Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them
Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)

Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them

Executive Summary

Physicians who are presented with a proposed provider participation agreement by a managed care organization (MCO) often look only at the fee schedule or capitation rate (as applicable) in deciding whether to sign the agreement. However, there are many other important provisions in MCO contracts that will determine whether the contract ultimately is favorable to the physician. Even if the individual physician does not have sufficient bargaining power to cause the MCO to change the terms of its standard contract, it is still essential that the physician analyze the contract carefully in order to decide whether to sign it. 

Mistake 1        Having Insufficient Knowledge About the MCO

The financial health and “provider-friendliness” of MCOs vary widely. Physicians should be familiar with the fiscal strength and claims processing history of an MCO before contracting with it. Information on an MCO’s solvency, timeliness of claims processing, and claims denial rates is often available from state insurance agencies and health care trade associations. If the physician identifies the MCO’s weaknesses and areas of likely conflict before negotiations begin, the physician may be able to negotiate contract terms that will adequately protect the physician’s interests. In some cases, the physician may decide not to pursue a contract with a particular MCO based on the results of such “due diligence.”

Action Step     Physicians should research the MCO’s financial strength and business practices before deciding to contract with the MCO. 

Mistake 2        Failing to Understand the Meaning of “Covered Services”

The typical MCO-physician contract requires the physician to provide (or arrange for) “covered services” to the MCO enrollees who seek service from the physician. A physician cannot understand what commitment he or she is making unless the term “covered services” is clearly defined. The definition of covered services is particularly important in capitation contracts in which the physician agrees to provide all covered services the enrollee needs in exchange for a lump sum (capitation) payment from the MCO.

Physicians should be alert to any language that allows the MCO to change the definition of covered services during the term of the contract without the physician’s consent or bases the definition of covered services on another document, such as the patient’s employment benefit plan. Such clauses are particularly dangerous in a capitation contract because they permit the MCO to expand the scope of the services the physician is required to provide, with no guarantee of a corresponding increase in the capitation payment.

Some MCO contracts include in the definition of covered services, goods and services that the physician cannot personally provide (e.g., eyeglasses, services of physicians in other specialties or of nonphysicians, and even facility services such as nursing homes). It is essential that physicians understand what services they are required to arrange for and whether they have any control over the source and price of those items. In some cases, the physician may be financially at risk for these other items or services. 

Action Step     Physicians should scrutinize the definition of covered services and analyze whether the services are the types of services they typically provide, and whether the compensation offered by the MCO is acceptable in light of the services the physician is obliged to provide (personally or through others). 

Mistake 3        Paying Insufficient Attention to Payment Formulae

Physicians focus on the dollar amounts in the MCO’s fee schedule or capitation rate in deciding whether the proposed MCO contract is a good deal. However, these rates may tell only part of the financial story. Many contracts state that the capitation or fee schedule payments to the physician are subject to interim reductions (withholds) that are ultimately paid only if the physician meets certain quality and/or utilization targets.

It is also common to reduce physician payments to fund deficits in MCO accounts that are used to pay for pharmaceuticals or facility or specialty services used by the physician’s patients. Such payment reductions can be particularly frustrating if the physician has limited or no control over the patient’s use of specialist or facility services or the source or cost of these services. Legal counsel can assist the physician in deciphering complex compensation formulae and identifying situations that could cause the physician to be paid at less than full contractual rates.

The deadline for payment is another important element of the payment formulae. No matter how favorable the payment rate, the overall effect of the contract may be unfavorable unless it specifies a reasonable deadline for the MCO to pay claims, reconcile risk arrangements, and refund withholds. 

Action Step     Physicians, with the assistance of experienced counsel, should carefully analyze all elements of the compensation formulae stated in the contract. 

Mistake 4        Signing a Blanket Agreement to Comply with MCO Policies

Most MCO contracts include a seemingly benign requirement that physicians comply with all MCO policies and procedures. This provision locks physicians into complying both with existing and new MCO pronouncements. Physicians should review all existing MCO policies before signing a contract because the policies may substantially affect their right to payment (e.g., preauthorization procedures and medical necessity standards). Physicians should also attempt to negotiate contract language that:

  • Obligates the MCO to provide the physician with advance written notice of new policies
  • Allows the physician to terminate the agreement early and without penalty to avoid an unacceptable new policy
  • Exempts the physician from complying with any MCO policy that is inconsistent with the terms of the physician’s contract with the MCO. 

Action Step     Physicians should understand the contents of the MCO’s existing policies before agreeing to comply with them and should not make a blanket agreement to comply with all future MCO policies. 

Mistake 5        Making a Broad Indemnification Commitment

MCO agreements often contain a broad commitment by the physician to indemnify and defend the MCO. Such a clause typically obligates the physician to indemnify the MCO for liability (including settlements, judgments, and litigation costs such as attorney’s fees) that the MCO incurs as a result of the physician’s actions (and perhaps also the actions of others). Physicians should delete indemnification clauses, if possible, since even without the indemnification clause the MCO can sue the physician for damages caused by the physician’s actions. Physicians should confirm whether their professional liability insurance covers indemnification commitments; often it does not. 

Action Step     Physicians and their counsel should consider carefully before including any indemnification clause in the MCO contract, particularly if the obligation to pay under the clause is not covered by insurance. 

Mistake 6        Having No Assurances of Timely Reporting by the MCO

If the amount of payment the physician receives from the MCO is affected by utilization, it is essential that the physician receive timely utilization reports. For example, if a primary care physician receives a monthly capitation payment from an MCO, it is common for all or part of the cost of drugs and specialist and facility services the physician’s patients use to be deducted from the capitation. The primary care physician can determine if utilization problems exist (and analyze and solve them) only if the MCO provides the physician with timely, meaningful, and reliable reports of the “outside services” that are charged against the physician’s capitation. 

Action Step     If utilization rates affect a physician’s payments from a MCO, the physician should ensure that the contract requires the MCO to provide timely and reliable utilization reports. 

Mistake 7        Allowing the MCO to Amend the Contract Unilaterally

Physicians tend to ignore contractual “boilerplate” provisions (usually located near the end of the agreement) on the assumption that they do not really affect the parties’ rights. This approach can result in nasty surprises. A key boilerplate provision defines the process for amending the contract. Some MCOs reserve to themselves a right to amend the agreement at any time simply by giving the physician written notice of the change. This means the MCO could change key terms of the agreement (such as payment rates, term and termination, and scope of covered services) without the physician’s consent.

Alternatively, the contract may authorize the MCO to send the physician a written notice of proposed amendments, which become effective automatically unless the physician objects in writing within a specific number of days. This is a dangerous approach because of the risk that the notice will not be received, the notice will not be reviewed by a knowledgeable individual in the physician’s office, or the deadline for objecting to the amendment will be missed. 

Action Step     A high priority for physicians when negotiating managed care contracts is requiring that all amendments to the contract (including any reductions in payment rates) be agreed to in writing and in advance by both parties. 

Mistake 8        Having No Effective Penalty for the MCO’s Breach

A typical contract allows either party to terminate the agreement if the other party breaches the contract and fails to correct (cure) the breach within a specified number of days after receiving written notice of the problem. The most likely breach of a provider agreement by the MCO is failure to make full and timely payment to the physician. Under a typical termination provision, the physician would notify the MCO of the MCO’s breach. The MCO could then avoid termination of the contract by paying the delinquent sum to the physician just before the termination deadline. Unless the MCO is penalized for making late payments, the MCO has no incentive to improve its performance.

A fairer result for the physician can be obtained if the contract requires the MCO to pay the physician interest on overdue amounts or increases the rate paid to the physician for services that are performed while the MCO is delinquent. 

Action Step     Physicians should include in MCO contracts an effective penalty to motivate the MCO to make prompt payment of the full amount due. 

Mistake 9        Having No Right to Terminate

A physician can afford to accept many “imperfections” in an MCO contract so long as the physician has a right to terminate the agreement without cause and without penalty on relatively short notice. Conversely, if the physician is locked into a contract and is able to terminate only if the MCO clearly breaches, then the physician needs to be certain he or she is well protected by the contract terms.

If a physician insists on a right to terminate the contract without cause on short notice (e.g., 30 or 60 days), the MCO likely will insist on having the same right. Therefore, the physician needs to weigh the benefits of being able to terminate the contract easily against the risk the MCO could abruptly terminate the physician’s participation without cause. 

Action Step     Physicians, with advice of counsel, should consider the benefits of negotiating a right to terminate the agreement easily without cause, and the disadvantages of granting the MCO an equivalent right to end the agreement easily.

Mistake 10      Not Paying Attention to the Post-Termination Obligation to Treat MCO Enrollees

A real trap for the unwary is a contract clause that obligates the physician to continue to treat MCO enrollees after the physician’s contract with the MCO is no longer in effect. Physicians should consider the following issues in analyzing such contract language:

  • Which enrollees must the physician continue to treat? The contract should clearly address this point; the answer likely will be different for primary care physicians (who have long-term relationships with specific patients) and for specialists.
  • How long is the physician obliged to continue services? Physicians should avoid open-ended commitments, such as continuing to treat the MCO’s enrollees until they can find another physician, until the MCO arranges for a replacement physician, or until the patient’s treatment is complete. Such commitments could require the physician to treat noncompliant and otherwise difficult patients or patients with chronic illnesses indefinitely, while not receiving the benefits of full participation with the MCO.
  • At what rate will the physician be paid for post-termination services?
  • Are the physician’s post-termination obligations reduced (or eliminated) if the contract was terminated because the MCO failed to pay properly? Physicians need to avoid long-term commitments to continue treating an MCO’s enrollees in cases in which the contract ended because the MCO was unable or unwilling to pay the physician. 

Action Step     Physicians and their counsel should focus on any proposed obligations by the physician to continue treating the MCO’s enrollees after the parties’ contract has ended. In some states, MCOs are obliged to include in their provider agreements specified language regarding post-termination services; physicians should be familiar with any such requirements in their state. 


Physicians undertake major financial and service commitments by entering into a participation agreement with an MCO. It is essential that they understand the common pitfalls in such contracts and attempt to avoid them. 

Additional Resources

  • American Medical Association, Model Managed Care Contract, 2nd ed. (2000)
  • S. Freymann Fontenot, Managed Care Contracts: What Do You Need to Know? (Southern Medical Association, 2004)
  • Medical Management Institute, Negotiating Managed Care Contracts (Practice Management Information Corp., 2004)
  • M. Rust, Managed Care Contracting for Physicians in a New Era of Leverage (American Health Lawyers Association, 2001) 

Written by:

Maria B. Abrahamsen, Esq. 

Peer reviewed by:

Kathrin E. Kudner, Esq.

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