Managed Care Contracts and Your Practice

Prepared for the
American Association of Orthopaedic Surgeons®
September 2006
Jayme R. Matchinski, Esq.
Hinshaw & Culbertson LLP

[This document was prepared in conjunction with the American Academy of Orthopaedic Surgeons® Practice Management Consults: Managing Payer Agreements podcast.]

Prior to signing a managed care contract, orthopaedic surgeons should carefully consider proposed contract terms to determine their ability to economically deliver health care services and avoid potential managed care pitfalls. Most managed care contracts attempt to share some of the financial risk for the provision of health care services with the surgeon through per diems, per case rates, capitated payments, withholds, or some other form of risk-based pricing.

There has been a shift in fee-for-service (FFS) to managed care contracts. Historically, FFS has been an arrangement where patients pay physicians, hospitals and other health care providers for each service rendered and then reimbursement is sought from a private insurer or the government. FFS reimbursement has been based upon the traditional provider reimbursement system under which the provider receives a payment calculated on the basis of the provider's billed charges. Managed Care Organizations (MCOs) and managed care contracts have changed how surgeons provide care to their patients and receive reimbursement.

It is critical that orthopaedic surgeons actively negotiate their payers agreements and have a clear understanding of what a managed care contract means to their practice in terms of revenue and expenses. This article will provide an overview of key MCOs and models, contract negotiation issues, deal points, payment methodologies, managed care traps, and dispute resolution mechanisms.

Contract Negotiation

Before you begin negotiating your managed care contract you should gather background information regarding the MCO, conduct due diligence, and identify key objectives to determine your deal points. Core contract issues you should consider include: identification of covered services, the definition of medical necessity, financial arrangements, the parties' obligations pursuant to the health plans, and termination rights. Orthopaedic surgeons and their group practices should identify deal points that relate to certain objectives which may include: protection or increase of patient base and market share; development of a managed care network; creation or protection of revenue stream; development of a relationship with specific payers; and alignment with other providers and payers in the market.

If a MCO presents you with a managed care contract on a take-it-or-leave-it basis you should proceed cautiously and consider this a red flag that may warn you about a difficult future payer/provider relationship and unfavorable contract terms. If a contract is presented as non-negotiable, this should not prevent you from attempting to negotiate objectionable provisions. Carefully read and understand all contract terms prior to signing a managed care contract. Most managed care contracts contain "boilerplate" language that the MCO has drafted and included in all of its standard contracts. The contract provisions in your managed care contracts will not only impact the patient/physician relationship, but also the business aspects of your practice.

Make sure you obtain all corresponding documents that are incorporated into the contract by reference including: administrative policies and procedures, protocols, bylaws, manuals, and rules. During the negotiation process there may be several versions of the contract. You should review the final language to ensure that the negotiated terms have been included in your final contract. You might decide to walk away from a proposed contract if it does not contain the terms you are seeking for your practice or group practice.

MCOs and Key Managed Care Contract Models

Since the advent of managed care contracting, many MCOs have evolved and been presented to orthopaedic surgeons including: PPOs, HMOs, IPAs, EPOs, and POS. The Preferred Provider Organizations (PPO) is a plan that contracts with independent providers at a discount for services. The PPO is usually limited in size and has some type of utilization review system associated with it. A PPO may be risk bearing, like an insurance company, or it may be non-risk bearing, like a physician-sponsored PPO, that markets itself to insurance companies or self-insured companies through an access fee. While there are several different PPO models, the provider sponsored plan is the model that has been utilized by many orthopaedic surgeons. Provider sponsored plans are developed and promoted by health care providers and can be organized around a single hospital, a regional hospital network, or a group of physicians. A variation of this model involves one or more hospitals and medical staff members offering services and receiving reimbursement outside of the traditional FFS.

A Health Maintenance Organization (HMO) is an entity that contracts with employers and individuals to provide comprehensive health care benefits through a network of health care providers for a fixed monthly fee. HMOs provide physicians through several models. Orthopaedic surgeons have participated in the IPA/Direct Model HMO, where the HMO contracts directly with an Independent Practice Association (IPA) that in turn contracts with its physicians. An IPA is typically a professional corporation owned by physician providers that contracts to deliver health care services to HMOs, PPOs, employers, unions and other payers. Some IPAs contract with upstream payers to assume both professional services and hospitalization risk. The IPA also enters into participating physician provider or similar agreements where the physicians agree to provide pre-paid medical services to members and enrollees of the plan and other persons with whom the IPA contract, often on a discounted fee-for-service basis.

The Exclusive Provider Organization (EPO) combines elements of PPOs and HMOs. Like a PPO, EPOs contract with a preferred group of providers. Similar to an HMO, insurers in an EPO must use those providers to be eligible for reimbursement or sacrifice reimbursement altogether.

The Point of Service (POS) plan allows members to choose from non-participating providers or without regard to an MCO's protocols governing out of plan use. However, members generally pay co-insurance, deductibles, or both, if they go outside the network. Some POS plans are regulated as insurance companies, others as PPOs, and some without a clear cut distinction, form the requirements applicable to HMOs. POS plans move HMOs toward indemnity insurance and many HMOs may not have the relevant underwriting, rating and administration capacity to effectively assume risk for significant levels of out of plan utilization.

Understand Key Contract Terms

Contract terms that should be found in all managed care contracts include "medically necessary" and "covered services" definitions. The American Medical Association (AMA) developed the AMA Model Managed Care Contract in 1997 to assist physicians in navigating the arena of managed care. The AMA model defines "medically necessary" care as "health care services or products that a prudent physician would provide to a patient for the purpose of preventing, diagnosing and treating an illness, injury, disease or symptom in a manner that is in accordance with generally accepted standards of medical practice." Be alert for managed care contracts that define "medically necessary" according to the plan's own arbitrary cost criteria and use such language as "least costly alternative." You should also be cautious of contracts that leave medical necessity decisions in the hands of the health plan's medical director.

Health plans will generally pay for "covered services" that are medically necessary. When an orthopaedic surgeon determines that a particular procedure or service is medically necessary for his patient, the clinical decision does not determine whether the service is covered by the patient's health plan. Many managed care contracts either poorly define "covered services" or include a definition which works to the advantage of the health plan by giving wide discretion to the health plan to deny requested services that are not covered. The AMA Model Managed Care Contract defines "covered services" as those services "specifically set forth on one or more exhibits attached to the contract." A health plan should have an easily accessible system for surgeons to confirm that a service is covered when a patient is in the office. This allows the physician to inform the patient if the service is not covered and that the patient will be responsible for payment if the service is performed.

A majority of states have enacted patient protection laws that require managed care health plans to accept an independent second opinion before refusing to pay for medical care. In the past, however, health insurers have taken the position that these laws are preempted by the federal Employee Retirement Income Security Act of 1974 (ERISA). In June 2002, the U.S. Supreme Court rejected this argument in a major victory for physicians and patients. The Supreme Court decided in Rush Prudential HMO, Inc. v. Moran, No. 00-1021, that the Illinois HMO Act, which provides for external review of medical necessity decisions, was not preempted by ERISA. However, the Supreme Court also indicated that the Illinois law does not apply to patients who receive their insurance through self-funded plans. Since more than fifty percent of commercial insurance is provided through self-funded plans, additional advocacy work still needs to be done at the state and federal levels regarding the patient's right to appeal denials of care based upon medical necessity.

Managed Care Payment Methods

When reviewing a proposed managed care contract you should determine what the exact reimbursement will be under the contract and if the reimbursement is sufficient. Specifically, review the contract to ensure that it provides you with enough information to determine what you will be paid for the services you provide. Make sure that your contract includes a comprehensive fee schedule that includes detailed information on payment methodology, CPT codes and guidelines. You should also figure out the costs to provide the services required under the contract. If the managed care contract does not compensate you beyond your practice expenses, you may lose money on the contract.

The following are examples of some of the payment methodologies utilized in managed care contracts:

Risk-Based Payment allows a payer to shift to a provider (orthopaedic surgeon or practice group) certain economic risk associated with covering a defined population of enrollees for health care services. Most common risk-based payment methods are per diem rates, per case rates (global fees), capitation, and percentage premium.

Discounted Fee for Services is used when the orthopaedic surgeon or group practice agrees to provide covered health care services at a discount from the "standard" full charge for those services.

Per Case Rate/Global Fees occurs when the payer pays the provider a fixed rate for each enrollee based on the enrollee's diagnosis.

Capitation is used when the surgeon or practice group receives a flat payment per enrollee, per month from the payer. For this monthly fee, the surgeon or group practice agrees to provide certain specific services to a given population of enrollees.

Percentage of Premium occurs when a provider agrees to accept a percentage of the payer's monthly premium in return for providing all covered services to the enrollee during that month.

Risk Pools is a risk sharing method that may be used in conjunction with other reimbursement methods and involves withholding a certain portion of the provider's reimbursement payment or the payer's premium.

Avoid Managed Care Traps

There are many pitfalls to avoid as you negotiate your managed care contract. The following issues pose potential risk to your practice and require special attention as you negotiate with MCOs:

Undefined Provider Responsibilities/Delegation of Duties: Identify the expectation for your involvement in utilization management, medical management, member relations, credentialing, compliance, and other responsibilities.

Prompt Payment and Balance Billing: Review state law that governs the contract, recent court decisions, and legislative trends. Make sure you define "clean claim" in your contract and include a time limit for payment by the payer upon receipt of a clean claim.

Renewal Provisions: Include a provision that fees will be negotiated separate and apart from the renewal terms of the contract. Some managed care contracts are "evergreen" contracts that automatically renew every year. Carefully review the term, track renewal terms, and termination provisions of your contract.

Reimbursement for Services: Identify the reimbursement methodology and make sure it is clearly and concisely spelled out in your contract.

"Gag" Provisions: Review applicable state law to confirm that you are not restricted in any way from discussing treatment alternatives with your patients, which may or may not be a covered service under their plan.

Protection of Confidential Information: Include provisions regarding HIPAA compliance and protection of protected health information.

Carve-Out Arrangements: Consider the use of carve-out arrangements to tailor reimbursement to high cost or unpredictable frequency of services, e.g. physical therapy, or behavioral health care. Make sure you understand any carve-out relationships that you have with the managed care entity.

Dispute Resolution: Include an alternative dispute resolution (ADR) method in your contract that contains an internal administrative determination or appeal as a prerequisite to any further process; non-binding, conciliatory dispute resolution processes, such as mediation; and binding adjudicatory alternatives to litigation, such as arbitration.

MCO Insolvency: To reduce the likelihood of unpaid claims due to the MCO's insolvency, you should continually evaluate and monitor the MCO's financial condition; include effective contract termination provisions in your contract that provide for immediate termination if the payer appears insolvent; avoid payment delays and losses prior to MCO insolvency; consider the use of payment advances, deposits or other payment security; and understand state law reserve requirements and the state insurance insolvency parameters.

Membership Lists and Provider Directories: Make sure the MCO maintains current membership lists so that your practice and the MCO can accurately verify patient eligibility prior to delivering services. Include a provision within your contract to the effect that payment for services is rendered in reliance of the payer's identification authorization.

Managed Care Contract Dispute Resolution

Your managed care contract should provide specific procedures to appeal a reimbursement decision and resolve any disputes that may arise between the parties. If you find yourself in a dispute with a managed care payer, there are certain steps that you should consider in order to resolve the dispute, including: reviewing your contract for possible areas of dispute related to coverage, claims, and payment; determining whether the payer has received all required documentation and confirming that you have filed a "clean clam;" initiating all applicable appeal or review procedures for claim denials; identifying dispute resolution mechanisms, including interim determinations or appeals, negotiations, mediation or arbitration; determining whether mediation or arbitration results are binding or non-binding; setting time frames for dispute resolution; and utilizing state and federal statutes to receive timely payment, including state prompt-pay statutes and ERISA as applicable.

It is imperative that you carefully chart your course when negotiating your managed care contracts and strategically plan to achieve your deal points and avoid managed care traps. Make sure you understand the contract provisions, include safeguards in the contract to protect your practice, and know your rights and remedies if a dispute arises between the parties.

Jayme R. Matchinski, Esq., a partner with the law firm of Hinshaw & Culbertson LLP, in Chicago, Illinois, concentrates her practice on health care law and has counseled physicians and health care providers nationally. Ms. Matchinski can be reached at (312) 704-3000 and via email,