The Georgia Scroll
July 1998

Negotiation of Managed Care Contracts

by: Marci Thomas

More physicians are signing up with managed care organizations (MCOs) these days. In its recently published study on physicians in the marketplace the American Medical Association said that 35% of physicians had one or more capitated contract and that overall 25% of their revenues were capitated. This doesn’t take into consideration the number of physicians with managed care contracts where compensation is discounted fee for service or some other method. Anecdotal evidence from physicians would suggest that many of their contracts are entered into without careful consideration. The result is often disappointing, including physicians being forced to reduce fees, or facing financial and other difficulties that were not anticipated. The need for due diligence and effective negotiation doesn’t just apply to physicians. Hospitals and other providers should also take the appropriate action prior to contracting.

However, many providers have the same complaints:

• "Managed care plans just won’t negotiate with us. They say, ‘Take it or leave it."
• "The managed care plan gave us a pre-printed contract and said, ‘This is our deal.’ We assumed we could not negotiate."
• "The agent didn’t seem receptive to getting into negotiations."
• "This is too adversarial for me. I’ll fix any problems down the line, after I sign it."

If the relationship between provider and MCO is not shaped so that both parties can perform efficiently and collaboratively, there is little long-term opportunity for a physician or provider group to increase profitability, market share or the quality of patient services within the managed care relationship. This situation becomes magnified with multiple managed care contracts, each with their own procedures and policies, definitions and demands.

Develop provider objectives

Preparation is essential to successful negotiations between the provider and the MCO. The provider should identify reasons why it would benefit from entering into managed care contracts. Managed care contracts should not be considered just because of fear that the provider will lose patients. In many instances this may not be true. Provider objectives might be:

• Protect or increase patient population
• Develop managed care program experience
• Create or protect revenue streams
• Develop relationships with specific payors

Develop Provider "deal points"

Prior to beginning the negotiations the provider must determine if it is able to manage healthcare services. Most contracts shift some of the risk from the MCO to the provider. The provider should assemble a team of people to perform the due diligence necessary for the provider to determine if they are willing to negotiate and what their deal points are. The contract developer and negotiator, the chief financial officer, the controller or business manager and legal counsel will all bring different skills and perspectives to the table. Certain provisions in the contract may be negotiable from the team’s perspective, some may not.

Identify the parties to the contract and the provider services involved

A payor may have more than one plan such as a health maintenance organization, a preferred provider organization and an indemnity plan. Each may have its own covered services and payment mechanisms. The provider should understand whom the payor is, the plans included along with the covered services, payment provisions and other rules. In addition, it is important to understand the mechanisms that will allow the provider to determine the coverage for each enrollee.

Evaluate payor risk-solvency, reputation and enrollee population

Equally important is evaluating the initial payor risk. It is important to learn as much about the payor as possible including its history, financial resources, reputation, target markets etc. to limit any surprises later. For example, state law or the contract may require the provider to furnish services for a specific period of time (i.e. a hospital stay) even if the MCO does not pay. Financial information can be obtained from:

• State insurance commission
• Securities and Exchange commission
• Reviewing the MCO’s insurance and reinsurance policies
• Reviewing the MCO’s guarantor agreements
• Reviewing audited financial statements

Investigate the reputation of the MCO. Talk to participating providers to determine utilization review policies, payment policies, administrative requirements and general satisfaction with their arrangements with the MCO.

It is very important to understand the characteristics of the enrollee population. This can be done by identifying the employers with whom the MCO has contracts. This can reveal risks associated with certain employee groups such as exposure to hazardous chemicals or groups of retirees. Actuarial advice should be obtained to determine exposure. It is important to determine if the viability of a contract for the provider depends on increased utilization which might not materialize. It may be wise to request a tiered approach based on the number of covered lives delivered to the provider.

Determine the adequacy of the rate

The provider should have an idea of what it costs to deliver its services. It should also understand the impact the additional subscribers will have on its practice. If the provider can add patients without adding additional overhead, it may be able to accept a lower rate and still be profitable. A financial model could be created to determine the effects of the rate and the increased patient load. An MCO may be willing to increase its rate in order to attract a provider.

Compare contract offered against the deal point list

The MCO should compare the contract offered against its deal point list. Legal counsel should review the contract for troublesome language that may not be acceptable to the provider if this has not already occurred. The due diligence team should make a list of differences in the contract with what the provider is willing to accept. Then a meeting should be held with the MCO to discuss them.

The best approach for successful negotiation is to seek long-term relationships only with managed care organizations that the provider respects, and with managed care organizations that have respect for the provider. This may mean that the provider may need to find something of particular value to offer MCOs, perhaps cost, or, even better, a willingness to demonstrate superior quality, to provide highly satisfying services, to provide enhanced services or to take on financial risks.

For assuming risk, the provider should also get value from the MCO such as quick payment, new market penetration, high volume or simpler administrative rules.

When negotiating with MCOs it is important to remember that:

• If you don’t ask for it, you won’t get it.
• If you don’t deserve it, you won’t get it.
• If you do deserve it, you must demonstrate—why you should get it.

Managed care negotiations should result in a contract that represents a win-win for both parties.

Marci Thomas is Director of the Atlanta office’s enterprise risk services department of Deloitte & Touche LLP.

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Last modified: June 22, 2001