Understanding the Managed Care Contract
Managed care contracts, or Managed Care Agreements, are a vital part of the healthcare industry, defining the relationship between healthcare providers – such as physicians and hospitals – and managed care organizations (MCOs) – that is, the private health insurance companies that pay the healthcare providers’ bills. The contracts include the terms by which the MCO pays the provider for healthcare services provided to its members, thus laying out the financial arrangements between them.
The first commercially successful health insurance practice began in 1929 when a group of teachers in Dallas provided each other with pre-paid medical services. After seeing its success, New York’s Blue Cross and Blue Shield (BCBS) expanded this model to physicians and hospitals. BCBS agreed to pay a fixed price for a defined level of service, so long as the participating providers performed those services . That groundbreaking agreement today is recognized as the basis of modern managed care contracting. With the establishment of the Medicare program in 1965, and increasing economic pressures on patients and providers in the decades that followed, managed care plans became the only affordable, and in many cases the only available, health insurance option for millions of Americans.
Practically, a managed care contract dictates how the MCO will reimburse the provider for services. Managed care contracts can be written on a per diem ("per day") basis, meaning that the MCO pays a set dollar figure for each day a member spends in either an inpatient or outpatient setting at a participating hospital or physician’s office. The contracts may also be written on a per procedure ("per visit") basis, whereby the MCO pays a set fee for each individual procedure the member receives. Other compensation models may include per diem, per diem adjusted for case mix, or per discharge.
Managed Care Contract: The Basics
When embarking on the path of managed care contracting, a provider must consider the various components to determine the potential performance and quality of the contract. There are common terms and provisions in most contracts. The following is a discussion of those key components.
Reimbursement Terms
Probably the most important provision is also the most basic. The method by which you receive reimbursement, fee-for-service or capitation, is crucial for a number of reasons.
Fee-For-Service.
If your services will be reimbursed based on a fee-for-service methodology, it may be helpful to know an approximate average of that reimbursement from all payors. This information should be calculated using the most common codes and the total number of claims for all payors. The average for all services rendered may help to determine the total amount of revenue from the contracting relationship, while the average specific to each service can help in determining the impact of the percentage discount.
Capitation
Under a capitation reimbursement methodology, detailed data reflecting the distribution of patients by type of contract is absolutely critical. In order to determine the performance level, the practice should analyze its procedures and the number of procedures provided to patients paying under a capitated contract. Your reimbursement should be reasonable and aimed at capacity. Adjustments to the initial capitation should be made to accurately reflect changes in the number of patients for whom you provide services, as well as changes in the number of services provided to those patients on a per-member basis. Note: The cost of capitation is often much higher than the health plan determines.
Provider Network
A qualified managed care provider network can generate referrals to this practice, and ensure this practice has access to specialty and ancillary service providers.
Quality Metrics
It is essential to determine if this practice can comply with the quality metrics. Are they data driven and how will they be managed into the future? Will they require staff time and financial investment into software or hardware? Will the implementation of these quality metrics have any impact upon the ability of this practice to perform its practice responsibilities? How will the managed care organization evaluate the quality metrics and the process of delivering the medical services? Will the results be shared with the providers in the network? Will practice the results of the quality metrics be made available to the public? What impact if any will the quality metrics have on reimbursement, contract renewals and/or penalties? How are the quality metrics updated and who is responsible for compliance?
Compliance Requirements
Are the requirements necessary to operate in the managed care product burdensome or impractical? How were they prepared and who is responsible for complying with them? Do they require information from the health plan in addition to what is required from the practices in order to effectively evaluate the network’s performance? How often will an evaluation be performed? Will the managed care organization make the results available to the providers and will the results be available to the public? How will the results be used to improve practice networks and compliance efforts?
Negotiating as a Provider
Effective negotiation strategies are paramount when securing profitable managed care contracts. The following tips are key to ensuring favorable terms:
Become an expert: A healthcare provider should know their business inside and out. Learn what your costs are. Most providers have a general idea of what the cost of their services to a single patient are, in aggregate, over a year. A provider should also know what the expected volume of services are.
Clearly define goals: A healthcare provider should know what it wants and why from a contract. For example, if the cost to deliver a specific good or service is or is closely tied to the cost of treating those who are covered by the proposed managed care plan a healthcare provider should clearly articulate such. A healthcare provider should also be prepared to explain how specific terms will allow the organization to meet its goals.
Be reasonable: A healthcare provider should structure its request in a way that invites dialogue, does not come across as unreasonable, and is open to discussion.
Document everything: A healthcare provider should document everything that occurs during negotiation- even log the times the calls occur. This allows a healthcare provider to keep track of what issues have been resolved and the status of a given proposal. It also avoids potential "miscommunication," which can be costly.
Negotiate one contract at a time: Negotiating more than one contract with a managed care organization is not advisable, since it detracts from your negotiating power on the contract terms that are most important to your practice. Focus on getting a good contract for your practice.
Managed Care Contracts: Legal Implications
Beyond the basic business terms and reimbursement rate negotiation, several legal issues require review to avoid unnecessary disruption after signing the agreement.
First, contractual provisions (such as indemnification and confidentiality) can affect both parties in ways that are not immediately apparent. For instance, a standard indemnification clause may appear to break even for both parties, but on closer review it may penalize one party more for events that are largely out of its control. And an overly broad confidentiality obligation on the provider that allows a managed care organization to disclose, in its sole discretion, confidential information to the entire world, including competitors, will only keep everyone out of trouble for so long.
Second, in addition to contractual terms, there are statutory and regulatory obligations imposed on both parties that should be considered in order to avoid penalties for violations. For example, there are laws governing how they provider can share information with the managed care organization, particularly medical and substance abuse information . There are also restrictions on how the managed care organization markets its plans.
An additional area where the managed care organization and provider should seek guidance is to ensure that their arrangement doesn’t violate anti-kickback laws. The terms of a contract can greatly affect liability under those laws; for example, a compensation arrangement that is based on the number of referrals to a provider can be problematic, but if it is based on the sharing of administrative costs, there is a much lower risk. Along the same lines, an agreement that provides financial incentives to a managed care organization to deny coverage to a provider’s patients can create liability for the managed care organization, even if the provider has no knowledge or involvement in the scheme.
To avoid problems, both parties should seek legal advice during the negotiation process in an agreement between a managed care organization and a provider. For example, a managed care organization should seek legal review and input of any policies governing its providers. In addition, the managed care organization may want its counsel to draft its provider agreements.
Managed Care Contracting and the Patient
The impact of managed care contracts on patient care is an essential consideration in healthcare contracting. Such contracts may have a direct impact on service quality, access to care, and patient outcomes.
Managed care contracts can positively impact patient care by providing a framework for care that is often directly tied to patient health outcomes. For example, a contract may include an incentive structure that rewards providers for efficiently managing the care for a specific population or for improving patient health markers, such as lowering blood pressure or cholesterol levels. These types of contracts may incentivize the healthcare provider to improve patient education on maintaining their health and making necessary lifestyle changes.
Contracts with wellness programs may boost patients’ access to preventive care, which can in turn lead to improved health outcomes through the prevention of chronic conditions or disease. The contracts may also reduce barriers to access such as cost, availability of specialists, and facilities. For example, a contract may allow providers to refer patients to specialists without requiring prior authorizations from insurance companies.
While many managed care contracts can have positive impacts on patient care, they can also present challenges and risks. Like any healthcare practice, some managed care models focus on reducing the costs associated with providing services, and this can sometimes create a financial barrier to treatment. For example, a lower rate of reimbursement can be a disincentive to a provider for implementing a necessary service, or for providing additional services that patients may need in order to obtain full benefits from a course of treatment.
Managed care contracts can create access barriers by limiting the pool of providers to those who have agreed to accept the terms of the agreement. This can be disadvantageous for a patient who has preexisting relationships with providers who are not within this network or who has a life-threatening illness that requires a specialized provider who is not part of the network.
In addition, an unintended risk of some managed care contracts is the potential for the dehumanization of patient care. As payor-driven healthcare systems continue to move toward reduced lengths of stay and value-based payment structures, patients may receive less personalized or substandard care compared to less restrictive models.
Managed care contract negotiations should take into account the potential impact on patient care.
The Future of Managed Care Contracting
The future of managed care contracting continues to move towards value-based care delivery to impact physician and other provider behavior. Current risk-based managed care contracts (e.g., accountable care organizations ["ACOs"], Medicare Shared Savings programs, and other capitation agreements) have an integral role in the future contracting landscape, but newer arrangements connecting cost and quality will supplement these existing models.
Examples include value-based purchasing for providers, bundled payments, and federal and state payor initiatives like Alternative Payment Models (APMs). For example, the Centers for Medicaid and Medicare Services ("CMS") has developed a series of APMs under MACRA to drive physician behavior through APM’s that share risk with hospitals and physicians (Stage II).
The rapid growth in these arrangements will require that providers work more collaboratively to manage administrative burdens and improve quality. Physicians, in particular, will need to work together in order to maintain gains made under earlier managed care arrangements, (for example, risk sharing arrangements that result in substantial provider support). Beyond ACOs , physicians often choose to form independent practice associations ("IPAs"). These collaborative entities consolidate several independent practices for upside risk sharing. The focus is typically more on ancillary services (for example, diagnostics and therapies) than on hospital-based services. As more managed care risk-based arrangements emerge, IPAs may evolve into larger organizations to accept greater levels of risk.
Surgeons are uniquely poised to prosper in this evolving healthcare landscape. Their clinical services are cut out to take an episodic view of patient care, especially bundled payments. They are also among the highest volume of any physician specialty and drive the costs of hospitalization. These characteristics make them prime candidates for bundled payment models or other long term risk sharing and APM arrangements.
The growing movement toward lower intensity and lower-volume care in the outpatient setting will undoubtedly continue. Given the mounting burden of shared savings, APMs and bundled payments, medical practices will need to drastically reduce costs through improved efficiency in these settings. This will result in a spike in demand for physicians in smaller, lower-overhead settings such as freestanding surgical centers and office-based facilities.