By Jane Wood
10/09/07

Managed Care Contracting Issues: The Pathology Provider’s Relationship With Managed Care Entities

When contracting with any managed care entity, there are four principal contracting components that every pathology provider should keep in mind, as follows: (i) considerations prior to negotiating a managed care contract; (ii) assessing the managed care entity’s program; (iii) determining the pathology provider’s negotiating approach; and (iv) evaluating and negotiating the contract’s terms. This chapter provides a comprehensive roadmap of the four principal contracting components that a pathology provider can follow when contracting with a managed care entity.

Managed Care Contracting Issues:

The Pathology Provider’s Relationship With Managed Care Entities
Prior to negotiating or entering into any managed care contract, a pathology provider should ask itself two very important, but often overlooked, questions. Determining the answers to these questions, in advance of negotiating a managed care contract, will enable the provider and its negotiating team to develop an informed negotiating strategy. Having an informed strategy will ensure that the provider’s critical needs and expectations are reflected in the contract.

First, a pathology provider must determine its reasons for entering into the contract? For example, is the contract necessary to maintain the provider’s current patient base or to expand its patient base? Is the contract required by an affiliated hospital or important referral source?

Second, the pathology provider should define its contract expectations. The pathology provider’s reasons for entering into the contract should be documented and discussed with the provider’s negotiating team. If the provider does not sufficiently define its expectations prior to negotiating the contract, those expectations may not be met or may not even be addressed during contract negotiations. Moreover, if the pathology provider discusses its expectations with its negotiating team in advance of contract negotiations, the provider can determine if its expectations are realistic, or need to be revised, based on the experience of the team members in negotiating with managed care entities.

To support its financial expectations during contract negotiations, a pathology provider should conduct a thorough financial analysis of its practice and business operations. Simply stated, a provider needs to understand, and share with its negotiating team, the financial specifics of its operation, including the fixed and indirect costs associated with its services. Having this information will assist the provider to determine what reimbursement rates are necessary and appropriate in contract negotiations.

Third, a pathology provider should determine how important the contract is to its business. If the contract is not important, the provider can be less flexible in its contract negotiations. If the contract is critically important, more flexibility may be required. Pathology providers should always keep in mind that physicians who refer patients to them are usually contractually required to send managed care patients to participating providers. For convenience, such physicians may choose to send all of their referrals to participating providers. Therefore, a pathology provider’s failure to participate in a managed care contract may preclude it from receiving not only a physician’s managed care referrals but also such physician’s non-managed care referrals.

If a pathology provider determines, in advance, its reasons for entering into a contract and the contract’s importance to the provider’s business, the provider can insure that all of its critical needs are addressed in negotiations and determine what concessions the provider can make during such negotiations.

Evaluating the Managed Care Entity

In addition to performing a self-assessment, a pathology provider should assess the managed care entity by evaluating (i) the managed care entity’s patient base, financial solvency and payment structure; and (ii) the experience of other providers who have contracted with the managed care entity.
An evaluation of the managed care entity’s patient base should determine if the contract is likely to increase or maintain the provider’s current patient base. Pathology providers should request the number of members and referral sources, and determine the demographics of the members and their dependents.

The pathology provider should assess whether the managed care entity is financially sound. This can be done by requesting specific financial information (e.g., whether and to what extent the payor has returned reserve withholds; how long it takes to pay on claims submitted; if it has ever defaulted on payments due providers; information filed with the state department of insurance).

The pathology provider should ask other participating providers how satisfied they are with the managed care entity. It is advisable to determine whether the managed care entity’s utilization management review, quality management, and peer review programs are appropriate, and whether the managed care entity engages in unreasonable denials of service.

It is critical to determine the adequacy of payment offered by the managed care entity. If payment is offered on a capitation basis, factors to consider include relevant actuarial data; the base rate; the type of population served; the services and item covered by payment; the extent of services that have to be referred outside the panel; and any additional administrative and overhead costs attributable to the managed care entity’s subscribers.

If payment is on a fee-for-service basis, the important factors to consider in determining the adequacy of the payment are the base rate; the scope of covered and non-covered services; any amount of reserve withheld and the likelihood of any such reserve being returned; the deductible, co-payment, and co-insurance amounts; the timing of payments on claims; and any additional administrative and overhead costs attributable to the managed care entity’s subscribers.

Once the pathology provider assesses itself and the managed care entity, the provider is ready to develop its negotiating strategy.

Preparing for Negotiation of Managed Care Contract

A pathology provider should have a plan of negotiation prior to negotiating any contract and especially contracts with managed care entities that usually employ very sophisticated and experienced negotiators.

As a preliminary matter, a pathology provider should not assume that it must sign the standard managed care contract as there is almost always room for negotiation. Prior to negotiating a managed care contract, the pathology provider should do the following:

i. Assemble an appropriate contract team including provider representatives, and legal and financial representatives, among others. The importance and complexity of the contract should determine the composition of the team.

ii. Determine who will negotiate the contract and avoid multiple contact points. The contract negotiator should be provided with written negotiating parameters.

iii. Require that the managed care entity appoint someone to negotiate the contract on its behalf who has decision-making authority.

iv. Identify problem areas in current managed care contracts and how they can and should be corrected and addressed in new contracts.

v. Identify the “must have” and “deal breaker” positions in new contracts before negotiations begin and prioritize requested amendments.

vi. Attempt to negotiate the contract on your home turf.

vii. Set a timetable for contract completion.

Key Managed Care Contract Provisions

Proper Parties to the Contract/Relationship to Each Other. It is important that the contract be executed by the proper party for the pathology practice. If the provider is a corporate entity (e.g., professional corporation or association, general corporation, or partnership), the contract should be with the corporate entity and not an individual. If not all members of the corporate entity (e.g., members in a group practice) do not want to participate in the managed care contract, the contract should specifically identify the participating physicians.

The managed care contract should provide that both parties are independent contractors and that the pathology provider has no liability or responsibility for the acts or omissions of the managed care entity. In addition, the contract should specify that the managed care entity will not exercise control or direction over professional judgment. If the managed care entity owns or operates its own facilities (such as an HMO health center), the contract should provide that the provider is not liable for injuries to patients due to a defect in the facilities.

Defined Terms.

The pathology provider should review all defined terms, especially the definitions of “payor” and “covered services” or their respective equivalents, because these definitions can have substantive effects upon the contractual relationship.

The term payor should not extend to additional plans or payors without the provider’s prior written consent. The term covered services should not be subject to unilateral alteration by the payor without the provider having the ability to terminate the contract on reasonably short notice. Note that the definition of covered services can be particularly relevant to pathology providers who wish to bill and receive payment for their professional component of clinical pathology services.

Materials Incorporated by Reference

If the contract addresses exhibits, quality-assurance guidelines, provider manuals, or any other form of reference that the pathology provider is required to follow, a copy must be analyzed in advance and filed with the contract. If any exhibits, quality-assurance guidelines, provider manuals, or any other form of reference are addressed in the contract, the contract should specify that the contract itself will control if any of these documents are inconsistent with the contract, that a copy must be given to the provider in advance if any of these documents are modified, and the provider has the right to terminate the contract prior to the effective date of any modifications of such materials.

Credentials and Qualifications

The contract should clearly set forth (i) credentials and other qualification requirements for pathologists; (ii) accreditation and/or the certification requirements for facilities; and (iii) that the managed care entity will preserve, and require employers and other third parties to protect, the confidentiality of confidential/proprietary information, except where disclosure is required by law or third-party contract. The pathology provider should delete requirements that are not applicable to the service being provided by the provider.

The managed care contract should specify who will have access to credentials information and the purposes for which such information will be used. The pathology provider will want to negotiate for use of existing credentials information or a standardized credentials form.

When negotiating the terms of the managed care contract, the pathology provider should attempt to place limitations on third-party access to confidential and proprietary information (e.g., information disclosed in credentials statements); and examine the effect of the transfer of such information upon its discoverability. In this context, the pathology provider should be wary of provisions which require the provider to notify the managed care entity of incidents of possible malpractice. Disclosure regarding incidents of possible malpractice could be viewed as an admission of malpractice in subsequent litigation. It is important that any disclosures of possible malpractice should be reviewed with legal counsel prior to disclosure to the managed care entity.

Services Provided

To adequately assess the managed care contract, it is critical to determine what services are covered under the contract. This can be accomplished by reviewing the schedule(s) of benefits contained in the subscriber contracts. The pathology provider should determine whether the contract requirements will require the provider to expand operational capabilities or materially alter normal business operations.

The pathology provider should beware of and object to the following:

i. provisions which give the managed care entity the power to unilaterally amend the schedule of covered services without giving the provider the right to terminate the contract at least on reasonably short notice;

ii. language that requires services to be provided at a level of quality higher than that which is generally required (which could significantly increase liability exposure);

iii. blanket requirements to provide 24-hour per day services, seven days a week;

iv. provisions which require unreasonable turnaround time; and

v. provisions that require the provider to continue rendering services upon the insolvency or termination of the managed care entity or the termination of the contract (in such an instance, the managed care entity should be obligated to act in good faith to promptly transfer patient care to alternative providers in the case of contract termination, and the payment obligations of the managed care entity and other payment sources should be specified)

Utilization and Peer Review

The pathology provider should review all utilization protocols, policies, and procedures in advance of signing the contract. If any utilization protocols, policies, and procedures cannot be followed by the provider due to the type of services being provided, these items should be deleted from the contractual obligations of the provider. The pathology provider should also determine whether the utilization and peer review protocols, policies, and procedures of the managed care entity blend with the provider’s utilization management and peer review programs (e.g., claims submission deadlines, electronic claims submissions).

It is important to determine the provider’s obligations regarding referrals and authorization guidelines and the pre-certification of services (i.e., how does the provider determine if necessary authorization/pre-certification is obtained, how will the pathology provider actually obtain authorization/pre-certification, and what is the risk to the provider if necessary authorization/pre-certification has not been obtained). The provider should attempt to negotiate language that explains that payment will not be denied due to another participating provider’s or patient’s violation of utilization protocols, policies, or procedures (e.g., failure to meet a billing deadline).

The contract should specify the provider’s rights for alleged violations of policies and procedures, including appeal rights. Appeal to an outside arbitration panel is preferred.

The pathology provider should consider the provider’s potential liability exposure under the contract. The provider should beware of utilization programs which shift all responsibility for services rendered to the provider. The managed care entity also has responsibility because of its utilization review and quality assurance functions.

Participation in peer review and disclosure of records is tied to a reasonableness standard. If the contract requires the provider to participate in peer review functions, the provider should also confirm that there is coverage for utilization review/peer review activities under the provider’s malpractice insurance. It is advisable to obtain the carrier’s response in writing. The provider should also consider confirming whether there is coverage under the managed care entity’s insurance program. The provider should confirm that the peer review program of the managed care entity complies with federal and state statutory requirements for participants in peer review to qualify for statutory immunities.
Membership Verification. The contract should explain how a patient’s eligibility for covered services is to be verified.

The contract should also address the payment source for services provided to patients who are designated as being covered but are later determined to be ineligible by the payor. It is preferable from the pathology provider’s standpoint that the managed care entity pay for services to ineligible patients, at least to the extent the error was the fault of the managed care entity. Otherwise, the patient should remain responsible for payment.

Capitated Payment Terms.

If payment is made to the pathology provider on a capitation basis, the contract should specify the payment rate, the payment schedule/timeframe, and any exceptions to or limitations on payment. The rate should be subject to renegotiation upon specified events. The managed care entity should not be able to unilaterally reduce the payment rate unless the provider has the right to terminate the contract on short notice.

Under capitated contracts, it is also critical to specify the “stop-loss limit.” The stop-loss limit is the limit of liability of the provider, and is usually tied to a set dollar amount per member, per year. The pathology provider should negotiate an annual aggregate stop-loss limit for all members assigned to the provider to protect against numerous expensive individual cases.

For capitated payment contracts, the pathology provider should also consider negotiating a “safety net” provision, whereby payment is made on a capitation basis, but with a guarantee that the aggregate capitation payment will be “no less than” a specified discounted fee-for-service amount.

The pathology provider should watch provisions which permit the managed care entity to adjust deductibles, coinsurance, and co-payments downward without an appropriate adjustment upward in the capitation rate. Lower deductibles, coinsurance, and co-payments mean higher utilization).

Fee for Service Payment Terms.

If payment is made to the pathology provider on a fee-for-service basis, the contract should clearly identify the fee schedule to be utilized. The fee schedule proposed by the managed care entity may be based upon schedules developed nationally or in other states, and may not be appropriate in all areas. The fee schedule should be subject to regular renegotiation. The managed care entity should not be able to unilaterally reduce the fee schedule unless the provider has the right to terminate the contract on short notice.

The discount rate, if any, should be specified in the contract and should not be subject to mid-term downward adjustment, unless the provider has the right to terminate the contract on short notice. The provider should watch volume pricing provisions, and assess whether the figures are realistic and how accessible the volume is (i.e., is the volume widely scattered or not from existing referral sources).
The contract should address whether payment will be made for the professional and/or technical components of all services. If the pathology provider performs both components, the contract should confirm that payment will be made for both components.

Caution should also be given to language that could permit the managed care entity to impose unilaterally payment edits, similar to Medicare’s correct coding initiative edits, that could limit the number of reimbursable units of service, or impose other payment restrictions such as rebundling edits.
If pathology providers expect payment for professional component of clinical pathology services, they should specify the payment terms in the contract.

The method of billing the managed care entity should be reasonable and compatible with the current system. The pathology provider should review the specific information that must be disclosed for billing purposes and the specific billing forms.

It is important to remember that prompt payment is part of the consideration for the provider’s agreement to accept discounted fees. Payment by the payor to the provider should be tied to the date the properly completed bill is submitted and not the “approval” date (the latter is largely up to the managed care entity). The agreement should specify when a claim will be considered “properly completed” (i.e., what form must be used and what information must appear on it). The pathology provider may wish to negotiate late-payment penalties.

If significant administrative responsibilities are assumed with respect to a managed care contract, such as substantial credentials review or utilization management, the provider may want to seek compensation for these services from the managed care entity.

The pathology provider should attempt to delete “most favored nation” clauses. A “most favored nation” clause requires the provider to give the managed care entity the more favorable financial terms agreed upon between the provider and any other payor. Generally, a “most favored nation” clause should only be triggered by financial arrangements with substantially similar plans (e.g., same type of plan, same patient volume, and same geographic area).

If a reserve withhold is utilized, it is important for the contract to specify: (i) the cost items to be subtracted from the withhold; (ii) the obligation of the managed care entity to return the withhold; (iii) the payment schedule therefor; and (iv) which party is entitled to the interest on reserves. The pathology provider should beware of agreements which give the managed care entity discretionary power to return the reserve balance even when cost targets are met. The provider should request regular financial reports regarding withhold accounts, and the right to audit such accounts.

Other payment considerations include the determining if there is a default reimbursement for new codes and test that may be added in the future and if the managed care entity can down code or bundle claims unilaterally. The pathology provider should also review restrictions on billing for non-covered services, and confirm that such services be billed to the patient without the necessity for a signed advance beneficiary notice.

Liability Insurance. The pathology provider should confirm that the insurance or self-insurance requirements under the managed care contract are fair and can be met without significant additional expense. If the provider is self-insured, the contract should specifically permit self-insurance. The pathology provider should beware of contracts which limit insurance to “occurrence” policies. Claims-made insurance should also be an option.

The provider should not agree to insure against all losses and liabilities. Instead, coverage requirements should be subject to standard policy exclusions and limitations. The pathology provider should also ensure that it does not agree to insure individuals or situations that are not covered under its policy.
The contract should not give the managed care entity the unilateral right to eliminate self-insurance or determine insurance limits. Initial limits should be set in advance and the provider should have the right to terminate the contract before the effective date of any new insurance limits.

The managed care entity should be required to maintain adequate professional liability insurance, general liability insurance and, if a risk bearing entity, reinsurance.

Indemnification and Hold Harmless Provisions. The pathology provider should carefully review any indemnification provisions with its insurer. Most insurance policies do not cover contractual indemnification provisions. Possible substitute language is: “Each party shall be responsible for its own acts and omissions to the extent it would be responsible under statutory or common law, and nothing contained in this Agreement shall impute or transfer responsibility for the acts or omissions of one party to the other party.”

The pathology provider should beware of provisions that impose liability on the provider beyond that which would exist under applicable law (e.g., liability for acts/omissions of third parties). In addition, the pathology provider should avoid provisions which shift liability to the provider or make the provider solely responsible for medical care decisions (e.g., unduly shift all responsibility for patient care decisions to the provider).

Reporting, Record Retention, Disclosure, and Facility Inspection. The contract should specify what information and records have to be maintained and disclosed (e.g., internal financial information). Record disclosure should be made subject to all applicable laws, regulations, and ethics codes. The provider should not be required to maintain records longer than the provider’s standard retention period.

The pathology provider should ensure that record disclosure is limited to those records of subscribers of the managed care entity unless broader disclosure is required by law or by federal or state agencies. The provider should not be required to disclose proprietary business information, or, if such information must be disclosed, the managed care entity should be required to protect its confidentiality and refrain from using such information except where disclosure is required by applicable law. The contract should also specify that the records are the property of the provider.

If the provision of records to a managed care entity will be routine and substantial, the contract should specify that the managed care entity will bear the photocopying costs and other costs related to disclosure.

If the pathology provider operates a laboratory, the contract should explain that laboratory inspections may occur only upon reasonable notice and at reasonable times.

The pathology provider also should confirm that the managed care entity or provider has proper release forms in place before releasing a copy of any patient records to a managed care entity.

Use of Name

The contract should explain the managed care entity’s policy regarding the use of the provider’s name in the managed care entity’s marketing and promotional materials. If the pathology provider operates a laboratory, it is beneficial to commit the managed care entity to referencing the provider and its laboratory services in all general circulation marketing and promotional materials. The pathology provider may wish to request the right of prior review and, preferably, the right of prior approval, of marketing and promotional materials which reference the provider.

Termination of Contract. It is important for the pathology provider to identify how the contract can be terminated. If the contract can be terminated “without good cause,” the provider should confirm that the termination rights are reciprocal and balanced. Similarly, “with cause” (or for “good cause”) termination language should be reciprocal and balanced between the parties. If there is a provision for “with cause” or “good cause” termination, the term “with cause” or “good cause” should be defined.

The pathology provider should obtain the right to terminate the contract upon a certain amount of notice, preferably not to exceed 90 days, so that a “bad” contract can be terminated quickly. The provider should watch for provisions which permit such notice termination only at the end of a term.
The managed care entity should not be permitted to terminate the contract for the acts or omissions of a single professional. The contract should provide for termination action only against the individual professional.

The pathology provider should obtain the right to terminate the contract immediately if the managed care entity fails to make payment, files for bankruptcy, or becomes insolvent.

Dispute Resolution

The contract should state the procedure for resolving disputes and the venue for resolution of disputes. The provider should have the right to present its argument, and to hear the opposing arguments/evidence. The provider should also have at least one level of appeal to an independent third party.

The pathology provider should beware of dispute resolution procedures where the managed care entity has final authority to resolve disputes. Instead, the provider should push for the right to submit disputes to an independent body such as an arbitration panel. The provider should also avoid restrictions on the provider’s ability to litigate against the managed care entity or engage in a class action or arbitration. It is advisable to delete provisions which state that the contract is governed by the laws of another state, or that the venue for dispute resolution is in another state.

Other Provisions.

The contract should specify how notices have to be sent under the contract (e.g., by certified mail). It is preferable to require notice to be sent in a format in which receipt is confirmed (such as certified mail or overnight courier delivery), rather than regular mail, general mailings, or Web site notices. Managed care contracts increasingly are specifying Web sites as permissible means of providing notice, which can be problematic for the pathology provider. No provider has time to constantly review a managed care entity’s Web site.

Amendment and modification to the contract should be mutually agreed, in writing, and with prior notice. At a minimum, the contract should contain the right to terminate if key terms are amended or modified.

The contract should explain the parties’ rights, if any, to assign the contract. The pathology provider should avoid provisions which permit the managed care entity to assign the contract without the provider’s consent. The provider may wish to have the right, however, to assign the contract to its affiliates or successors without the managed care entity’s consent.