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Managed Care Contracts - Key Provisions for Providers

The contract between a physician or other health care professional and a managed care organization (MCO) such as a provider-sponsored network, integrated delivery system, health maintenance organization, or other health care plan, is the fundamental document which frames, defines and governs their relationship. Contractual provisions can affect payment, office organization, practices and procedures, and confidential records as well as clinical decision-making.

Traditionally, the relationship between a doctor and his or her patient required no formal, written engagement. Society understood that the doctor was responsible for rendering medical services to the patient according to the community's standards of practice, and in turn, the patient was responsible for paying the physician's usual and customary fees.

The evolution of health care reform, in particular the emergence of third party payors and managed care, has contributed new elements to the intrinsic doctor-patient mix that require increasingly complex, structured agreements which prescribe who renders medical services, and how, when, and what medical services are rendered. Today, providers should carefully examine the provisions of every contract before undertaking the commitment to abide by its terms. A good managed care contract, like any other form of business agreement, is clear, consistent, comprehensive, and concise. It will conform to both the intent of the parties, setting out their respective rights and responsibilities, and the requirements of state and federal law.

Initial Considerations

Contract analysis and evaluation involves several basic steps. First, the provider should investigate the MCO to assess its market share, service area, stability, solvency, and reputation, and consider the answers to a number of questions. Is the MCO actuarially sound? Does it have a good reputation among patients and other providers? Is the plan coverage booklet clear and comprehensive? Do enrollees switch frequently from one primary care physician to another? What is the role of the primary care physician? Does it pay providers on time in accordance with its contractual obligations? A high rate of reimbursement may become less attractive when payment is constantly overdue.

Other key questions to consider include: who owns and manages the MCO; is it for profit or nonprofit; how many subscriber group contracts does the MCO have; are they with small or large employers; where are the participating providers located; what is the physician and hospital turnover rate; is it accredited by the National Committee for Quality Assurance; and is it federally qualified?

The information obtained during the provider's review of an MCO before considering the specific terms and conditions of the contract will provide a framework and context in which to evaluate its provisions.

Analysis of Contract Terms

Next, the provider should analyze the terms of the agreement. Even "boilerplate" provisions can raise serious issues and concerns. One of the most important, yet often overlooked, components of the managed care contract is the definitional section. For example, precisely what the "Covered Services" encompass is critical since the provider will agree to deliver them, and perhaps, be financially responsible for them. Covered Services should be listed, explicitly, in an exhibit to the contract.

A provider should limit his or her obligation to provide Covered Services to the extent allowed by the provider's facilities, staff, and other resources. In particular, a provider should not assume the obligation to provide any services he or she does not typically offer.

Medical Necessity

Since a fundamental concept in managed care is that unnecessary services will not be covered, usually the contract will limit reimbursement to services that are "medically necessary." The key issue is: who decides medical necessity -- the provider, or the MCO? Does the contract clearly state other exclusions from coverage? Is there a quick, fair grievance process or other review procedure? May the provider refuse treatment in cases in which the plan's coverage is limited? Many contracts now assert that the term "medical necessity" relates only to the determination of whether the services are eligible for reimbursement, and that the approval or denial of a claim should not affect the provider's decision whether treatment is appropriate in his or her professional judgment. These types of provisions ultimately shift substantial risk to the provider.

The standard of care imposed by the contract also requires attention. Does the contract require a level of duty or care that exceeds the community standard?

The provisions which establish utilization review program requirements should be specific. While the contract may require that individual utilization be tracked on a continual basis, the provider may not receive utilization reports at all, or in practice, may receive them too late to respond. Before entering into a contract, the provider should require the MCO to disclose the applicable criteria and incorporate them by reference into the contract. If the MCO has the right to amend its utilization review and quality assurance protocols, the provider should have the right to "opt out" of, or terminate, the contract if the provider finds the changes unacceptable for any reason.

Many contracts require that the provider be responsible to verify the subscriber's status and obtain approval for treatment. The provider should have the right to rely upon telephone confirmation of the enrollee's status.

Mechanisms for Payment

Probably the key element of the managed care contract for the provider is the mechanism for payment. The contract should state how, when, and what the provider will be paid. The provider's personnel should understand the claims' forms and processing procedures. Does the MCO have the right to change the fee schedule or capitation rate from time to time?

A provider should only consider a capitation arrangement when there is a reasonably predictable volume of enrollees during the contract's applicable term. One way to limit the assumption of risk is for the provider to require "stop loss" protection to protect the provider against unanticipated losses incurred as a result of the capitation payment.

Finally, the provider should understand what actuarial data, other statistics, and assumptions were used in calculating the capitation rate. No provider should consider participation in a pool with other providers he or she does not expect will manage their utilization in an appropriate manner.


What are the termination provisions? May the MCO terminate the provider only "for cause" -- such as breach of contract or loss of license -- or "without cause," that is, for no apparent reason? Does the contract afford the provider with due process rights and a hearing prior to the imposition of any corrective action? What are the dispute-resolution mechanisms provided -- arbitration, judicial review? Sometimes the contract will require that the provider continue delivering care to the MCO's enrollees after the contract has been terminated. In this case, the provider should ask whether he or she will be paid for services rendered after the effective date of termination.

The contract should also specify the obligations of the MCO including its administrative and marketing duties. Will it include the provider in network lists distributed to subscribers, and update the lists on a frequent basis?

Other provisions to avoid include "most favored nation" clauses, which require that the MCO will be offered the best price, or lowest reimbursement rate, that the provider will accept from other plans, nondiscrimination clauses which exceed the parameters of federal law, and terms requiring exclusivity with this MCO or intra-network referrals.

Many managed care contracts now restrict open communication between providers and patients. The MCOs claim that these confidentiality clauses, or "gag rules," are designed to protect proprietary information. Some gag rules, however, may attempt to prohibit the provider from discussing the MCO's denial of care which the provider believes, in his or her judgment, is medically necessary. Finally, the provider should examine the insurance and indemnification provisions carefully. The agreement should contain mutual indemnification provisions which require that the provider and the MCO each indemnify and "hold harmless" the other for liabilities which arise as a result of their respective conduct. The provider must also evaluate whether the contract will create new types of liability which the provider did not undertake before the new relationship.

Final Considerations

The provider should obtain copies of, and analyze, all relevant documents, especially any documents which the contract incorporates by reference. These documents, whether actuarial data, policies or procedures, can be integral parts of the MCO-provider relationship

And most importantly, the provider should feel free to ask questions of the MCO's representatives, and negotiate the terms and conditions of the contract. Few contracts, even standard, printed-form contracts, are nonnegotiable. Start-up MCOs with little market share willmore readily negotiate, but even larger organizations will discuss particular provisions with multispecialty groups, tertiary care specialists, key providers, or specialists willing to accept capitation arrangements.

Also, the provider should confirm all representations, additions, and clarifications in writing. No change will be binding unless it is set forth in a signed, written instrument which amends thecontract.

Finally, the provider should sign the contract, and accept its terms, only after considerable evaluation and review.

One of the most important factors for providers to remember is that the best contract in the world may not be suitable for a particular provider. Also, since a contract is simply an agreement between two or more parties, there is no contract, even one printed in indelible ink, which cannot be changed.

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