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Important Considerations in Negotiating a Managed Care Contract: The Provider Perspective

March 28, 2011

From the provider perspective, negotiating a managed care contract can be a burdensome and frustrating process. Since payors usually insist on using their “standard” contract, the provider is bombarded with an extensive and varied array of lengthy and technical contracts and amendments. The provider may not have the resources and personnel for comprehensive drafting efforts, and, depending on the size of the provider and the payor entity, may have little leverage to bring to the negotiation table. Nonetheless, considering the provider’s potential liabilities for not performing its obligations under the managed care contract, the substantial dollars involved, and the fact that the contract may be in place for decades, it is critical that the provider’s operational personnel, relevant health care professionals, and legal counsel carefully review each managed care contract. The payor entities will often be agreeable to modifications reasonably requested by providers and supported by a strong rationale, including (but in no way limited to) modifications to accommodate the Provider’s internal operations, required by law, and to prevent interference with professional care.

Below is a general checklist for legal practitioners representing providers in the review of managed care contracts. It does not address provisions that are specific as to provider type (i.e., hospitals), but rather as a guide in identifying contract issues requiring of attention in typical managed care.

Key Definitions

The following are key provisions that the Provider should review closely:

Clients and/or Payors. The Contract will include a definition of the different Payor organizations (and possibly plan sponsors) to which the Contract is applicable. The Provider should ensure it is not overly broad so as to allow the Payor to receive discounted rates for enrollees of organizations which the Contract is not intended to cover.
Covered Services. Because the Provider’s basic obligation under a contract is to provide “Covered Services,” the Provider must ensure that the term is carefully defined. If the Provider is only providing specific services, the Provider may attempt to limit the scope of services by developing a separate schedule listing such specific services. In addition, the Provider may request language permitting it to transfer an enrollee to another Provider if treatment of such enrollee is beyond the scope of Provider’s resources and capabilities. The Payor should be responsible for payment of any care provided following such transfer.
Medical Necessity. Under most contracts, the Provider is only paid for “medically necessary” services. The Provider should ensure that the definition of “medical necessity” does not give the Payor the sole authority to determine what is medically necessary, and which would potentially interfere with the Provider’s discretion in delivering care. Rather, the definition should rely upon the clinical judgment of the Provider and/or community standards.
Standard of Care. Payors often include language requiring the Provider to render the “highest” or “best” quality of care. The Provider would generally desire to avoid such language and ensure that the standard of care is not higher than that which it would otherwise encounter in its community or in medical malpractice claims.

Provider Obligations

Maintaining Records. The Provider should consider whether different medical record retention periods set forth in different contracts conflict with the Provider’s need to have a uniform medical record retention policy. To this end, the Provider should seek a general provision stating that Provider must retain patient records for the period prescribed by applicable state and federal law. In addition, the Provider should ensure that the scope of documents to be maintained is consistent with the Provider’s internal operations and no broader than applicable law.
Audits. In general, the Provider should ask the following questions with respect to provisions describing the Payor’s rights to conduct audits:
- Are audits conducted at the Payor’s sole expense and only during normal business hours?
- Are the types of documentation subject to the Payor’s auditing rights narrowly defined?
- Is the Payor required to provide advanced written notice within a specific time period prior to conducting an on-site audit that describes the nature of the review?
- Is the Payor’s right to audit limited to a prescribed “look back” period?
- Is the Payor prohibited from using statistical samplings or extrapolations as a basis of an overpayment claim?
Policies and Procedures. The Contract will likely incorporate multiple policies governing various aspects of managed care, including, but not limited to, utilization management and claims processing. The Provider should never execute a Contract without reviewing such policies. The following questions should be raised in connection with contract provisions incorporating policies and procedures:
- Is the Provider only obligated to comply with policies and procedures provided to the Provider in advance of implementation?
- Does the Provider have the right to object to the Payor’s amendments to policies and procedures? If not, does the Provider have the right to terminate the Contract if it is not agreeable to such amendments?
- In order to protect the enforceability of terms the Provider has negotiated in the Contract, does the Contract include language stating that in the event of a conflict between the Payor’s policies and procedures, the Contract controls?
Utilization Management. Utilization management refers to the medical review process, including the evaluation of the appropriateness, medical need, and efficiency of Provider services. From the perspective of the Provider, the following concepts should be included in the Utilization Management program:
- The Provider’s obligation to cooperate with the utilization management program should be subject to Provider’s right to appeal.
- The Payor’s review of Enrollee medical records should be during reasonable business hours and subject to advanced written notice.
- The Contract should include a clear procedure that the Provider can rely upon to verify enrollee eligibility (e.g., enrollee identification cards should include a telephone number where Provider can verify eligibility and certification information in order to provide covered services to an Enrollee).
- The Contract should include time periods within which the Payor must respond to preauthorization requests.
- Qualified physicians should be part of the Payor’s utilization management review process.
- If the Payor maintains ultimate responsibility for decisions of medical necessity, the Provider should ensure that such determinations are subject to a grievance procedure that provides for the Payor and the Provider to mutually agree upon a qualified independent third party physician to determine medical necessity.

Claims Submission and Reimbursement Provisions

Evaluate the Time Period and Process for Submitting Claims. Is the time period and process for submitting a claim consistent with the Provider’s internal operations? The Provider will generally desire a longer time period for submitting claims and should request language providing additional time under special circumstances, such as when additional time is needed for the coordination of benefits.
Obligation to Pay. Is a party to the Contract obligated to pay the Provider within a prescribed period or is a different entity ultimately responsible for payment? If the Payor’s “client” or “plan” is ultimately responsible for payment to the Provider, the Provider may propose language requiring the Payor to have a written contract with the “client” or “plan” that: (1) obligates such party to pay the Provider for services rendered in accordance with the Contract, and (2) requires the Payor to cooperate with and assist the Provider with obtaining payment.
Nonpayment. In addition to the right to terminate, the Provider would desire the right to suspend services and impose penalty fees in the event of non-payment by the Payor (or other entity responsible for payment).
Retroactive Denial of Claims. Payment for services rendered by the Provider in reliance on the Payor’s authorization systems should be guaranteed. To this end, the Provider would desire the Contract to prohibit the retroactive denial of claims that were positively adjudicated absent fault or fraud of the Provider.
Coordination of Benefits. In the event there are multiple Payors responsible for payment, the Provider would prefer that the Payor fully pay a claim to Provider and take responsibility for handling coordination for benefit claims.

Term and Termination

Contract Term. Payors often propose contracts with multi-year terms in order to provide enrollees adequate access to health care by maintaining its Provider network. Multi-year terms also have the effect of locking Providers in at current discounted rates for longer periods (while sometimes allowing the Payor to further reduce rates pursuant to unilateral amendments). For greater flexibility in the event the Provider becomes dissatisfied with the Contract, the Provider would typically want to negotiate for a shorter term (e.g., one year) and a “without cause” provision (as discussed immediately below).
Without Cause Termination. Providers may request a mutual right to terminate “without cause” in order to have an “out” if participation becomes a financial burden or the Provider otherwise becomes dissatisfied. The without cause provision should be subject to a sufficient notice period (e.g., 60-90 days is reasonable) to allow for an adequate transition.
For Cause Termination. Except for special events of default such as insolvency or exclusion from a government program (which warrant immediate termination), it is appropriate for termination “for cause” to include a time period in which the defaulting party (whether the Provider or the Payor) can cure the breach of its obligation under the Contract. The Provider would want to avoid provisions allowing the Payor to terminate the Contract at its “sole discretion” (although it is common for contracts to permit termination in the Payor’s “reasonable discretion” if the Provider’s participation jeopardizes the health or safety of enrollees).

Government Health Care Program Provisions

If the Contract covers beneficiaries of regulated programs, such as Medicare Advantage, Medicare Part D, or a Medicaid health maintenance organization, the Payor will include regulatory provisions or an addendum incorporating such regulatory provisions in the Contract. Providers sometimes assume that such regulatory provisions are required by law or constitute government “form” provisions. However, such provisions are often drafted in favor of the Payor, and sometimes include Provider obligations that are not necessitated by law. Therefore, it is important for the Provider’s counsel to carefully review applicable federal and state regulatory provisions in order to ensure that regulatory provisions proposed by the Payor are consistent with the actual law and do not impose unnecessary obligations on the Provider.

Review Miscellaneous Provisions.

Amendments. The Provider should generally object to clauses allowing the Payor to unilaterally amend key terms negotiated in the Contract. At a minimum, the Provider should propose language requiring the Payor to provide advance notice of a unilateral amendment, and allowing the Provider the right to object to such an amendment within a specified time period prior to implementation.
Insurance. Providers should ensure that the insurance policies are consistent with their actual policies in effect and that the Payor agrees to similar coverage requirements.
Indemnification. Providers should only agree to indemnify for damages arising from their own actions and those individuals that they employ or engage to provide services to enrollees under the Contract. For instance, a Provider providing pharmaceutical services should not agree to language that requires indemnification of the Payor for damages arising from manufacturing a drug product if the Provider is not the manufacturer. In addition, mutual indemnification is standard-– either the Payor should agree to equivalent language to indemnify the Provider or the indemnification provisions should be deleted. (The common law would control indemnification.)
Assignment. The Payor’s assignment of the Contract should require the written consent of the Provider (an exception for change of control events is reasonable). Assignment provisions that provide the Payor with broad discretion to assign the Contract could allow assignment to a different Payor with poor financial and/or contractual relationships.
Changes in Law. Given the dynamic changes that are occurring in the health care industry, it is more important than ever for the Contract to describe a fair and sophisticated process for amending the Contract in order to comply with a change of law or in order to address a “material change” resulting from a change in law, such as a change in law that threatens to disrupt the economic terms in the Contract. The change in law provision should permit either party to request an amendment in order to comply with the change in law or to maintain economic equivalency, and should allow the other party to terminate the Contract if it is not agreeable to the amendment. In addition, the provision should require the parties to negotiate amendments necessitated by a change in law in good faith.

Comment: While difficult to forecast, health care reform will require substantial modifications if not a complete overhaul to managed care contracts. Such modifications will include new key definitions, provisions addressing new reimbursement methodology (e.g., shared savings and other incentive based programs), and delivery models (e.g., accountable care organizations).

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