January 1997 Bulletin

Beware of pitfalls in MCO contract

by Kristin Olds Glavin

Kristin Olds Glavin is the Academy's Associate General Counsel.

This two-part series examines the pitfalls that physicians can encounter if they don't fully understand the provisions of a managed care contract. Part I of the series in the October 1996 Bulletin examined contract provisions on capitation, the description of care, what is medically necessary and referrals. Part II examines the provisions on provider participation in utilization review, selection and peer review; provider-patient communication, indemnification provisions; and other potential pitfalls.

Dr. Jones and his three partners were reviewing a managed care contract with H+ Health Care Corporation (fictitious name) that seemed to meet all their needs. They believed they had access to the managed care organization's (MCO's) patients and an acceptable working relationship with the corporation defined by the agreement.

The contract provided that Dr. Jones and his associates would participate on H+ panels for utilization review, selection and peer review of providers, upon request by H+. The H+ staff had assured Dr. Jones that the MCO rotated these positions among all of the MCO providers, so that the time commitment for any one provider would not be too great. Dr. Jones felt comfortable with that reassurance, especially after the H+ staff agreed to insert a paragraph in the contract allowing for a stipend to be paid to any member of the group who sat on an H+ panel.

The H+ contract section on physician-patient communication stated that the provider would send a copy of any enrollee/patient medical record to H+ upon request, for review of the care provided and utilization by the provider. This section also contained the sentence, "Provider shall not disclose to Enrollees any confidential information, which H+, in its sole discretion, deems to be confidential."

Dr. Jones was confused by this sentence, but the H+ staff explained that H+ primarily intended the sentence to address the financial relationship between H+ and the provider, which Dr. Jones felt was all right because he typically would not discuss that with a patient.

The section on insurance required the providers to supply their own professional liability insurance coverage and contained the sentence, "Provider shall hold harmless and indemnify H+ against all claims, demands, suits, costs (including reasonable attorneys' fees) and expenses arising from or relating to any acts or omissions Provider performs according to the duties described in this Agreement." Dr. Jones discussed this section with his associates. They decided there was no problem with this language because they would be able to apply the medical malpractice insurance coverage they already maintained to the responsibility for "acts or omissions" stated in the contract.

Finally, the termination paragraph in the contract allowed the MCO to terminate the contract, without cause, upon 30 days' prior notice. When Dr. Jones questioned this, the H+ staff told him that all new providers with H+ had contracts that contained this termination provision and that it didn't really mean anything, it was just the way that MCOs did business.

The rest of the contract seemed to contain standard contract provisions that the physicians disregarded because the provisions didn't apply to the care they would be providing. Dr. Jones and his group felt fortunate because they had seen the voluminous contracts that some of their friends in the medical community had contended with when they joined MCOs. The physicians felt relieved that they had been able to find such a "physician-friendly" MCO, and the H+ staff had responded to many of their questions in the discussions the group had held with H+ over the last three weeks. Consequently, Dr. Jones' group signed "on the dotted line," excited at the prospect of increasing their patient base so easily.

Problems in contract

Do you see any problems in this scenario that Dr. Jones and his colleagues failed to address?

Failure to miss even one of the problems inherent in this scenario could result in great liability exposure to your practice, or even to you personally. That's why the Academy strongly recommends that orthopaedic surgeons who are negotiating a managed care agreement engage an attorney or business consultant who has experience in this arena.

While this article is not inclusive of all points that should be addressed in the negotiating process, the following analysis points out some of the issues of which the physician should be aware.

Utilization review

The H+ contract provision stating that the surgeons will provide utilization review, selection and peer review upon request needs to be scrutinized carefully. While it may be efficient and appropriate for the network physicians to review each other, Dr. Jones and his colleagues need to make sure that the MCO insures them for any liability exposure they may have because of these activities. These activities are not "direct patient care" related and consequently, will probably not be covered under standard professional liability insurance. However, participation could still result in a medical malpractice claim, for example, when the provider makes a utilization review decision or other cost-containment decision that directly impacts an enrollee's care. Participation also could result in antitrust liability exposure, for example, when physician exclusion from the MCO network is decided by the MCO selection panel. Both the malpractice claim and antitrust exposure could result in personal liability to the provider.

Provider-patient communication

Complete physician-patient communication is very important to maintain and the H+ contract provisions directly impact this relationship. The provider cannot release a patient's medical record, even to the MCO, without first obtaining the patient's written consent. The provider also must also be able to freely communicate with the patient, in the provider's sole determination, any information that the provider feels is necessary to communicate to the patient in the medical decision-making process.

This may include information on treatment options that the MCO won't pay for or the physician's concerns about the MCO's network of specialists necessary for the patient's care. Any of these bits of information may be considered by H+ to be "confidential information;" the provider would be in breach of contract because he or she is fulfilling his or her legal and ethical duty to the patient. While H+ staff verbally "clarified" this provision to Dr. Jones in a meeting, unless the clarification is part of the written contract, Dr. Jones and his group will not be able to rely on the statement.

Insurance, indemnification

The insurance and indemnification/hold harmless contract provisions are very important to negotiate and fully understand. A physician should always send any proposed language to his or her professional liability insurer to review before signing a contract.

Aside from the fact that most professional liability insurance policies will not cover claims unrelated to direct-patient care activities (i.e., treatment by the physician of his or her own patient) without special endorsement language tagged on, many policies also specifically exclude risk assumed contractually-which includes all indemnification and hold harmless provisions. Along the "continuum of liability," the H+ contract is very broad: it essentially means that the provider will be responsible for and pay the H+ attorneys' fees for any claims relating to utilization review decisions made by H+ resulting in a denial of care to the provider's patient, all "extra" activities the provider performs on behalf of H+ even though H+ may be dictating the parameters, and all other activities (referenced in the contract) that the provider may have participated in to some extent on H+'s behalf. So even if H+ makes a final decision that the provider cannot control, any resulting claim might be the provider's responsibility if he or she supplied any care or activity "relating" to that claimant. It is important to remember that attorneys' fees can often be greater than the amount of damages awarded or the amount of settlement-the H+ contract provision specifies that the provider would pay all of H+ legal fees in the case of a claim. Obviously, it is very important to carefully negotiate, and limit to the extent you can, any liability exposure in managed care contract indemnification paragraphs.


The language in the H+ termination provision essentially turns this MCO-provider agreement into a 30-day contract, no matter what the "term" provision specifies. This is because the MCO may terminate the provider, for any reason, upon 30 days' notice. If Dr. Jones' group is relying upon this patient base, termination can result in a serious blow to the practice. It is important to evaluate whether you want that kind of "out," and if so, to negotiate it as a mutual provision. If your practice is relying on the patient base provided by the contract, try to negotiate a termination only "for cause" with enumerated reasons by which the MCO may terminate and a "cure" period of time during which the provider can remedy the complaint and maintain the contract. Many states are now passing laws that protect physicians from certain types of MCO terminations, for example, those related to failure to meet utilization goals.

Providers also need to negotiate a contract provision that requires the MCO to continue to pay the provider for treatment rendered to enrollees (patients receiving care at the time of the contract termination) after the MCO-provider relationship has ended. The physician cannot legally or ethically "dump" a patient who he/she is currently treating because the physician is no longer getting paid for the care. A negotiated interim period allows the provider time to supply notice to the patient and the patient to transfer to another provider at a time good for the patient, while the provider is still paid for the care he or she provides after contract termination.

Review of contract

Finally, Dr. Jones and his colleagues need to review the entire contract, including all attachments and documents referenced in the contract but not yet supplied by the MCO, with a professional experienced in negotiating managed care contracts. Often seemingly innocuous contract provisions can cause the most problems once the contract is in effect. Almost all contract provisions can be negotiated and modified, although the degree of flexibility the MCO demonstrates may depend on the size and prestige of the medical practice group relative to the MCO in the community.

This article presents one point of view and is not intended to provide legal advice. It is important to consult your own managed care professional when negotiating a managed care contract.

MCOs may impose contractural liability

There are basically three levels of contractual liability that a managed care organization (MCO) may try to impose upon a provider. Most indemnification provisions in MCO contracts impose more liability upon the provider than the courts would otherwise impose, if no contract provision exists. Consequently, it is important to negotiate these provisions.

The first type of indemnification provision is what most physicians probably expect: the provider indemnifies the MCO for claims resulting solely from the provider's negligence or intentional acts in providing patient care.

The second type imposes more responsibility upon the provider for what is termed "concurrent negligence." This is where the provider agrees to indemnify the MCO for claims that arise resulting in any way from an act of the provider when the MCO is not solely responsible. This means that even if the MCO has some negligent involvement or makes a final decision (such as a cost-containment policy that detrimentally affects a patient's condition) that leads to a claim, if the physician is involved at all, he or she will be obligated to indemnify the MCO.

The most burdensome type of indemnification provision puts the responsibility on the provider to indemnify the MCO against claims that arise due to the sole negligence of the MCO. A sample of this type of paragraph would be:

Provider shall indemnify and hold MCO harmless from all claims, settlements and liabilities incurred as a result of professional services provided or not provided by Provider with respect to an Enrollee.

These clauses can be interpreted to mean the provider is responsible for utilization review decisions made solely by the MCO, where the physician has no input.

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