or one-time fee for each individual licensed to use the browser-based lab test ordering and results reporting system.

3. SITE LICENSE MODEL:

Probably the most familiar software pricing model, the vendor charges a flat fee to the laboratory, and is paid an annual support fee in the range of 18% of the site license cost.

Use Checklists In RFP

“It’s a much better strategy to use checklists,” recommended Fishkin. “Ask the vendor to check items or services they provide which are relevant to the lab’s needs. Alternatively, the RFP can invite the vendor to use attachments. That permits the vendor to attach documentation concerning implementa- tion procedures and other functions.

“In both cases, your vendor can probably provide better information than if it must write narrative answers to broad questions,” he noted. “As well, these basic guidelines insure that the RFP gives the lab a fair basis to evaluate competing vendors.

Earlier Interfaces

“Next, it is particularly important to identify how the vendor has interfaced its other clients to the same LIS and PMS systems in use by your lab and your clients,’ commented Fishkin. “This is a key point and the lab should definitely contact those customers the vendor provides as references. Writing the interface and implementing it are critical success items as you move to introduce browser-based services across your laboratory organization.

“Another critical success factor is the vendor’s ability to install the system and implement the solution with maximum success,” he added. “During the RFP process, you should insist on meeting the staff and the managers who will be responsible for implementation,” stated Fishkin. “Frequently, it is only the sales people who work with the RFP. After signing the agreement, the lab then must implement the system working with an implementation team they’ve never met. It’s a shrewd business step to meet the vendor’s implementation staff during the RFP process. It gives you the opportunity to evaluate their capabilities and whether they can meet your laboratory’s unique needs.”

It’s a shrewd business step to meet the vendor’s implementation staff during the RFP process. It gives you the opportunity to evaluate their capabilities and whether they can meet your laboratory’s unique needs.”

Pricing is the next subject. “As vendors respond to the initial RFP, they have three basic pricing models to offer,” he said. “These are: 1) the transaction model; 2) per user license model; and 3) site license model. Each has different advantages and disadvantages for laboratory customers.”

According to Fishkin, the transaction model is the newest pricing model to emerge as part of the ASP remote-host business concept. “Transaction pricing involves charg- ing the lab for each electronic transaction. This can be done by charging either a fee for a single patient’s test order and results—commonly called a ‘round trip’—or charging individually for test orders and reports.

“Under this pricing model, higher volumes of transactions will earn lower prices per transaction,” he said. “Also, vendors have up-front fees. Each interface that needs to be written might cost between $10,000 and $75,000. Training and project implementation fees can run as high as $25,000. However, some vendors are willing to offset these up-front costs and recover those monies from slightly higher transaction fees during the life of the contract.

Price Per Transaction

“Typically, the price per transaction will range from 25¢ to $1.00. The exact amount is determined by transaction volume and whether the vendor’s front-end fees were deferred and will be recouped from transaction fee revenues over the life of the contract,” explained Fishkin.

The lab’s sales strategy will influence the type of transaction pricing it selects. “Some labs want to emphasize browser-based lab test results reporting as the main service. They want to get as many doctors as possible to begin accessing lab test results by browser. To support this strategy, I recommend that labs ask their vendor for a two-tier pricing arrangement, with results reporting charged at a lesser sum than test ordering.

Economic Benefits

“Typically, test order transactions should be priced higher than lab results transactions,” continued Fishkin. “This is sensible. It is less complex to report results. Also, the economic benefits to the lab from an accurate and complete electronic test order justify a higher price per transaction.

“Some vendors are amenable to this pricing arrangement,” he stated. “They know that the more frequently a physician’s office uses electronic test reporting, the more likely they are to subsequently adopt electronic test ordering. That benefits both the lab and its vendor.

“A couple of caveats about the transaction pricing model. First, make sure that support fees, generally around 18% to 20%, are not assessed on implementation fees,” advised Fishkin. “Such fees would include project planning, project management, training, administrative, set-up—anything relating to installation.

36-Month Estimate

“Second, the best way to determine your total cost and compare proposals from competing vendors is to add the up-front charges to your projected volume of transaction fees over the first 36 months of the contract,” he added. “This is precisely what the vendor does to insure it recovers all its costs.

“Such a calculation allows the lab to understand how the pricing for individual services in the contract affect the total price paid over the life of the contract,” observed Fishkin. “Equally important, it allows the lab to accurately compare its true costs between all vendors and any of the three pricing models that might be used.”

Next is the per user license fee pricing model. “This can be described as ‘pay-as-you-go’,” said Fishkin. “For every clinician using the system, including M.D., P.A., and N.P., the lab pays a license fee to the vendor. This fee can either be a one-time payment or a monthly charge. It is based upon the number of individual users.

Popular Pricing Module

“Currently, this is the most popular pricing model in the lab marketplace,” observed Fishkin. “It’s easy to set up and manage. Monthly fees will range from $20 to $70 per user. One-time fees go from as low as $100 to as much as $1,500 per user. Again, if there is not a separate implementation fee, license fees should include implementation, including installation of the server, establishing a database, loading the lab’s test catalog and ordering rules, and validating interfaces with the LIS.

“A word of caution about this pricing model,” warned Fishkin. “Exercise care in how the agreement defines a user. Be sure to know whether it includes staff in the physicians’ office or only clinicians. Further, make sure you can recycle the user license if individual physicians leave the client practice.

“It’s been my experience that the laboratory’s marketing strategy and client composition determines the eco- nomic justification for the per user license pricing model,” observed Fishkin. “For example, if the lab serves lots of smaller physician group practices, per-user arrangements can be quite cost effective.

More Economical Options

“However, in larger groups and clinics where per-user fees could be assessed on 20 or more clinicians, it may be more economical for the lab to either switch to another pricing model or install a thick client, depending on the needs of the practice. Another option is for the ven- dor to carve out these types of clients and price them differently for the lab.”

The third pricing model is the familiar “site license” arrangement, used for decades to acquire LIS software. It involves a flat cost to operate the system. “Conceptually, the lab pays once for use of the system and fees are not linked to either the volume of transactions or the number of clinicians using the system,” explained Fishkin. “Annual support costs generally run between 18% and 20% of the license fee.

“The actual price of the system will vary according to the features selected by the lab and the number of users it expects to use it,” he continued. “To negotiate the most favorable agreement, the lab should do detailed estimates of the number of physicians’ offices which can be expected to move toward browser-based lab test ordering and results reporting during the life of the contract. This is the customer mix which must be supported by the thin client ASP software.

“One benefit of the site license pricing model is that the fixed cost arrangement allows a laboratory to accurately budget its costs over a multi-year period. The downside is that the lab may be paying for the complete menu of functions such as orders, reporting, and queries, but only using certain services or for physician licenses you may never need.”

Contract Terms

Fishkin notes that most site license agreements have a clause that allows the contract to be renegotiated if the lab’s parent hospital or health system is involved in a merger or acquisition. “This is a reasonable response to major changes in the client’s operations and transaction volume,” he observed.

Fishkin notes that, regardless of the pricing model used, laboratories should be careful to establish the right kind of support for their needs. “If your lab provides services to emergency departments, urgent care centers, and physician’s offices that offer weekend hours, you may need a 24/7 service arrangement,” he said. “Also, you want a vendor whose support infrastructure is capable of notifying you if the system is down. That avoids the unpleasant surprise that occurs when a client calls and says they can’t use the system.

“I’d also recommend that laboratories build an ‘up-time’ incentive into the agreement,” he added. “In situations where the system might be down for hours or days, vendors should provide a credit to the laboratory. This credit is a motivation for them to maintain service continuity and fix problems fast!”

Fishkin’s advice and recommendations on RFPs and pricing models is based on several years of hands-on experience with the earliest generations of browser-based systems built on the ASP concept. THE DARK REPORT believes this experience can help laboratories acquiring such services to nego- tiate the best possible terms and prices.

Inducement Issues May Need To Be Considered

“WHEN INSTALLING these browser-based systems in physicians’ offices, it’s important to remember that inducement issues must be considered,” advised Cory Fishkin, President of Mostly Medical, Inc. of New York.

“For example, if the lab provides a PC to the physician’s office which hosts the browser used to order lab tests and access results, the browser should point only to the lab’s Web site,” noted Fishkin. “If the physician is using the PC for other, non-lab related tasks, he should pay ‘fair market’ for these functions. Each situation may vary, so it’s wise to consult your legal counsel about compliance and other legal issues.”

Better Performance

Each new generation of browser-based lab test ordering and results reporting products offers a better combination of performance and price. Most likely, the pace of acceptance by physicians’ offices will track the rate at which they acquire broadband Internet access in their offices.

The entire American healthcare system is moving toward more effective use of Internet-based services. Laboratories and pathology groups would be well-served to position their organizations to benefit from this trend.

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