October 1995 Bulletin - Index

Learn your 3 Rs for MCO contracts

by Jack R. Bierig

Jack R. Bierig is a partner with the law firm of Sidley and Austin in Chicago.

This article was adapted from the audiotape that accompanies the Academy's Health Care Reform and Managed Care: A Guidebook for Orthopaedic Surgeons.

When the time comes for the negotiation of a contract with a managed care organization, the "three Rs" are important to the orthopaedic surgeon. They're not readin', 'ritin', and 'rithmetic. Rather, they're responsibilities, reimbursement, and remaining provisions.


In terms of responsibilities, it is important to understand the scope of covered services. What are the surgical procedures the orthopaedic surgeon is expected to provide to patients of the managed care organization? Will patients come only through a gatekeeper, or will they include self-referrals? What emergency services might be required? In what circumstances are emergency services to be performed?

Another important issue relating to the responsibilities of the orthopaedic surgeon concerns referrals outside of the network. Can you refer out of the network? In what circumstances? If all referrals are to be within the network, are there acceptable physicians in all relevant specialties?

You should understand what happens if you conclude that a particular procedure is necessary, but the managed care organization says that it is contrary to their policy. How do you protest the decision and resolve the dispute? If possible, you would like to have a system in place which allows you to appeal to a medical review board comprised of MDs so that you can get their permission to do a surgery that you regard as necessary to a patient even though the MCO might not want to pay for it. In this connection, you should know what procedures govern if there is a grievance by an enrollee against you. Again, if at all possible, you want to have that grievance subject to peer review.

Sometimes, the contract provides that the MCO will not interfere in medical care. You might think that that is a favorable provision. However, if, at the same time, the MCO requires you to clear anything you want to do or to practice according to the parameters that it sets out, you have a provision that protects the MCO and not you. You may want to consider whether you really want that provision in the contract.


Reimbursement is an important consideration for physicians. Although there are several variations, there are two basic models— the fee-for-service model and capitation. Under fee-for-service, how are fees determined? Do they involve a percentage discount from your usual and customary fee? Is there a fee schedule or some other basis of reimbursement? Will there be a withhold? If so, what is it and what are the conditions for it to be paid out? Make sure that the managed care organization cannot amend these provisions unilaterally.

There are other issues relating to billing procedures. How do you verify coverage, and are you assured of payment if you have verified coverage? If a patient in the managed care organization has other insurance coverage either by his spouse's insurance or by some other coverage, who does the coordination of benefits? What kind of documentation do you have to submit to be paid? When will you be paid? Are there penalties for late payment?

You should also be aware of the practice of some MCOs to sell "participations" to persons who do not really belong to the MCO. This "silent PPO" practice can be resisted by providing that you will offer a discount only to have those patients who are actually enrolled in the MCO. You should consider a provision that explicitly prohibits the MCO from selling or brokering your participation to other entities.

Concerning capitation, the most important and most difficult question is whether the capitated amount is satisfactory. You, of course must understand your costs and the alternatives available to you. In addition, you should understand the likely utilization patterns of the patient population. Will you have a population that is likely to require a lot of services, such as an elderly population? Or will you have a mainly healthy population?

In capitation agreements, it is particularly important to understand what services are covered and what services are excluded. You may be willing to capitate certain basic orthopaedic procedures, but you may not want more complicated procedures included in the capitation amount. You may want to exclude certain specified procedures from the capitated amount. You may want to try to include a stop-loss provision if utilization exceeds a certain level.

Remaining provisions

If you're reviewing a contract, you may be getting bored by this time. It may seem that you are getting into areas that are fairly standard or boilerplate. However, some of the most important provisions are in what I've called the third of the three Rs—the remaining provisions.

One thing that you want to know up-front is the term of the contract. How long are you binding yourself, and how long is the MCO binding itself to the agreement? You may want a provision for "termination without cause." This provision will be mutual, i.e., if you have the right to terminate without cause, the MCO will have the right to terminate without cause. If you're dissatisfied with the MCO, for whatever reason—its payment, its policies, its interference with your medical judgment— you should have a way to walk from the deal without having to litigate about whether there was cause.

On the other hand, you may not want to enable the MCO to terminate at will. This is particularly true if a substantial portion of your patients come from the MCO. In that event, you may want to provide for termination for cause only. If there's a provision for termination for cause, you want to spell out what "cause" is and how it is determined. At a minimum, the MCO should be required to give specific reasons before terminating your participation. Remember that a two-year agreement with a 30-day termination provision without cause is a 30-day agreement.

The second important issue under the "remaining provisions" is indemnification. Frequently, the MCO will ask you or will require you, to indemnify it against your malpractice. That approach should be resisted if at all possible. Your malpractice insurance will not cover an indemnification that you give. Indemnification is a contractually required obligation. Malpractice coverage generally extends only to liability incurred as a result of your professional negligence—not as a result of a contract.

You should review provisions on exclusivity. Often an MCO will ask physicians to provide services to that managed care organization exclusively. You may want to resist that provision if you want to be available to other contracting entities. If, however, the economic terms of an exclusive arrangement are favorable, you might want to give exclusivity.

Another issue that frequently comes up is a provision that you might call "non-solicitation of covered persons." That provision says you cannot suggest to your patients who come from the MCO that they ought to use you privately rather than going through the managed care organization. That's not unreasonable from the point of view of the MCO, but sometimes these provisions can be very broad. They can prohibit you from making any kind of derogatory statement about the plan. You need to understand that provision, and if there's something objectionable in it, you should try to work it out.

You should review provisions on the use of the physician's name in advertising and in promotional materials of the managed care organization. If you are well-known in your community, the MCO will want to advertise heavily that you are associated with that organization. Many orthopaedic surgeons find that offensive. Make sure you understand whether the MCO has a right to use your name in advertising and in general promotional brochures. You may want to permit listing of your name in brochures but not in other forms of advertising. Alternatively, you may want to provide that if the MCO advertises your name, it must pay you at least X dollars.

In conclusion, any contract with an MCO should be carefully reviewed before it is signed. If the MCO is eager to have you in its panel, you may have some bargaining strength. If not, you still have to decide whether it makes sense to sign.

To order a copy of Health Care Reform and Managed Care: A Guidebook for Orthopaedic Surgeons with audiotape, contact the Academy's customer service department, (800) 626-6726.

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