BASIC CONTRACT STRUCTURE – Class 7

HMOs may attempt to broadly define the services physicians are to provide under the contract.

Important for physicians to specify the services they are required to render under contracts with HMOs because HMOs may attempt to broadly define the services physicians are to provide under the contract
The basic structure of a typical managed care organization’s contract with Primary Care Physicians typically consists of the following:

Preliminary provisions – References to the parties to the contract, definitions of contract terms, etc.:

From a provider’s perspective – the named parties are important to know, because they may identify if the Managed Care Organization (“MCO”) is a separate entity from the payer for services and if they are separate whether both are directly contractually obligated to or have privity with the provider.

From a provider’s perspective – the named parties are important to know, because they may identify if the Managed Care Organization (“MCO”) is a separate entity from the payer for services and if they are separate whether both are directly contractually obligated to or have privity with the provider, such as to get a guaranty from the parent organization.

From MCO’s perspective – persons defined as provider identifies whether there is one or potentially several locations or groups of providers authorized to provide services under the contract.

Definitions section – usually include key terms that dictate the scope of services to be provided and the circumstances under which payment will be made.

Covered services – What is Covered and Not Covered by the Contract:

From provider’s perspective:  it is important to precisely define not only what is covered, but what is not since non-covered services are typically paid by subscriber at ordinary and customary rates. Services not to be provided or arranged for by provider should not be included in any all-inclusive payment rate.

From Managed Care Organization’s (MCOs) perspective:  it is desirable to define covered services as broadly as possible.

Contracts also normally specify circumstances under which covered services are to be provided. Example: MCO may require a provider to obtain authorization to provide service as well as verification of patient status as being covered to receive the service. Provider may require obligation to provide service is subject to availability of beds, personnel. Provider might seek to obtain a guarantee of payment from MCO if provider complies with the authorization and verification procedures.
Physician groups would consider purchasing reinsurance or having stop-loss type of provisions in their risk-bearing managed care contracts to protect themselves if there are material shifts in factors that influence medical costs

The article by Charles A. Brown and John B. Reiss, Ph.D., J.D., “HMO Contracting Strategies Protecting the Provider’s Interests,”Healthcare Financial Management (April, 2000), encourages providers to understand the contract terms they enter into with HMOs and use negotiating strategy to minimize their risk.

Information that may strengthen a provider’s position in negotiating with a HMO includes understanding the HMOs historic and projected general administrative costs, inflation factors, and utilization rate which can be obtained from the proposed premium rates HMOs must file with their state departments of insurance or from HMO annual statements.

Also, providers should make sure their contracts allow them the right to regularly review the HMOs database of information relating to the provider’s costs and revenues.

Physician groups would consider purchasing reinsurance or having stop-loss type of provisions in their risk-bearing managed care contracts to protect themselves if there are material shifts in factors that influence medical costs.

Provider should have “stop-loss” insurance and a “re-opener” clause in the contract that allows renegotiation of the payment rates if there are material shifts in member demographics or other factors that influence medical costs.

Utilization risk shifted onto providers can be limited with a utilization “corridor”  so that a specified dollar limitation on a provider’s exposure to utilization risk is set.

Rate risk is the risk when the payment amount depends on the premium charged by the plan such as a percent-of-premium arrangement.  To protect providers from this rate risk, contracts should include a payment formula that defines a minimum payment level based upon the premium before discount, if applicable.

Protection against unit price risk:    For global risk contracts with carved-out products, it is important for providers to understand how HMOs negotiated the terms with the providers of carved-out services (because this may be money coming out of their own contract to pay for the carved-out services) and to set appropriate limits to the carve-out terms in their own contract with the HMO.  The simplest protection from unit price risk is to exclude all carved-out services and their associated costs from the contract.

Legal risks can be found particularly in the following clauses of contracts:  definition of contracting parties, coordination of benefits (COB), indemnification or hold harmless clauses, term and termination and assumption of the contract.

HMOs can use incurred-but-not-reported (IBNR) expenses related to claims, general and administrative costs, reserves, and risk pools, and unassigned membership revenue to its advantage and contract provisions in this regard should be specific.

For Providers:  to understand the contract terms they enter into with HMOs and use negotiating strategy to minimize their risk

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