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Important points in managed care contracts.

Health care is increasingly managed through some contractual relationship. Such contracts vary and the contracting entities may be clinics, universities, health maintenance organizations, individual practitioner organizations, preferred provider organizations, corporate health plans, or other structures. It is estimated that within 10 years more than 70 percent of all health care will be provided through some type of managed care plan.

There are some basic elements that must be considered in the construction of any contract for the provision of managed care.


There must be a clear identification of all parties involved in the contractual relationship--insurance company, employer, union, third-party administrator group, hospital subsidiary, marketing group, or broker. The contract is usually between two parties, and the proper legal name of each must be precisely stated.

The Other Organization's Business History

As a provider, you need to know as much as you can about the group with whom you are entering into a business relationship. What has been its performance? What is the business history of the principals of the company? What are its current contingent liabilities? Are there any prior or pending law suits? Is it currently approved by the state and/or federal agencies that would require such approval? Why is it in this business?

Has this organization ever had a business relationship with a similar group? References, preferably within the same market and same specialty, are very useful. You should have free access to at least three references to call and discuss the company's performance. You should review, if available, marketing brochures, advertising materials, and any other previously published documents that pertain to you and the plan. Reserve the right to approve all documents that will list you and describe your services as a participating provider. You need to have a clear understanding of the governance of the organization with which you are engaging in business.

Financial Viability

In addition to the organizational information above, what is the current financial status of the company? Pertinent financial information should include audited statements from the past two years, bank references, credit rating, any published business plan of the organization, and the company's current premium structure. Is it adequate to meet reasonable needs?

What organization is responsible for unpaid bills in the event this organization fails? If administered by another company, what is the financial viability of the third party? Does the sponsoring organization have a reinsurance policy? If so, to whom are the insurance proceeds paid? What happens to the patients for whom you provide care if the insurance company should fail?

Communication Procedures

Specific legal methods of communication with the managed care organization as to names and addresses are given in contracts, but that is not enough for a working arrangement. Who precisely is the executive responsible for making your practice agreement work? How is that person reached? Where is he or she located? What business hours is the person available to satisfy your needs, making this business relationship an efficient one? You need to get to know and develop a working rapport with the medical director and staff of the organization.

Contractual Obligations of the Parties

Duties are the substance of the agreement. The contract should outline clearly what the provider and the prayer of services are to do through simple, clear-cut, unambiguous definitions of the obligations of each party.

Determine if the plan follows a discounted fee-for-service model or a capitation model. Where a capitation model is used, you must clearly define any risk-pool sharing arrangements. You must specifically define the services you are required to deliver and under what circumstances patients may be referred to other providers. How much general medical care are you required to provide? If using a capitation system, determine how profit is gained or losses are shared.

You should know exactly how much the total out-of-pocket expenses will be, including all computer software and additional hardware required. Copayments must be precisely outlined. Reserve the right of mutual agreement in the event that policies are changed.

Terms of Payment

Terms of payment, as well as the exact documents required for payment of claims, should be precisely detailed. There must be a clear understanding of when payment is delinquent, and interest should accrue on bills not paid within 30 days.

Remember that most managed care companies want discounts from fee-for-service charges. You must therefore be paid promptly and not subsidize a managed care company through slow payments. Computer equipment and software requirements should be precisely outlined so that electronic payment of claims can be expedited with prompt transfer to your bank accounts. With a discounted fee comes the obligation for the managed care company to simplify paperwork in terms of payments.

A fee-for-service schedule should define in exact dollar amounts the terms of payments for services provided. Where capitation is not used, there must be mutual agreement of fees, as in instances where extraordinary costs are encountered in the provision of care. What fee schedules are to be used and what adjustments for inflation are to be included? What criteria will be used to increase fees? Which inflator will be considered?

Governance Issues

Determine who is on the board of directors of the organization and if you are eligible to participate in its governance. You need an opportunity to evaluate all aspects of management.

Quality Control Issues

What is the quality of the network of providers with whom you will be sharing profits and/or risks? Be certain there is some quality control as to other providers whom the group may wish to add. Understand and define credentialing processes and denial criteria to make certain they include physicians who are of known training and acceptable ethical standards.

Physicians and physician groups must know specifically which hospitals they can use to refer patients and determine what changes can be made without prior approval. They need to know what procedure to follow if they have concerns about the plan's hospitals and how the plan will deal with poor hospital performance or change in hospital administration.

Ancillary Services

You need to know clearly what the contract requires in terms of providing or choosing ancillary services. What is the payment schedule for such work? You need to know if there is a quality assurance committee and utilization review to evaluate ancillary services. Are there limitations to reasonable diagnostic tests?

Who will control ancillary services? Who will control the revenue? Does the organization share in the profits? Who provides peer review and ancillary personnel and covers their costs? Who is required to interact with any state or other licensing agencies? Who provides legal and accounting costs for this activity?

Customer Satisfaction

In addition to making certain that you have the opportunity to voice your dissatisfaction, the plan should ensure that patients have the same right. It should have a clearly organized patient satisfaction measurement device and should display such data prominently.

Marketing and Communication Data

You need to know how information is going to be distributed to other providers, both inside and outside the plan. How will you be described to both providers and prospective patients? What marketing efforts will be undertaken? Will marketing give the proper message? You need to have the opportunity to review any provider manuals and patient materials.

What are the plan's targeted geographic markets and to whom does the plan intend to market its product? Is the marketing effort large enough to be successful, and what is the anticipated enrollment size? How will the plan be sold? Will it be through exclusive agents; brokers; inhouse representatives; or large, currently established groups?


Contracts should clearly indicate the specific corporate or organization officer who is authorized to settle any and all disputes, including termination, concerning the contract. There must also be a specific person assigned by both parties at an operational level who can say "no or yes" when advised of problems with the contract.

Indemnification and "Hold Harmless" Clauses

These agreements are generally drafted to require all damages, losses, and expenses, such as attorneys' fees, to be paid by one party for the other. Indemnification language in health care contracts should be eliminated. If present, it should be mutual.

Additional extension of the "hold harmless" concept deems that the provider will continue to care for a group member for a specified period should the managed care company become insolvent. The patient would not be bound to pay for such services. You should not agree to this provision, but, if some care is required to complete care already undertaken, it should be time limited.

The managed care company should be at the same risk as the provider, hence you should not indemnify it and it should not expect to be "held harmless" when an activity is performed on its behalf.


Standard practice in these contracts requires a provider to maintain set amounts of malpractice insurance, as well as general liability insurance on the premises where care is provided. The managed care corporation may wish the provider to name the other party as an additional insured on these insurance policies. A better practice is to require the managed care company to provide proof of its own insurance as its cost of doing business.

Exclusivity and Noncompetition Agreements

For a contract to be an "exclusive" agreement, it must say so. This is very a difficult area. These agreements may have antitrust implications. They require precise legal counsel and advice.

Contracts frequently have language stating that the parties will not compete with each other either during the contract term or for some designated period after its termination. It is very important to understand and state exactly what each party has agreed to do in a "not-to-compete" arrangement. This is an area you may wish to avoid. If you agree to this arrangement, the terms should be very limited in scope and should expire with the termination of the contract.

Arbitration Policies

Designated representatives--one named by the plan, one named by the provider, and a third party agreed upon by both parties, should be available to promptly arbitrate any differences. If the goal is to have a successful cooperative venture, prompt resolution of any differences is a necessary ingredient. As most of these policies will be fee-related, a clause should be included that states that any disputed fee will be paid at the full fee-for-service rate, with arbitration to follow.

No rights to designate hospitals should be extended to the health care organization unless it is clearly understood in advance. There should be no provision in the document that would allow the organization to change hospitals where it would affect the pattern of practice for the provider or produce a geographic hardship.

Length and Termination of Contract

The contract must include a specific provision that describes its length. Often it is a fixed term, such as one year with an automatic renewal for successive periods unless terminated by prior notice. Contract language needs to be quite precise as to circumstances by which each party may terminate the contract. Useful language includes a termination clause granting either party the right to terminate without cause after giving notice to the other party within a stated number of days and avoids disagreement over whether or not "breach of contract" has occurred.

The contract should state the effect of termination on the legal relationship of the parties and any obligation that continues beyond the term of the contract. Financial implications of termination should be precisely specified, such as plans for the collection of fees for services directly from patients if the contract is terminated because of insolvency.

Also useful is a clause providing for prompt renegotiation of termination on short notice if any substantial change in law or administrative procedure makes a relationship no longer legal or beneficial.

Incorporation by Reference

Incorporation by reference should be avoided. All documents that are part of the contract should be directly attached. Failing that, incorporation by reference should allow time for the review of any documents that change the relationship of the parties and allow immediate cancellation.

Role of the Provider

The provider should clearly understand its duty as to when professional services are to be available, at what geographic site they must be provided, what after-hours coverage is needed, and any other specific requirements for availability. The requirement of a provider to limit referrals to other plan providers and to obtain prior approval for plan referrals needs to be clearly understood. The provider must be very precise in its duties as to risk sharing. Assumption of risk is rarely set out explicitly but is a concept that is often grafted into agreements by interference.

A clear duty of the insurance company should be to pay for any time required by the provider for ancillary duties, such as marketing efforts, peer review, and other administrative services, and for additional costs required to interact with or govern the managed care entity. A statement that the provider is free to see other patients on a fee-for-service basis as well as to seek other professional income may be worthwhile if the managed care contract will purchase a large percentage of the provider's professional effort.

Common Provisions

Contracts often contain provisions that have become fairly standardized over the years and are rarely of major importance. Such matters include under which state laws the contract is interpreted, the statement that the parties signing have the proper authority to sign, who the successors and assigns are for the contract, and some description that the contract is the agreement in its entirety and that any prior discussions not included in the contract are not enforceable.


A contract that contains the above essential elements and is negotiated with the appropriate payment amounts and with advice of counsel will allow providers to successfully interact with managed care companies. Drucker noted recently that buying customers is a failed marketing strategy.(*) Likewise, underpricing a product produces no profit cushion to build a business, but, rather, a history such as that of the Hyundai Excel--rapid growth and tremendous losses with disappearance in two years. Your services should be priced as Henry Ford priced the Model-T, low only because it earns a nice profit.

Competent legal counsel and careful negotiation prior to the signing of a managed care contract will produce a relationship with a responsible managed care company that will allow the provider to provide care and avoid the constant renegotiation and differences of opinion that preclude any mutually beneficial, long-standing commercial relationship.
COPYRIGHT 1992 American College of Physician Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Health Care Law
Author:Masterson, Byron J.
Publication:Physician Executive
Date:Nov 1, 1992
Previous Article:MSO - the new kid on the block?
Next Article:Interviewing for a position.

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