October 1996 Bulletin

Beware of pitfalls in MCO contract

Watch out for description of care, 'medically necessary'

by Kristin Olds Glavin

Kristin Olds Glavin is the Academy's Associate General Counsel

(First of a two-part series)

Dr. Jones was elated. He and his three partners had been feeling anxious over the current trend of their peers joining managed care organizations (MCOs) while Dr. Jones' group had remained strictly a fee-for-service practice, primarily serving the town where they were located. But his meeting with H+ Health Care Corporation (fictitious name), a national MCO that was establishing a network in the area, had gone more smoothly than he had anticipated and Dr. Jones looked forward to sharing the news with his partners.

Three weeks later, after Dr. Jones had conferred with his partners and several physicians in his community who were already MCO providers, he received the H+ contract to review and sign. Dr. Jones knew, from talking to other orthopaedic surgeons, that the most important part of the contract was the payment or reimbursement provision. Because this was primarily a capitated contract arrangement, Dr. Jones and his partners had worked with their bookkeeper to try to come up with their average costs per procedure. Dr. Jones felt reasonably comfortable with their proposals, based on his discussions with the other orthopaedic surgeons in the community who were signing up with MCOs.

For certain more complex procedures such as spine surgery, Dr. Jones and his partners had worked out "carve-out" discounted rates, separate from the capitation arrangement, that H+ would reimburse the group for when that procedure was required for an enrollee. H+ had agreed to the group's capitation and discounted fee-for-service rates. Because Dr. Jones and his four partners handled the full gamut of orthopaedic care, they felt comfortable with the H+ description of services provided by Dr. Jones' group as "all orthopaedic care, including related and follow-up procedures and conditions, according to the highest standard of care."

The H+ procedures seemed fairly simple and easy to follow. When an H+ enrollee visited the group and one of the surgeons made a diagnosis requiring a test, procedure or follow-up care, all the group had to do was contact H+ for authorization in advance, which H+ would provide when the care was deemed "medically necessary" by H+. The range of covered services and the parameters that would be applied by H+ in authorizing care was described in a brochure Dr. Jones had received.

H+ staff had mentioned that the MCO occasionally updated and changed the brochure, but the providers would receive any updates from H+ promptly. The contract also mentioned that any service or procedure denied by H+ would be a final decision. For care that didn't fall within the range of services to be provided by Dr. Jones' group, the contract specified that the provider would refer the patient to another H+ -certified provider.

Problems in contract

Do you see any problems in these particular details of the contract 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. Unfortunately, because the managed care industry is complex and evolving so quickly, it is very difficult for even an experienced business person to catch all of the possible problems when negotiating a contract like this without specific experience in this field. 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 two-part 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.

Payment provisions

While Dr. Jones is smart to do some background work in developing an acceptable capitation rate, he and his colleagues entered into very dangerous waters when they conferred with other orthopaedic surgeons in the community about their fees. Conversations about fee ceilings or floors with peers outside of the practice group, even at a cocktail party, might be perceived as price fixing which is a per se violation under the federal and most state antitrust laws. Situations such as this have been successfully prosecuted by the government against physicians, so it is best to confer with an attorney first to understand the parameters of collecting pricing information in a lawful manner.

Description of care

The description of care provided by the group also may ultimately present a problem; it is a very broad and general description that includes "related and follow-up procedures" which may result in the practice group absorbing the costs of patient care that need to be attended to by other health care providers, such as therapists and subspecialists. Particularly with capitated contracts where a provider will only receive a stipulated amount per patient, per month, the contractual definition of care to be provided by the physician needs to be very specific and as narrow as possible, in order to control costs.

While the group did negotiate carve-outs for the more complicated, expensive orthopaedic procedures, the general definition of care to be provided could bankrupt the practice group if it encounters many enrollees who need lengthy and expensive "related" care not provided by the practice group but still within the definition of what the group must provide for under the capitated fee. Under the H+ contract, the MCO can also unilaterally change the description of covered services to include more services, which would mean Dr. Jones' group would be providing even more services than they originally intended for the same capitated fee.

The last part of the description of service provided- "according to the highest standard of care" -is a legal stick of dynamite because this definition significantly raises the standard of care otherwise applied to the physician in a medical malpractice case. Under common law, the care provided by the defendant physician is measured against the community standard in a medical malpractice case. When the physician is contractually bound to provide the highest standard of care, the standard goes from a regional to a national comparison which may be a significant disadvantage to a rural area physician or one who is not equipped to provide the latest technology.

"Medically necessary"

The enrollee authorization process, although simple, also presents some potential problems. If care is provided in an emergency situation, preauthorization will not be obtained and H+ could refuse subsequent payment. The H+ contract includes many provisions that take medical decision-making out of the physician's hands: H+ solely determines what is "medically necessary" and consequently what will be paid for; H+ can, at any time, change the description of covered services unilaterally and without physician input; and the description of the covered services includes practice parameters that H+ essentially forces the physician to follow if he or she wants to be reimbursed for certain procedures or treatment.

The physician needs to remember that the physician-patient relationship must always come first, both legally and ethically. Regardless of any allocations, gatekeeper directives, practice parameters or withhold objectives, the physician must advocate for all care he or she thinks will benefit the patient.

Rules, parameters and authorization processes may inhibit a physician in effectively treating a patient. For example, complications that arise because the physician must wait for the MCO to grant permission for a procedure has resulted in a court holding the physician liable for a patient's injuries. Even though the physician may be contractually bound to comply with MCO rules that include preauthorization requirements, second surgical opinions, length-of-stay limitations, choice of provider restrictions, capitation and other cost-containment or risk-sharing vehicles, courts are not sympathetic to physicians who defer this medical decision-making to the MCO and consequently, do not act in the best interest of their patients.

The orthopaedic surgeon needs to be involved at all stages of the patient's care and in determining whether that care will be provided, i.e., whether a procedure is determined to be "medically necessary," participating in the determination of covered tests and services and having the right to appeal a denial of care from the MCO, which the H+ contract does not allow. The time to focus on these concerns is during the contract negotiation process when provider involvement can be clarified and put in writing.


The last part of the H+ paragraph on care specifies that the provider will refer the enrollee to another H+-certified provider for treatment that does not fall within the definition of care provided by the group. This type of provision can work against the provider acting in the patient's best interest, as required legally and ethically, if the provider feels that the patient needs to be treated by a specialist who is not part of the MCO network.

The provider also must be careful to check out any physician to whom he or she refers patients; there have been successful lawsuits against physicians for "negligent referral" when a physician refers a patient to another network provider that he or she doesn't know, instead of to a provider he or she knows will provide good care who is outside the MCO network.

Part two of this series will examine the provisions in Dr. Jones' agreement on provider participation in utilization review, selection and peer review; provider-patient communication, indemnification provisions; and other potential pitfalls.

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.

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