Negotiating your managed care future.

You can create vast new opportunities - or lose it all.

The future is managed care. In some regions of the country - California for example - managed care rapidly has become the dominant player and payor in long-term care. In other regions, facilities view it as a plague that hopefully will not be visited upon them. With knowledge, information, and rationality, though, managed care can be transformed from something to be feared into an effective means of assuring continued financial and operational viability.

In order to do that, nursing homes need to understand that managed care is managing costs. They must recognize that every aspect of their operations has associated costs, and therefore is subject to management.

Eligibility, coverage and services, risk sharing, provider and physician recruitment and retention, utilization review, quality assurance, pricing, payment, and liability all may be targets in the managed care environment. Each provider must evaluate all aspects of its operations, recognizing its own capabilities and limitations.

Preparing To Negotiate

To be prepared to negotiate the best possible deal with a managed care organization (MCO), a nursing home must coolly assess its market, itself and the MCO. It also must be aware of key issues and potential problems that may arise under a managed care contract.

Facilities typically seek managed care relationships for many reasons. These include protecting or expanding admission streams, creating or protecting revenue streams, and increasing the financial productivity of beds and services. These goals and expectations need to be accurately evaluated in order to avoid the desperation inherent in negotiating merely to survive.

Self-analysis must include market analysis. Primary sources of current and likely sources of future admissions must be identified. In addition, broader market trends, such as the market's degree of integration, the strength of regional MCOs, and the likely position of long-term care in the overall service area must be examined. Then you must get into more facility-specific factors:

Define Your Product. MCOs primarily view nursing homes as facilities where patients may be "dehospitalized" and treated at lower cost. For most nursing homes this perspective translates into higher acuity residents with more intensive care needs. A nursing home must decide whether to offer care by addressing differing levels of acuity within the facility or by creating specialized units.

The nursing home must also make careful note of whether the product it is selling is really the product the MCO is buying. A hospital-centered MCO, for example, may see hospital admissions, rather than patient-care services, as the real product it is purchasing when it contracts with a nursing home. Indeed, on average during any year, a nursing home will prompt one inpatient admission for each bed it has. These admissions can generate significant income for hospitals. This also casts light on the nursing home's subacute mission, which can be organized accordingly.

Identify Your Costs. The most important element in preparing to negotiate is accurate assessment of facility costs. As acuity increases, direct costs obviously increase. Residents require more Sophisticated and costly equipment, more staff-hours, new staff and more training for existing staff.

There are also many hidden, or indirect, costs likely to be associated with partnering with an MCO. An MCO is likely to demand 24-hours-a-day, seven-days-a-week admissions. The associated administrative and information management demands of this and other functions under an MCO contract will undoubtedly increase costs. At the very least, payment under the contract needs to cover the cost of services provided. In actuality, the facility should realize a reasonable profit from the contract.

Determine Your Ability to Deliver. A nursing home must evaluate honestly its strengths and weaknesses. It may not have the staff, training, or equipment to handle the more acute patient. In addition, traditional nursing homes face cultural and psychological adjustment issues when a medical subacute care model is superimposed. Finally, administrative and management personnel, as will as billing and claims systems, may be ill-equipped to satisfy all contractual obligations. Only if a facility is capable of delivering its product is it prepared to negotiate.

Evaluate Your Prospective MCO Partner. Before actually negotiating, however, a nursing home should learn as much as possible about its prospective business partner. Identify the MCO's service area, enrollment experience, and history of provider participation and satisfaction. Obtain financial information regarding the MCO. Know its ownership, financing, solvency, reserves, insurance coverage, and related businesses.

Regulatory and accreditation bodies are potential sources of information. Examine license and insurance filings. Finally confirm the MCO's general reputation. If you like what you've learned, then negotiations can begin.

Your Negotiating Position

The truth of the matter is that nursing homes will, in general, have limited market power and negotiating leverage in contract discussions. Nursing homes do have alternatives to taking on managed-care patients, including diversifying into other areas of the long-term-care continuum - assisted living, home health care, retirement communities - as well as into ancillary services such as pharmacy or durable medical equipment, or into hospital-based systems or specialty networks such as SNF/PPOs or long-term care specialty consortia. But all of these alternatives pose their own practical and legal problems, and MCOs know they have a patient base that is attractive to nursing homes and, what's more, one that is growing.

Nevertheless, a nursing home can win concessions from the MCO. To do so, the nursing home must determine its non-negotiable points, deal only with the MCO's decision makers, and ask as many questions as are needed to arrive at an understanding. The nursing home should try to anticipate sticking points and be ready to offer solutions that encourage agreement.

Key Contractual Elements

Extra Services Provided. A nursing home must define clearly the covered services it is expected to provide. Do they include ancillary services, such as pharmacy, or non-medical services, such as hairdressing? If so, the facility should seek service "carve outs," setting up separate payment for these services. For example, by paying for pharmacy services under a separate fee schedule, the facility minimizes the risk of significant loss from including expensive drugs within its per-diem rate.

Admissions Procedures. Pre-admission authorization is essential to the MCO, as is pre-admission review of the referral and examination of the patient to the facility. The nursing home should seek to maintain its right to refuse or accept admissions, subject of course to any access requirements the state may impose. While HCFA has been silent regarding a resident's ability to waive OBRA rights, nursing homes nonetheless should consider whether changes in the admission agreement could ease the tensions inherent between MCO contractual obligations and OBRA regulatory obligations, yet do so without violating federal or state law.

Transfer and Discharge. The contract should specify clearly a nursing home's obligations to the MCO when subscribers require transfer to hospitals. At a minimum, in emergencies, the nursing home should be able to transfer the resident to the nearest hospital with bed availability, whether or not the hospital is an enrolled provider.

The contract also must respond to a nursing home's notice and appeal obligations under OBRA. Federal law requires 30-day advance notice of most non-emergent transfers and discharges, with appeal rights and no transfer or discharge pending appeal. As a practical matter, family members frequently become comfortable with the more intensive care and services provided to high-acuity patients in a skilled nursing facility and, as a result, may resist transfers or discharges to less intensive settings, such as home-health care. Such situations may prompt lengthy and tedious appeals. The contract should clearly specify the degree to which payments will continue during the appeal, and what reconciliation will be once the appeal is resolved.

Most MCOs lack familiarity with bed-hold requirements. Any such expectations and obligations should be described in the contract. On a related note, particularly if payment rates are acuity-sensitive or case-mix based, each patient should be reassessed upon readmission to assure adequate payment for any changed conditions.

Utilization Review. The contract should specify explicitly the type and nature of the utilization review to be conducted and the appeal process for payment denials. Failure on the part of a nursing home to provide services which it deems to be necessary merely because the MCO denies payment creates great potential liability when there are adverse patient outcomes. The nursing home must acknowledge these liability risks. The facility must also weigh the risks of undermining relations with the MCO by pursuing appeals for payment for treatments, even though requirement can be documented.

MCOs typically seek unilateral authority to amend utilization review guidelines with little notice to a nursing home. While MCOs are unlikely to allow a nursing home to refuse such amendments, the nursing home should be able to successfully negotiate contract termination rights when these amendments are deemed unacceptable.

Quality Assurance. MCOs usually offer nursing homes quality assurance guidelines developed for hospitals. These should be evaluated for applicability to nursing homes and for consistency with OBRA requirements. Reputable MCOs will seek to establish nursing home-specific guidelines generally consistent with federal law.

Indemnification. The nursing home faces liability risks for an MCO's mistaken utilization review decisions. In addition, if the MCO requires use of its own physicians, allied professionals, and ancillary suppliers, the nursing home is at-risk for their professional decisions. If possible the contract should indemnify the nursing facility for any untoward acts or omissions. Indemnity clauses must be considered carefully, though, because they are usually mutual, and the MCO may face even greater risks which the nursing home does not wish to indemnify against.

Claims Processing. The contract should define a "clean claim" and should require the MCO to promptly notify the nursing home of questionable claims. If such notice is not provided, claims should be deemed clean. Clean claims must be paid in a timely fashion, and delays should require penalty payments and interest. The contract also should specify appeals procedures and timetables to resolve disputed claims.

Terms and Terminations. While automatic annual renewals may be acceptable, the nursing home should not include payment rates as part of such renewals. Rates should be subject to periodic reevaluation and renegotiation.

Termination provisions should define the causes for which either party may terminate. Evaluate carefully whether to allow for termination without cause, because such provisions will apply equally to the MCO as well as to the nursing home. In some cases, the nursing home may be better served if the agreement cannot be terminated without cause. Finally be certain to specify ongoing treatment and payment responsibilities upon the end of the contract.

No nursing home should ever enter into a contract out of desperation. If terms that meet your basic needs to manage your business, care for your patients, and derive a fair profit cannot be negotiated, then that MCO is not the right partner for you. However when armed with sufficient knowledge and information about their own and the MCO's needs, nursing homes should be able to negotiate terms that benefit both parties.

Alan Rosenbloom is a partner in the Philadelphia-based firm of Cohen and O'Connor, a full service law firm with offices in Atlanta, Charlotte, Dallas, San Diego, and Seattle and locations in New Jersey, New York and South Carolina. Mr. Rosenbloom limits his practice to health law, with a particular focus on long-term care.