June 2002 Bulletin

Controlling contracts

Keep tabs on agreements with third-party payers

By Steven E. Fisher, MBA

Two types of contracts typically govern the financial relationship between patients and physicians. The first–between the patient and a third party payer–describes the medical care the patient is entitled to receive and stipulates premiums that need to be paid. The second–between the third-party payer and the physician–sets forth terms and conditions under which the physician or practice will be reimbursed for services that are rendered.

Here are some pointers to assist orthopaedic surgeons and their staff in controlling third-party payer contracts:

Keep hard copies of all agreements

Practices should keep hard copies of all current and former payer agreements. Otherwise, they become dependent on the payers for information. This places them at a disadvantage when disagreements arise. It is also important to maintain a database of key contract conditions, including renewal and termination clauses (see illustration). Many agreements now contain language stipulating that unless the practice gives notice of its intent not to renew by a certain date, the contract will continue in effect for another year.

Maintain a payer database

Maintaining a payer database will permit the practice to review each contract once a year, and at least 90 days before any "drop dead" date, to determine if the agreement still constitutes an attractive business proposition. This involves three steps:

  1. The practice needs to decide what does constitute an acceptable business arrangement. It should do this annually, considering market realities and the practice’s operating expenses. The best "seat-of-the-pants" benchmark that can be used to determine an acceptable business arrangement is gross collections ratio (GCR) receipts for a period divided by associated gross charges.
  2. The practice should calculate the specific GCR for the payer/plan being analyzed. If it does not meet the standard, the plan is a candidate for being terminated. Before making any final decision, the practice should undertake an analysis of why such is the case. If the payer has arbitrarily lowered its reimbursement rates, this constitutes a real problem. If, on the other hand, the plan’s GCR is low due to claim submission errors on the part of the practice, it makes sense to correct these and get a sense of what is the true GCR.
  3. Finally, even if the GCR meets or exceeds the minimum standard, the practice should conduct an annual audit to determine if the payer is complying with the terms of the contract. For example, it is extremely important to verify that the (continued on p. 18) payer is paying the correct amount and that payment is being made within the prescribed time period. To undertake this analysis, the practice needs to have access to a computer system sophisticated enough to maintain multiple fee schedules and to track the time delay between charge entry and payment date.

Give notice to third-party payer

If a decision is made to drop a contract because of poor reimbursement or non-compliance, the practice should notify the third-party payer as soon as possible. This will allow the payer to sweeten the deal and/or come up with a compliance plan. As might be expected, a group’s ability to negotiate more favorable terms with a payer depends on many factors. Generally speaking, its bargaining position is better when its reputation in the patient community is strong and the physicians’ utilization rates are low.

Play hardball to get good rates

Sometimes it is necessary for physicians to play hardball and actually terminate a contract before the payer will become compliant and/or reconsider reimbursement rates. Before taking this action, the practice needs to assess what the financial impact might be. Sometimes, for example, when a practice drops a contract, this alienates primary care physicians who stop referring patients covered by other payers. All things being equal, decreased referrals usually translate into lower gross receipts.

Thoroughly review payer agreements before signing

Finally, payer agreements should be reviewed in their entirety before they are signed for the first time, as well as whenever they are substantially amended. This review will ensure that the practice is not put into a "Catch-22" situation; for example, being locked into a contract for a specific period during which the payer has the option of arbitrarily reducing reimbursement.

Following the above steps will require the practice to invest a certain amount of time and money. In the ultimate analysis, this is a small price to pay for establishing full control over agreements with third-party payers. The practice will be certain that the agreements are being adhered to, its collection efforts will be simplified and practice gross receipts will be improved.

Orthopaedic Associates
Database of Third Party Payers
June 1, 2002



Start Date

Payment Terms


Review Date




80% of group’s standard charges

Evergreen; 120 day termination notice





120% of 2002 Medicare

Termination: 04/30/2003; no "out clause"





Payer’s fee schedule

Termination: 09/14/2002; option to terminate if payer reduces fees> 10%

06/14/2002 or upon rec’t of fee change




100% of current yr. Medicare

Termination: 3/31/2004 90 day termination option





80% of the 80th percentile of UCR

Evergreen; 90 day termination clause


Steven E. Fisher, MBA, is manager of practice management affairs, AAOS health policy department. He can be reached at (847)384-4331 or sfisher@aaos.org.

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