Preparing for Managed Care Contracting

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This is the first article in the Managed Care Contracting"Signature Series" by Managed Care Resources, Inc. -- articles on topics in managed care written by experts in the field. The author of this article is Ira H. Rosenberg.

In this first article, we will present an overview of contracting for managed care services.

How does a provider determine whether or not to contract with a managed care payer? There are many elements that go into the decision process. Understanding the competition, knowing your costs, having an appreciation for the market in which you operate, understanding your ability to accept risk are some of the basic questions that you need to answer when entering into negotiations. This holds true whether you are in a primary care group, a specialty network, an ancillary service organization or a hospital. How you set priorities, the method of reimbursement, and the amount of risk that you are willing to accept may be different, but the elements are the same.

The purpose of the Managed Care Resources, Inc. Signature Series on "Contracting for Managed Care Services" is to provide some insight into these issues from a general perspective, as well as to provide a practical and in-depth look at some specific issues. The series will examine the issues from two perspectives. Some articles will look at general issues such as reimbursement, contract language and division of responsibilities. Others will look at issues specific to provider type. For this perspective, articles will be dedicated to primary care physicians, specialty physicians, institutions and ancillary services organizations.

We hope to be able to provide you with information that will be helpful to you whether you are in a newly evolving market or a maturing market. For those in newer markets, this information may help you anticipate the issues that you must address. For those in the maturing market, the information may serve as a reminder or checklist, or it may reveal a new twist on an issue you have faced in the past. It is our desire to present the "Series" in an easy to understand format. We invite your comments and we hope that you are able to benefit from the content.

The concept for contracting for services in health care is not a new one. The need of having a written agreement though has taken on greater importance in recent years. Because of the complexity of today's business relations, new government regulations, accreditation requirements, demands for quality medical care and the assumption of additional risk by the provider community, having a written agreement between the parties is essential. And that agreement goes both ways. Recently, a medical group was awarded $350,000 in an arbitration hearing mainly because of the manner in which the contract was written. Without that written agreement, it is highly unlikely that the group would have recovered any of its funds. In another example, a medical group was able to recapture over $600,000 based upon how it had negotiated the services it was to provide under the capitation arrangement with the insurer. While most providers believe that contracts provide greater protection to the insurer, it is clear by these examples that they can benefit providers as well. At the same time, a growing trend in which insurers are using the specter of government regulations and accreditation requirements to try to effect changes to contracts is of concern.

It is incumbent upon all parties to understand their rights and obligations in a negotiation. Because of the complexity of the current arrangements being negotiated, it is important that a team of experts be assembled to ensure that the rights of all parties are protected. The failure to properly complete an agreement could cost an organization hundreds of thousands of dollars, if not more. In one case, the failure to understand all of the provisions of an agreement cost an integrated delivery system $500,000. As managed care becomes a greater component of a provider organization's overall revenue base, the importance of the written agreement grows along with it.

As recently as ten years ago, many agreements in the managed care field between providers and insurers were still on a handshake basis and many of the few that were written contained very little in the way of specific performance requirements. Often these agreements were no more than four or five pages in length. Those contracts that were more complete usually involved agreements between groups and insurers for the provision of capitated services. While many of these agreements were no more than ten to fifteen pages in length, the old Maxicare contract was almost forty pages long. Recently however, there have been changes in government regulations, accreditation requirements, complexity of reimbursement, and other issues which have pushed even the simplest of agreements to twenty pages or more, depending on the type size. Many insurers, trying to cover all of their bases, have written contracts that incorporate all lines of their business, even though the provider is only looking to cover a certain portion of the insurer's population. In the case of preferred provider agreements, the insurer has added language that allows it to "sell its network" to a variety of entities. This can lead to nasty surprises for the provider who, expecting a certain reimbursement rate for a patient carrying that insurer's card, finds instead that a significant discount has been taken because that patient is covered under an agreement of which the provider was not fully aware.

The proliferation of so called "Silent PPO" agreements has caused great alarm in the provider community. Usually, a provider organization is willing to enter into an agreement to provide services when it has some reason to believe that in return for giving the insurer a preferential rate, it will receive a certain volume of patients or provide certain services. The "silent PPO" agreement puts the provider in the position of giving a discount to the insurer whether one patient receives services or not. Any businessperson will tell you that this is a highly unusual way to do business.

There are two key factors for you as a provider to consider before entering into a written agreement with a managed care organization (and by that term we mean health maintenance organizations (HMOs), Preferred Provider Organizations (PPOs) or other entity that sells a product that may limit member access and/or create a reimbursement model that includes the provider in the risk). The first is the environment in which you are practicing, which can vary even within the same community. What may be good for primary care providers may not be as advantageous for specialists, institutions, or ancillary service organizations. You will probably want to start by asking yourself (and others) a few questions about market penetration, gross premiums, and market composition as you consider the necessity of entering into one or more arrangements.

While the list of questions goes on, it becomes apparent that the decision is complex and takes a significant amount of information in order to make an informed business decision.

The second key issue in determining whether to contract with a particular managed care company is the terms and conditions of participation. Again, the questions seem endless. Among others:

Once you have reached a final agreement with the payer, the difference between success and failure will depend on your knowing how to implement the agreement, making certain that you receive full benefit from the agreement, having an operating system that limits your risk exposure, and paying very careful attention to the details of the contract.

As always, the devil is in the details. Understanding your environment may seem simple, but the failure to pay attention to the smallest of details could place your organization at significant risk. Understanding the development of the gross premium is an important factor in negotiating and agreement. The gross premium is the amount that the insurer charges an employer per covered life. By understanding this number you can generally break out the different factors and establish a reasonable estimate of what the payer should be willing to reimburse you for the services you provide. There are many adjustments that may be made to that number, but you should be able to determine the general community contract cost. Once you understand the various cost factors, the mystery of how reimbursement is calculated is lessened and setting the gross premium now becomes more of a matter of negotiation than guesswork.

Another area that providers need to concentrate on is the cost of providing the service. Most organizations do not fully understand their costs. Many are willing to accept contracts that barely cover their marginal costs. This may be fine if managed care is only going to be a small part of the revenue base. But if you are entering into a contract that is going to require that you provide greater services or add personnel, you cannot look upon the agreement as filling unused capacity. Again, knowing how the insurer prices his product will assist you in coming to a successful conclusion to your negotiation. The intersection of your costs and the insurers pricing is the point at which you most likely will reach a satisfactory financial settlement. Understanding the risk factors is an important element of your strategy.

Now you understand the local environment and you know your cost, so you're home free, right? Wrong. Understanding the contract language, your responsibilities and all of the elements that make up the entire relationship are of equal importance. As described above, knowing the products that are covered under the agreement, understanding your rights under the term and termination clauses and paying particular attention to the division of responsibilities may make the difference between a highly beneficial relationship and an acrimonious and costly one.

Does contracting in a managed care environment really change the way in which care is delivered? A close look at managed care contracting reveals that, while there is a change in the reimbursement methodology and there is a greater reliance on communication with other providers and the insurer, many of the elements of delivering care are the same. The provider is still the final decision-maker for the vast majority of the care delivered. The site of care may change (i.e. from institution to home as an example), but all managed care companies are very aware of the sensitivities of the market and are not looking to disturb the patient/provider relationship.

I hope that you will join us as we explore all of the elements of managed care contracting in the coming months. In addition, we will be offering a "Signature Series" on "Medical Management Under Managed Care". We hope that the two series combined will lessen the mystery of managed care and help level the playing field between providers and payers.

Ira H. Rosenberg

President, Managed Care Resources, Inc.

The Managed Care Resources, Inc. team has over 150 years of combined experience in the development and implementation of managed care services. Please visit our home page to learn more about how we can assist you with your managed care needs. We also invite you to contact us with questions or comments.

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