How group practices can avoid managed care contracting pitfalls

Healthcare Financial Management, July, 1999 by Alice G. Gosfield

When negotiating contracts with managed care organizations, group practices should understand the potential pitfalls involved. The basic issues to be aware of are understanding the relative parties' negotiating positions, the business significance of fundamental terms, and the actual contract provisions.

The most important clauses in contracts concern compensation and termination. Group practices should require that their contracts include clauses that provide the physicians with protection should utilization assumptions not be met. They also should be realistic about their ability to fulfill contract terms. In addition, contract terms should be clearly written, well-defined, and time-limited.

When negotiating contracts with managed care organizations, group practices face somewhat different issues than individual physicians.(a) The most salient differences turn on how much actuarial risk the group practice is willing to assume financially, how the groups will deal with member physicians "problematic" to the overall relationship, and to what extent the group wants to be responsible for functions that otherwise would be performed by managed care organizations, such as credentialing and utilization management. When negotiating these contracts, group practices should be aware of the critical importance of adequately understanding their negotiating position, the business significance of fundamental terms, and the contract provisions.

Negotiating Positions

In any negotiation, it is imperative that a group practice understand its own position and know as much as possible about the other party. The group should have a clear understanding of the managed care organization's market position and how it handles contracts with similar entities.(b) Increasingly, the financial solvency of the organization with which the group practice is dealing will be a critical concern, whether a group practice is negotiating with an IPA that holds a contract from an management services organization, with an integrated delivery system that holds a full-risk contract, or with the HMO itself.

The most telling facts about any organization are its age and its market share. Because of the primary goal of having a desirable network, the younger and less established a managed care organization is the more likely group practices will successfully negotiate a contract that meets its own needs. Even when dealing with a well-established health plan with large market share, though, if the plan enters a new service area, introduces a new insurance product (eg, Medicare, Medicaid, or worker's compensation), or the group considers undertaking greater risk than is typical in that market, a group practice that fits in with the rest of the managed care organization's network will have an enhanced negotiation position.

It also is important that a group practice understand its value to its potential partner in the venture. Too much anxiety about being excluded from a network can undermine a group's goals. Group practices that are clear about which issues are deal breakers can better convey strength in negotiations.

Contract Provisions

The most important clause in a contract is, of course, the compensation arrangement. Whether a group practice is taking discounted fee-for-service, capitation only for primary care, capitation for specialty carve-out arrangements, extended risk including capitation that encompasses ancillary services (eg, laboratory and radiology), or a full-risk contract that includes risk for facility services (eg, hospitals or ambulatory surgery centers) and potentially for a continuum of care, the practice needs valid data to be able to negotiate. The data offered by managed care organizations about their experience with the scope of services or utilization assumptions often are difficult to validate.

Group practices, therefore, should negotiate protective devices, such as assuming broader risk only after a specified number of lives, or risk band, has been assigned to the group. If a managed care organization is moving from fee-for-service compensation to capitation for a carveout, the group should negotiate fee-for-service equivalents for services provided in case, for example, unexpectedly low numbers of patients join the group's panel, particularly in the first year. Above all, contracts should include a provision to renegotiate the compensation provision based on actual events.

Group practices also should be realistically self-critical in evaluating their ability to fulfill the contract terms. Meeting appointment time frames, managing triage and authorizations in a gatekeeper arrangement, and employing nonphysician personnel (eg, nurse practitioners, physician assistants, nurse midwives, and even case managers) are issues that group practices should assess carefully before signing a contract covering such practices.

It is essential to define the scope of the financial risk to be assumed. Group practices should ensure that contracts specify what is included and what is excluded in the capitation rate, whether primary, care physicians also may function as specialists, what controls are in place for those roles, when stop-loss coverage is triggered, and where such coverage is defined.