Managed Care Contracting -- Term and Termination Clauses

This is the sixth 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 Paula Nelson.

Managed care relationships are defined by the contract that establishes the ground rules and parameters under which a provider and managed care organization may operate. Although MCO's use boilerplate agreements, each MCO contract may vary significantly when it comes to provider responsibilities. Therefore an important goal for any provider during the contract process is to understand the true burden of risk represented by the agreement. In evaluating contract language, providers must give due consideration to their business, goals, capabilities, costs, financial requirements and the potential value of contracting with the MCO.

These issues come in to play in the evaluation of contract term and termination clauses. Before agreeing to any term or termination stipulations, it's important for the provider to have a broad perspective and determine the combination of provisions that will best address the requirements of both the MCO and provider. The intent should always be to create the most enduring relationship.

We present here an overview of contract term and termination clauses, plus some provider guidelines for successful negotiation of these contract items.

Contract Term

All contracts identify a contract term. The contract term is the period of time during which the contract is enforceable. Typically, managed care contracts are written with an initial term, usually one year. However it is usual to see language that provides for an automatic renewal of the contract unless one party gives notice a specified number of days prior to the end of any annual period. Providers should be mindful of automatic renewal provisions and their advantages and disadvantages.

Automatic renewal provisions can set the stage for a long term relationship that requires little administrative effort from the parties while also providing the parties flexibility to re-negotiate terms if necessary. The risk for the provider is that under such a provision, the burden is on the provider to initiate a rate increase discussion. And under such circumstances, the MCO may take its time in negotiating a rate increase for the next term of the agreement. As a result, providers can find themselves many months into a new contract period before new financial terms are finalized and executed, which can create substantial administrative and financial burdens for the provider.

Multiple-year contracts may be a desirable alternative because they have the potential to lock in provider market share for a substantial period of time and ensure a predictable income stream. However, such agreements also carry additional financial risk. Before entering into such an agreement, the provider must consider whether it would be prudent to include additional protection against any future adverse financial situations. To provide the necessary protection, a provider may include an escalator clause that calls for a rate increase at appropriate intervals.

However, if the initial assumptions upon which the contract was based prove inaccurate, for example, if the projections for utilization per l000 or other cost assumptions are off the mark, the escalator built into the contract may also be too low. As an alternative to an escalator clause or in addition to the escalator clause, providers may attempt to negotiate risk corridors that provide additional revenue protections. Although payers would prefer that the reimbursement rate remain flat throughout the contract period, this is usually not in the best interest of the provider.

Moreover, in today's negotiating environment, multiple year arrangements may be difficult to obtain. An MCO contemplating major changes, including its own purchase, an acquisition, or a change in a hospital affiliation, may be particularly resistant to such contract language.

On the other hand, a multiple year contract may be most appropriate for arrangements in which an MCO will obtain significant cost reductions over prior years, and the provider is comfortable with the compensation level. The provider may even have agreed to a gradual reduction in overall reimbursement in exchange for a longer-term arrangement with the MCO.

Contract Termination

Contract termination provisions refer to the abilities of the contract parties to terminate the contract. There are essentially three separate termination types found in contracts: termination without cause, termination with cause, and immediate termination for cause.

Most managed care contracts contain provisions that permit either party to terminate the contract without cause. Commonly either party will have the right to terminate as long as appropriate written notice has been made. This time frame is usually 60 or 90 days. However contracts may allow a 30- day notice or require as long as 120 days. The MCO needs a time frame such that, should the contract be terminated, it will have enough time to find an appropriate replacement to meet the needs of its members. Contract termination language should provide both parties sufficient flexibility to protect their business interests.

Careful consideration should be given before signing any agreement that requires a minimum term. A contract may stipulate that the contract will be in force for the initial term before termination without cause may be invoked. Contracts that are limited to termination with cause, even temporarily, may not recognize financial hardship as a valid reason for termination, thus potentially exposing a provider to severe financial losses. This is particularly the case where longer contract terms or required notice periods are in force.

Contracts often address a shorter termination period (e.g., upon 10-30 days' notice) in the event that either party has not complied fully with the terms of the agreement. Typically a written notice of breach is required, and the party in breach is allowed a specific period of time (e.g., 10-30 days) to cure the breach before termination is invoked. "With cause" is often defined as a provider breach for failure to comply with pre-authorization and utilization management parameters. Therefore providers should not be naïve regarding their contractual obligations in these areas.

The contract cancellation and termination clauses also typically describe situations under which the MCO can immediately terminate its contract with a provider. The most common reasons specified for MCO right of immediate termination are loss of license, malpractice suit, failure to pay claims, bankruptcy, criminal activity, unresolved and repeated member complaints, failure to maintain insurance coverage as specified in the contract or failure to meet other credentialing requirements. The provider should consider including similar language that describes situations under which it can also immediately terminate the contract.

Terminations for cause should always require a material breach of a contract term. The grounds specifying termination should be specifically spelled out in the contract and clearly worded. A careful review of a contract boilerplate may reveal termination conditions that allow MCO's to immediately terminate contracts based on their "sole judgment" of what is in the medical interest of members. These provisions are contract loopholes that will not serve the provider well, and should be carefully considered before being included.

Another termination provision the provider should look for of is language which allows the MCO to change the nature of the agreement before the contract term is to be renewed. Such provisions allow an MCO to terminate the entire agreement if the provider does not agree to the change. Again, from a provider's perspective such a stipulation is best taken out of the contract or significantly restricted.

In addition to the termination for cause examples invoked by MCO's, providers should consider as grounds for termination such items as:

· MCO failure to produce a minimum number of covered lives.
· Non-payment of amounts due.
· MCO change in hospital affiliation.

How strenuously a particular provider negotiates for such provisions will be dictated by its unique circumstances. For example, in capitation arrangements a decrease in the number of members or a significant increase in a specific type of membership may affect the financial viability of the agreement for the provider. However, insistence on such special provisions will often create a demand for greater flexibility on the part of the MCO. Providers must balance their needs according to the strength of their negotiating position with the MCO.

Continuation of Services

In the event that the agreement is terminated, responsibilities of both provider and MCO must be clearly stated in the contract to avoid future disputes. MCO's will protect their interests by stipulating in the contract that the provider will be responsible for rendering services to members until the treatment plans are completed or until the MCO has made reasonable and medically appropriate provision for the transfer of these patients to a new provider. The contract should also include a period of time in which transfer of patients will occur.

Such provisions are common and should be sure to specify the method of payment for services provided beyond the contract termination date. After termination of the agreement, a typical method for provider reimbursement by the MCO is using fee-for-service rates already stated in the contract.

Providers should also have a clear understanding of any obligations they will have even after the termination of an agreement. Some contract provisions will contain language that specifies that the provision survives the termination. For example, provisions that preclude a provider from holding MCO members and their employers financially liable for services provided under the contract often include this language. Providers should be mindful of how such provisions may obligate them in the future, or limit their recourse.

This article was written by Paula Nelson. As a Vice President of Managed Care Resources, Paula provides client assistance in the areas of network development, including the negotiation of payer/provider agreements, organization design and operations management. Paula has worked over 20 years in health care management with extensive experience both on the provider and payer sides.

For more information on Managed Care Contracting please contact us at (630) 325-6543 or by email at .


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 also offer 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

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.

MCR Home -- Services -- Consulting Team -- Project Highlights

Signature Series -- MCR Newsletter -- Managed Care Links
Site Map -- Contact Information __ email:

© 1998 Managed Care Resources, Inc. All Rights Reserved.