The 10 Biggest Legal Mistakes Physicians Make When Negotiating Managed Care Contracts

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.)

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Executive Summary

For most physicians and physician group practices, success in negotiating managed care contracts is a vital factor in overall practice success. To avoid common contracting mistakes, successful negotiation with a managed care organization (MCO) requires both thorough preparation and careful attention to the specific terms of the contract. Because of the magnitude of what is being undertaken, no managed care contract should ever be signed unless and until the contract has been carefully reviewed and its implications are fully understood.

Mistake 1 Not Adequately Specifying the Precise Services to Be Covered or the Exact Compensation to Be Paid

Physicians and group practices regularly enter into managed care contracts that do not clearly specify the precise services that are to be covered under the contract or the exact compensation that is to be paid for the services provided under the contract. Often, covered services are either poorly defined or not defined at all. Similarly, managed care contracts often provide that reimbursement will be made pursuant to the MCO’s fee schedule then in effect, or pursuant to a fee schedule attached to the contract that is incomplete or lacks specificity. Physicians also commonly fail to consider whether new procedures will be covered or how catastrophic cases and technologically advanced services or products will be reimbursed, if at all. Also, when providers are risk bearing, they occasionally fail to ensure in the contract that they will have adequate access to the financial information maintained by the MCO that is needed to verify proper reimbursement. Providers sometimes even unintentionally consent to participate with respect to “all products” of the MCO.

Action Step Physicians should insist that separate schedules be attached to the managed care contract identifying the precise services covered under each of the MCO’s plans or products. Likewise, for each of the MCO’s plans or products, separate schedules should be attached to the managed care contract identifying the exact compensation that is to be paid by the MCO for each covered service.

Mistake 2 Agreeing to Be Bound by Policies and Procedures That Have Not Been Reviewed and That Are Not in the Contract

Many physicians and group practices enter into managed care contracts that state that the provider will be bound by the MCO’s policies and procedures as they exist from time to time. Often, such policies and procedures are never actually produced for the provider or reviewed

by the provider until after a dispute has arisen. Also, physicians and group practices often cede to the MCO the ability to change policies and procedures unilaterally at will, regardless of any adverse effect such changes may have on providers.

Action Step Physicians should insist that any policies or procedures be attached to the managed care contract and that no changes to the policies or procedures will be binding on the provider without the provider’s written consent.

Mistake 3 Allowing the MCO to Hide the Devil in the Definitions

On a regular basis, physicians and group practices enter into managed care contracts without fully comprehending how efficiently MCOs can in effect take back in one portion of the contract what they appear to be giving away in another portion of the contract. For example, MCOs have become extremely adept at using definitions to restrict their liability to providers or to otherwise shift the contract in a way that does not comport with the provider’s reasonable expectations:

“Medically necessary”—Often defined in a manner that allows the MCO’s medical director to second guess clinical decisionmaking after the fact using vague standards
“Emergency medical condition”—Sometimes defined in a manner that allows the MCO to deny payment using a standard other than the “prudent layperson” standard
“Payer”—Often defined in a manner that allows inappropriate third-party access to physician discounts (e.g., “silent PPOs” and “renting” of discounts); also, when an MCO is administering a product for a self-funded employer plan, “payer” is commonly defined in a manner that absolves the MCO from any payment obligation, even when the managed care contract does not provide an adequate enforcement mechanism against the self-funded employer plan, which usually has no direct contractual relationship with the provider.

Action Step Physicians should carefully review the entire managed care contract, including the definitions, and seek professional legal advice before signing the contract if they have any questions about the parties’ respective duties and obligations.

Mistake 4 Failing to Insist Upon Contract Provisions That Ensure Prompt and Fair Reimbursement

Unfortunately, physicians and group practices often enter into managed care contracts that do not contain provisions necessary to guarantee prompt and fair reimbursement. For example, some important provisions that are often omitted include the following:

Uncomplicated procedures for efficiently obtaining from the MCO (or other payer) a binding advanced verification of a patient’s enrollment 24 hours a day, seven days a week, and 365 days of the year
Detailed coding standards and requirements that prohibit bundling and/or downcoding by the MCO (or other payer)
Clear claim submission procedures and deadlines, together with an easy process for obtaining from the MCO (or other payer) a binding acknowledgment of claim receipt
An unambiguous definition of “clean claim” placing the burden on the MCO (or other payer) to timely (e.g., 10 days) return any allegedly insufficient claim with a detailed written description of the specific purported deficiency. If the MCO (or other payer) fails to timely do so, the claim should be deemed a “clean claim” for all purposes.
A prompt payment provision specifying how many days the MCO (or other payer) has after claim submission to make payment on clean claims and providing for a significant penalty (e.g., total billed charges) and interest on untimely payments
A clear coordination-of-benefits clause providing that the MCO (or other payer) is obligated to make payment unless, within some reasonable time frame (e.g., 72 hours following claim submission), the MCO (or other payer) can document to the provider’s satisfaction that the MCO (or other payer) is secondary, and further providing that the MCO (or other payer) is not relieved of its payment obligation if the primary payer has not made payment within a specified time after claim submission
A provision providing that the MCO (or other payer) is obligated to timely pay the provider’s claims, notwithstanding the pursuit of subrogation rights against potentially responsible third parties.
An exclusive list of all approved “payers.”
An effective enforcement mechanism against “payers” that are self-funded employer plans, and against any other “payers” that do not have a direct contractual relationship with the provider.

Action Step Physicians should insist on inclusion of contract provisions (such as those described in this Mistake) that ensure prompt and fair reimbursement.

Mistake 5 Not Restricting the MCO’s Ability to Make Retroactive Adjustments

Physicians and group practices commonly enter into managed care contracts that allow MCOs to make refund requests and/or adjustments long after the underlying claims were originally processed and paid. As a result, an MCO may determine that it has paid the physician more than it should have and unilaterally decided to offset the alleged “overpayment” against future reimbursement due to the physician.

Action Step Physicians should reject any general clause in a managed care contract permitting the MCO to unilaterally make offsets or adjustments, and should instead insist on contract language allowing the MCO to request an adjustment only during the first 90 days after the physician’s receipt of payment. Any request for an adjustment should be required to be in writing and to detail the specific basis for the requested adjustment. If the physician disputes a requested adjustment and the MCO wants to pursue the matter further, the MCO should be required to follow the dispute resolution procedures in the managed care contract.

Mistake 6 Agreeing to Inefficient and Costly Internal Grievance and Dispute Resolution Procedures

When entering into managed care contracts, physicians and group practices regularly agree to be bound by inefficient and costly internal grievance and dispute resolution procedures that result in unnecessary delay. Often, multiple levels of appeals are required to be exhausted while there are no clear deadlines for the MCO to act, or penalties if the MCO fails to act timely. Similarly, many managed care contracts provide unreasonably short time frames for internal appeals of adverse claim determinations and have overly burdensome procedural requirements for making such appeals. Often, claim determinations and payments are deemed final for all purposes if the physician fails to comply with the MCO’s inefficient internal grievance and dispute resolution procedures.

Action Step Physicians should insist that any mandatory grievance or dispute resolution procedures be efficient and cost-effective, and should reject any unreasonable or overly burdensome dispute resolution procedures.

Mistake 7 Limiting in Advance the Ability to Seek a Satisfactory Remedy If the MCO Fails to Perform

Physicians and group practices often enter into managed care contracts that contain unreasonable restrictions on the provider’s ability to seek a satisfactory remedy if the MCO fails to fulfill its obligations. Some of the limitations often encountered include the following:

Restrictions on when a claim may be asserted (e.g., contractual statute of limitation clauses)
Restrictions on where a claim may be asserted (e.g., binding arbitration clauses and mandatory venue provisions)
Restrictions on recoverable damages (e.g., limitations or caps on direct or indirect damages, attorney’s fees, costs of litigation)
Failing to specify the circumstances under which the physician can collect from individual patients (e.g., noncovered services, ineligible patients)

Action Step Physicians should avoid contractually limiting their ability to seek a satisfactory remedy if the MCO fails to perform, and should attempt to remove from the contract any unreasonable limitations proposed by the MCO.

Mistake 8 Permitting the MCO to Make Unilateral Changes At Will, and Failing to Provide a Prescribed Mechanism for Periodically Renegotiating Reimbursement Rates

When entering into managed care contracts, physicians and group practices often agree that the MCO can unilaterally make changes to the contract and/or to the governing policies and procedures. Unbelievably, advance notice of the changes is sometimes not even required to be provided to the physician by the MCO. Also, physicians and group practices regularly sign managed care agreements containing no efficient mechanism for periodically renegotiating reimbursement rates (e.g., an inflation index and/or a prescribed annual review process).

Action Step Physicians should insist that no changes to the managed care contract and/or policies or procedures will be binding on the physician without the physician’s written consent, and should ensure that the contract contains a prescribed mechanism for periodically renegotiating reimbursement rates. Physicians should also attempt to ensure that the contract contains a provision allowing the physician, at his or her option, to terminate participation with respect to individual plans or products of the MCO without terminating the entire contract.

Mistake 9 Neglecting to Adequately Consider Post-Termination Obligations and Restrictions Under the Contract

Physicians and group practices sometimes fail to give adequate consideration to post-termination obligations or restrictions contained in proposed managed care contracts. For example, some MCOs ask physicians to agree to provide care for patients for certain periods of time after termination, regardless of whether the patient is under a course of treatment at the time of termination, yet make no provision for compensating the physician for such services.

Action Step Physicians should carefully analyze any proposed post-termination obligations and restrictions under a managed care contract, and should seek professional legal advice before signing the contract if they have any questions about the parties’ respective post-termination duties and obligations.

Mistake 10 Accepting Too Much When Agreeing to Indemnify and Hold Harmless the MCO

Far too often, physicians and group practices enter into managed care contracts that contain overly broad and unreasonable “indemnification” and “hold harmless” provisions that make the provider liable for assorted losses and expenses that may be incurred by the MCO.

Action Step Physicians should insist that any overly broad or unreasonable “indemnification” and “hold harmless” provisions be deleted from any managed care contract before they sign the contract.

Conclusion

By avoiding these mistakes, physicians and medical groups can help ensure successful negotiation of managed care contracts, and can increase the likelihood that their practices will succeed within the managed care arena.

Additional Resources

American Health Lawyers Association, Managed Care Contracting Handbook, 4^th (2001)
American Medical Association, Model Managed Care Contract, 3^rd, http://www.ama-assn.org/ama/pub/category/9559.html
Fontenot, Managed Care Contracts: What Do You Need To Know? (June 2002), http://www.sma.org/resident/manage_care.htm
Hursh, “Negotiating a Managed Care Contract,” Physician’s News Digest (Feb. 2004), http://www.physiciansnews.com/law/204.html
Medical Management Institute, Negotiating Managed Care Contracts (2003)
Negotiator’s Best Managed Care Contract Clauses (Brownstone Publishers), http://www.brownstone.com/products/product.cfm?product_id=83
The Provider’s Negotiating Edge (Brownstone Publishers), http://www.brownstone.com/products/product.cfm?product_id=89
Wieland, The Internist’s Guide to Negotiating Managed Care Contracts and Capitation Rates, 3^rd., rev. ed. (American College of Physicians 2002)