Tips For Better Managed Care Contracting

March 6, 2017

As some of you may or may not realize, physician participation in managed care plans can have a significant impact on a medical practice. Therefore, before entering a managed care contractual arrangement, it is important to understand the elements and ramifications of the contract. For example, since many managed care contracts go beyond reimbursement and payment for services, it is important for physicians to pay attention to and possibly negotiate terms that include such items as:

  • Restrictions on referrals,
  • Services that are not covered,
  • Utilization and peer review,
  • Liability exposure,
  • Reporting requirements to the payor,
  • Availability for emergency care, and
  • Medical-decision making issues

Understanding items such as these prior to signing a contract is absolutely essential to managing risk and obtaining reasonable payment.

Contracting Fundamentals

No matter how familiar you or your physician partners may already be with managed care contracting, this is a continually evolving area. As such, you should keep in mind these fundamentals of managed care contracting when working in this area with your legal and/or accounting professionals:

1. There are no right and wrong answers in contracting. As managed care evolves, so does contracting philosophy and strategies. Legal precedence and regulatory changes will almost certainly influence contracting. Also, the people in leadership positions at the payor (ex. Medical Director and Executive Director) often dictate a contracting philosophy. Obviously this may change as people in these positions are replaced by people with a different managed care and contracting ideas.

2. A managed care contract is a legal and binding document. Make sure you know what you are signing and make sure time is taken to read the fine print. Understand that the managed care contract is an enforceable document that can severely impact the financial viability of your medical practice. For example, the payor’s right to terminate the contract at any time could have a future impact on the practice (ex. Deselection).

3. A contract does not alter a physician’s responsibility to his/her patients. Unfortunately, a bad contract may cause a doctor to treat one set of patient groups differently from another. This has always been one of the major issues surrounding capitation contracts and often causes patient scheduling conflicts to arise.

4. A contract should reflect negotiated terms. Verbal discussions and negotiations should be put in a letter of agreement before signing a contract, and should be incorporated into the final signed agreement. Remember this: Managed care contracts are negotiable.

5. Do not allow yourself or your physician partners to say “no” to a contract opportunity unless you or they really mean it. Negotiations are a process of consensus building. Find common ground and areas of mutual compromise. If you want the business, negotiate. If you do not, walk away from the contract. However, there will probably be times when the payor just won’t negotiate and you will not want to walk away from the contract.

6. A contract or how the contract is negotiated should not violate antitrust laws. If necessary, consult a qualified health care attorney on terms that raise concerns or red flags in your mind.

7. Do not lock in rates for long-term contracts. Any contract over one year should contain language that provides for rate adjustments that account for incremental cost associated with volume. For example, in capitated contracts, ask this question: How does the cap rate increase each year? The objective is to make sure the rate does not stay constant.

8. Gain leverage over managed care payors by becoming part of a larger physician’s organization or forming your own organization. One excellent example is the formation of independent practice associations. In managed care contracting there is strength and power in numbers. Cooperation with other providers will often lead to better contracting terms. Related antitrust issues should always be addressed.

9. Finally, keep in mind a good contract reflects a good partnership. Aim for double win situations and utilize this in your negotiations with the managed care payor. This will usually require a compromise by all parties to the contact.

Managed Care Contracting Tips to Remember

Tip #1: Use Knowledge to Reduce Risk!

The more knowledge you have, the better contract you can negotiate. It is as simple as that. For example, gathering, analyzing, and presenting utilization and outcomes data to a payor will help the practice succeed in negotiating discounted fee for service contracts. Understanding patient demographics and obtaining prior utilization history can help you negotiate a better capitation contract.

Tip #2: Understand that Incentives are Different under Capitation.

The incentive under FFS is volume and more procedures. Under capitation, however, the incentive is efficient resource utilization and providing quality care in the most appropriate and lowest cost setting. Can your practice adapt to the incentives built into the capitation model? Can your practice change it’s clinical behavior so as to be successful under capitation?

Tip #3: Get Information from the Managed Care Organization.

Every practice should get a utilization report card from its major managed care payors. This information will allow the practice to determine whether its utilization patterns are in line with the other providers in the provider network. This information also lets a practice know whether or not it might be targeted for deselection. Finally, the practice may be able to obtain utilization information that may assist it in future negotiations with the payor. Keep in mind this very important point: In today’s managed care environment, data is king. Those practices that gather and present this information to payors will succeed in the long run.

Tip #4: Always Determine How the Plan Was Marketed to Employers and Employees.

Obtain information on how the managed care plan was marketed to employers and employees. Be wary of promotional gimmicks such as free screenings that may influence volume. For instance, one managed care payor marketed a plan by offering a physical for the price of an office visit co-payment. As a result, primary care physicians who had agreed to accept capitation for the primary care portion of patient care were overwhelmed with requests for physicals. Here was a case where the physicians should have negotiated a separate payment if the practice incurred a larger than expected number of physicals for any given population within a year.

Tip #5: Know What it Takes to Win Favorable Rates

As you know, managed care contracts use a variety of pricing methodologies and payment approaches. Discounted fee for service is what it looks like: The payor pays the doctor on some form of a discounted basis. There is a trend in the managed care industry to use the Medicare RBRVS system as a basis to pay its providers. The questions to consider are:

1. Does your practice have leverage to negotiate favorable discounted rates? and

2. How does the payor reward a provider for cost effectiveness in a discounted fee for service environment?

If a payor attempts to decrease reimbursement, or if the practice is unsatisfied with its current level of reimbursement, can it negotiate favorable rates? If not, it must somehow place itself in a position of strength. This is why we are seeing a dramatic increase in IPAs, along with more and more practices beginning the process of accumulating, analyzing, and presenting clinical data to managed care payors. The only way for a payor to reward a doctor in a discounted fee for service environment is to increase the rates it pays to its cost effective providers.

Capitation pays the physician a calculated per member, per month fee for specified covered services. The physician group or delivery system assumes the risk to manage the care of patient members for that fee. Leverage in capitation negotiations often relate to such issues as the number of primary care physicians, geographic coverage, and past history in providing cost effective, quality care. These factors will usually support the case for higher capitation rates. One should also attempt to carve services out of the capitation rate so they can be paid on a fee for service basis.

Tip #6: Know How to Minimize Risk.

There are several approaches for reducing the financial exposure of physicians at risk for catastrophic medical cases. Among the most widely used types of insurance:

Stop-Loss is a provision that stops payment at a certain dollar amount and usually is used to seek protection from catastrophic claims.

Reinsurance is used to cover claims over the stop-loss amount. Reinsurance may be obtained from the managed care entity or through an outside carrier. Some plans automatically carry reinsurance for the provider. This is usually needed by large networks and contracts; Rarely is reinsurance needed by a single physician operating under a normal capitation agreement.

The risk of catastrophic cases is particularly high when the number of capitated lives is small because there’s a greater statistical risk due to a small population base. Many Managed care payors offer stop-loss and reinsurance for providers under their capitated plans. This is generally paid through a small per member, per month deduction from the payment. However, it is often a good idea to seek several quotes on reinsurance because a specialty insurance carrier may cost less than the managed care plan.

Tip #7: Understand the Risks and Rewards of Capitation Contracts and Per

Member Per Month (PMPM) Payments

Prior to agreeing to a capitated rate, a practice should:

Step #1: Know the visit rates for its current patient populations. Compare the existing and projected utilization, accounting for demographic shifts and patient mix that may shift due to participation in specific plans.

Step #2: Know exactly what the practice is at risk for, including covered services and the age and adverse selection potential of a plan’s patient population.

Step #3: Review the plan for incentives/disincentives impacting utilization: co-payments, deductibles, annual caps, patient mix of new employer groups to be added to the plan, and benefit changes.

Step #4: Utilize a practice management information system that can track relevant managed care numbers. Be able to compare per member, per month payments versus cost of care per encounter and the payment if it were done on a fee-for-service basis.

Step #5: Calculate total dollar projection of revenue and include a calculation for Incurred But Not Report (IBNR) cash reserves for three years. Actuarial data submitted by the plan should be reviewed by an actuary, relative to the profile of the primary care organization supporting that contract.

Tip #8: Advanced Knowledge about Risk-Sharing Can Lead to Higher Reimbursement

Managed care organizations use various methodologies to shift risk to providers and set different mechanisms to reward cost efficient care provided in the most appropriate setting. Some of the most common are described below:

Withholds. In both a capitated and fee-for-service methodology, a withhold (usually around 10%) is applied in the event of budget overruns for specified services (hospitalization, specialty services) or outliers. In other cases, the payor implements a withhold to protect itself merely in the event of provider over utilization. The disbursement of the withhold is often based on pre-determined criteria and is adjusted for by overall profitability, with percentages distributed to both contracting parties. However, in many managed care contracts, the issue of how the withhold may be returned to the provider is often silent. This issue should be resolved before executing the contract.

With a fee-for-service methodology, a certain amount is sometimes withheld from physician payment and dispersed after deductibles, co-insurance, and co-payments are applied. The prime objectives of withholds are to protect the financial solvency of a plan and to incentivize providers to manage care and reduce the number of unnecessary tests and referrals.

Risk Pool. A risk pool applies to capitated methodology. A portion of the capitated payment is pooled or set aside to cover certain expenses. For example, a primary care physician may have portions of the capitated payment set aside to cover hospitalizations. Since hospitalizations are deducted from the pool, the physician is at risk. Target rates for hospitalization may be set. If the providers achieve the target, some return of risk pool money occurs. However, if hospitalizations are higher, the provider must accept the capitation as full payment. Because more Managed care organizations are doing economic profiling, inappropriate use of hospital or specialist resources could lead to termination from provider participation. Risk pools are used to minimize utilization of services and are frequently applied to primary care physicians for specialty services in addition to hospital care. Keep in mind a provider must elect to accept this risk; It is rarely forced upon the doctor. Unless there is a confidence that utilization and related costs can be contained, do not accept risk in the early years of the contract.

Risk Corridors. A risk corridor is calculated on a per member per month basis and establishes a target fee. If the actual charges go above or below the corridor, penalties and rewards are applied in different percentiles. For example:

Claims Target Fee = $27.00 pmpm

Administrative Fee = $1.00 pmpm

Total Target Fee = $28.00 pmpm

Risk Corridor = 10% + target fee

Penalties and rewards can be applied at 25th, 50th, and 75th percentile above corridor. A separate stop-loss is applied above 75th percentile. Risk corridors are used often in joint contracting situations because they still allow the providers to be paid a fee-for-service rate, while holding the joint contracting entity responsible for managing and containing costs. Here is how it works.

The Joint Contracting Company is paid $1.00 per member per month to manage the contract and oversee the clinical utilization of services in order to keep the average claim under $28.00 pmpm. The providers are paid on a fee-for-service basis. On a quarterly basis, the average cost per claim is calculated. If it is above the risk corridor, the Joint Contracting Company is penalized and will be paid $0.75 per month instead of a dollar. This system is recommended for a limited period of time (one year) and is used primarily to establish capitated rates.

Tip #10: Protect Your Practice Before Entering a Capitated or Risk-Sharing Plan by Getting Necessary Information

1. Identify specific criteria related to withholds such as what percent of all claims will be withheld and applied against any budget overrun, including, but not limited to, hospitalizations, specialty services, and outliers. After adjustments, overall profitability will be calculated and remaining amounts will be dispersed 50/50 between the two contracting parties. If it’s not explicit, don’t agree to it.

2. Assess the impact of risk-sharing on clinical care. Will your providers be incentivized to compromise care?

3. Find out if withholds are applied to services out of the provider’s control (out of area emergency care).

4. Verify the ability of the plan to administer any risk sharing agreement.

5. Do sample calculations of the risk sharing language applied to different scenarios.

6. Always maintain the ability to appeal.

7. Document the record keeping ability of both parties to reconcile differences.

8. Do a self-diagnosis of your practice’s ability to meet the set targets.

9. Pay extra special attention to the list of services that a primary care organization is obligated to provide under the capitation agreement. It’s essential that such a list is included in the text of an agreement or added as an addendum.

In summary, physicians need to understand the impact on clinical practice patterns of a managed care contract and the incentives created by its terms. The physicians in the group practice should do a self diagnosis to determine if the incentives employed by various pricing methodologies are compatible with the group’s own practice patterns.

If a group practice has never entered a capitated or risk sharing agreement before, or believes that the actuarial data provided is incomplete, the group may be reluctant to enter into a specific contract. In some instances this may be appropriate, particularly if the practice is small, lacks efficient administrative resources, and the information requested is not forthcoming. However, if it’s simply a matter of not wanting to deal with the unfamiliar, then it might be better to take another approach. If possible, negotiate a fee-for-service rate for one year and a tentative risk-sharing or capitated rate for the second year, subject to the first year’s experience, performance, utilization, and financial data.

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