If artificial intelligence (AI) is the vehicle that will
revolutionize health care, data is the fuel that will propel the
revolution. Health AI startups have recognized an unprecedented
opportunity to create a transformative network effect, akin to many
data companies, by collaborating with health systems and
hospitals.
The idea is simple yet powerful: by partnering with the
hospitals, health AI startups can access vast amounts of data,
which when aggregated and analyzed, can generate more refined
products, greater efficiencies and cost savings, and meaningful
impacts to problems that have plagued the health care ecosystem for
decades. These products can not only optimize patient care and
hospital operations but also become invaluable assets to other
stakeholders like pharmaceutical and medical device companies.
For hospitals, the proposition is tempting. By sharing their
data, they get access to cutting-edge AI solutions that promise to
cut costs, enhance patient and provider experiences, and drive
revenue. Meanwhile, for AI startups, the continual flow of data
means more refined algorithms, more accurate predictions, and an
expanding portfolio of insights.
However, the dynamics of these partnerships are not
straightforward. When health AI startups and hospitals sit at the
negotiation table, both sides must consider several key topics:
Data Use Rights
Many health AI startups are blindsided when learning how the
Health Insurance Portability and Accountability Act (HIPAA) and
state privacy laws limit data use. Absent certain authorizations
from patients or rights appropriately granted to the startup by the
hospital, HIPAA and other regulations can create barriers for
service providers, like an AI startup, to perform activities
outside of an agreement’s defined services that use patient
data. Necessary product-development activities, not considered part
of the defined services provided to the hospital-client, like
machine learning and using patient data to create training data,
are limited if not carefully negotiated.
Data Protection
To hospitals, protecting patient data is paramount due to
regulatory, ethical, and reputational concerns, as well as an acute
and ever-growing understanding of the true value of their patient
data. Hospitals tend to prefer non-exclusive rights, ensuring the
flexibility to use competing AI tools or share data with other
entities as needed. Startups may seek flexibility through the use
of de-identified patient data and the ability to license the
deidentified data through a fully paid, perpetual and non-revocable
license grant, which helps to ensure that they can utilize the data
indefinitely, as their algorithms evolve.
Pricing Strategy
Hospitals will want to ensure the AI solution offers a clear and
justifiable return on investment. Startups will aim to get a foot
in the door. Common pricing strategies, include low or no-cost
trial or pilot terms in exchange for valuable data insights and
collaboration clauses requiring both parties to routinely meet and
share insights gleaned from the data and the AI solution’s
performance. For startups seeking to evidence value and predictable
revenue, opting for a pricing strategy that includes
subscription-based pricing can serve multiple purposes, including
steady cash flow, recurring revenue and enhancing attractiveness to
potential investors and customers.
Term Length
Hospitals may prefer shorter-term contracts initially to test
the efficiency and reliability of the AI solution without a lengthy
commitment. They might also negotiate conditions where they can
exit the contract should the tool not meet specified performance
metrics. From the startup’s perspective, stability and
predictability are vital especially for future acquisition or
fundraising purposes. They’d want longer-term contracts,
offering them revenue consistency. To entice hospitals into these,
startups might offer discounted prices for longer commitments.
Discounts (and other pricing strategies and contract terms) should
always be considered for potential fraud and abuse implications
inasmuch as hospitals are likely participants in the Federal Health
Care Programs including Medicare and Medicaid).
Regulatory Requirements
Some AI software may be regulated by the U.S. Food and Drug
Administration (FDA) as Software as a Medical Device (SaMD)
depending on how the software operates and what claims are made.
Hospitals will likely look to the AI Startup to provide
representations and warranties that the software is compliant with
laws and some may require that the company has performed a
regulatory determination of whether the product is subject to FDA
requirements as a medical device. This can be challenging for AI
products that may undergo regular changes and adaptations.
Post-Termination Data Handling
Once the contract ends, hospitals should seek assurances that
patient data is either returned or destroyed securely. They would
seek clear clauses that prohibit any further use of their data,
ensuring patient confidentiality and compliance with regulations.
On the other hand, AI startups might negotiate terms that allow
them to retain derivative data (insights drawn from the raw data)
or de-identified datasets, aiding in further refining their
algorithms long after the termination of the relationship between
the hospital and the AI startup.
Renewal Rights
As the contract term nears completion, Hospitals may prefer
manual renewals, giving them an opportunity to reassess the AI
system’s performance and renegotiate contractual terms if
needed. They would want clear notice periods to avoid automatic
renewals without their explicit consent. Conversely, AI startups
tend to favor automatic renewals, seeing them as a conduit to
sustained revenue. They’d aim for clauses that default to
automatic renewal unless the hospital explicitly opts out.
Change of Control Provisions
In the event of a takeover or change in the AI startup’s
ownership, what happens to the contract? Is there a need for prior
notice or approval? In the event that a change in control provision
is triggered, the hospital would want assurances about data
handling and solution continuity. They might require prior notice
or even an option to terminate the contract in such events. That
said, startups might resist overly restrictive notice or consent
provisions which could deter potential investors or acquirers. As
such, they’d negotiate for reasonable notice periods and
clauses that are not too prohibitive accommodate flexibility during
mergers or takeovers.
AI has the ability to bring immeasurable and seismic change to
the health care industry. Health systems, hospitals and startups
are well-positioned to drive innovation through thoughtful and
meaningful partnerships. As the partnerships deepen, it’s
imperative for all parties to have clear, forward-looking
agreements that safeguard interests, respect data privacy, and
continue to push the boundaries of what AI can achieve in health
care.
SaMD Series
For additional resources on how software as a medical device
will impact the world of health care, click here to read the other articles in our
series.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
