E-Mail Bulletin #3, July 1998
As many of you know I've just moved from Northern California to Southern Florida. The 2,500 mile move has been "challenging" (to put it mildly) but very satisfying. There's nothing quite like standing in a torrential Florida thunderstorm with rain so warm it feels like a shower. Then the rain stops, the sun comes out, and 10 minutes later you're dry!
Please note my new mailing address and phone number at the end of the bulletin. My e-mail address and website URL remain the same.
Contract Duration And Automatic Renewal
Dangerous Traps In Your Provider Agreement?
It's July, and that brings significant potential danger for doctors and practice administrators. Many of your managed care contracts will automatically renew under the current terms on January 1st unless you have given proper notice and completed renegotiations prior to the specified "drop dead" date. Failure to do so can mean you're stuck in a less than satisfactory arrangement for another contract term of a year or more.
Assuming a January 1 renewal and 60 day notice period, you must complete any desired negotiations and have an amended document executed no later than October 31st in order to ensure that you're not trapped. If all is not completed by the "drop dead" date, your current agreement will roll-over automatically. Given the inordinate amount of time it takes to get anything done with an HMO or IPA, this means you must start those contract reviews and renegotiations NOW.
Obviously I can't cover the entire spectrum of contractual issues in this abbreviated format. This bulletin will discuss the generally unappreciated dangers of contract duration and automatic renewal, each of which can greatly influence the viability and survivability of a managed care provider agreement. Hopefully I'll also motivate you to engage qualified help before it's too late. In July, August, and September time is of the essence.
Multi-Year Agreements: A False Sense Of Security?
Many physicians and ODs, and certainly those new to practice, tend to believe that it's a good practice-building strategy to sign as many managed care contracts as possible and to have those contracts extend for the longest possible terms.
The argument goes something like this: "I'll sign every contract that comes across my desk to have access to more patients to build my practice. And if I can get those contracts locked-in for multi-year terms with automatic renewals I won't need to worry about annual renegotiations or the possibility of losing those patients to other practices. I can be more choosy later." Albeit reluctantly, many practice administrators follow the doctor's march down a dangerous path.
While this strategy may be borne out of perceived or real marketplace pressures on the doctor struggling to build a new practice (or on the established practitioner suddenly in a volatile managed care environment), experience tells us that it carries significant risk. Signing multi-year agreements without fully considering and understanding the consequences, and without prior experience with the payor is akin to getting married after the first date. Absent an engagement period to cultivate the relationship, the downside risks of failure are many and likely.
Managed care enrollees are usually covered through one year agreements between an HMO and the employer. Some HMO-employer agreements may renew in multi-year arrangements as those parties develop comfortable working relationships. Similarly, most provider-payor agreements will start out as one year arrangements and may renew for subsequent and extended periods based on mutually beneficial experience. (Note: some vision plans which are built on 24 month benefit intervals should be signed as two year initial agreements.)
As with any contract arrangement, you want to seek out those opportunities which give you the greatest upside potential while "buffering" yourself from the downside risks. But managed care payors typically write their provider agreements with provisions which dangerously tip the safety scale. Sadly, providers and network managers commonly sign agreements (often multi-year) not fully realizing the risks they are accepting. Let's look at a few and then discuss ways to reduce the danger.
Virtually all managed care provider agreements have an automatic renewal provision. This states that unless either party provides written notice, typically 60-90 days in advance of the anniversary date, the contract will extend for another year or more under the same contractual terms. Automatic renewal is tied intimately to contract duration, and it may turn what the doctor or administrator thought was a limited duration agreement into a multi-year nightmare.
Automatic renewal is a two-edged sword. It guarantees the practice in an administratively stable, financially viable contract continued access to a patient population and revenue base. However, if the contract turns out to be a financial drain, or if it's an intolerable administrative burden, or if the payor decides to change the deal, automatic renewal obligates the doctor or network to continue in a no-win situation
possibly one which will get even worse with time. This is a risk in any managed care relationship, but it's a particular risk for the practice or network that has:
- signed an agreement giving the payor unilateral rights to change the contract at any time during its term (typically with 30 days notice),
- signed an agreement without securing the right to review and approve payor-initiated changes before implementation,
- been involved in years of discounted fee-for-service managed care but now is dealing with the quite different complexities of capitation and risk contracting.
What do you need to know?
1) Unilateral Changes
It is very common to find provider agreements in which the payor grants itself the authority to make unilateral, mid-term changes to the provider agreement. Typically a contract may specify a one or two year term. But buried within the contract is a sentence stating the health plan or IPA may amend any portion of the contract at its sole discretion by giving the provider 30 days notice. This means that the one or two year contract is, in reality, a 30 day contract.
The deal may turn into something quite different than that signed. For example, the payment terms may originally specify $X per R.V.U. for med/surg services, or $Y pmpm for routine visioncare and eyewear. And suppose you've done your homework and determined that those rates are acceptable.
But at any time during that contract (even one day after it's signed) the plan can unilaterally decide to lower the reimbursement, let's say by 20%. It sends your practice or network a letter and 30 days later that change goes into effect for the remaining months or years of the contract term. Absent the right to approve any mid-contract changes, or absent the right to a quick and easy termination if the changes are unacceptable, you're stuck. And I'll bet many or most of your current agreements don't give you protection from such unilateral decisions.
This can be particularly painful if you're involved in a multi-specialty network or IPA working under a global budget. Let's say that the ophthalmologists and optometrists (and practice administrators) have been doing a great job managing utilization and costs, and delivering high quality care with wonderful levels of patient satisfaction. Let's say that they're well within the IPA's projected eyecare budget. But let's also assume that another specialty(ies) has gone well over budget. What is a very common scenario?
The IPA decides that the losses will be made up from some or all of the other specialties. So eyecare's payments are reduced mid-contract to make up for another specialty's poor performance! That's not right, that's not fair, but that's what can and often has happened if the payor has the right to amend the contract at its sole discretion.
Clearly your practice or group must not allow a payor to have such unilateral rights. Any provision must be stricken when the agreement is initially drawn-up or at renegotiation time. The payor won't like it and will fight you tooth and nail to protect its self-serving interests. But in my opinion a payor's unilateral right to amend mid-term is a deal breaker. You're giving them carte blanche authority to do anything they want and you're contractually obligating yourself for the consequences. Any payor that refuses to remove such onerous provisions is revealing a dangerous clue to potential future problems.
2) Right To Review And Approve Changes
In some cases you can't get the payor to agree to delete the unilateral change provisions, but the contract is so important that you don't want to walk away. One way to counter unilateral change is to demand the right to review and approve any changes before they become effective and, absent your approval, the right to a quick and painless termination. It's amazing how many provider agreements I review that don't contain these protections.
It's essential that you ask for (demand) the right to review and approve payor-initiated changes whether mid-contract or at renewal time. This is particularly important in the context of automatic renewal. You must protect yourself so that you're not locked into an automatic renewal for another year or more without the right to review and approve.
Typically you'd ask for a minimum 30 days advance written notice of any proposed change. If you don't like the change and don't want to agree, you'd like the right to continue the contract through its current term under the original conditions and then terminate. It's rare that a payor will agree, but I have seen it more than once. More commonly the plan will agree to give you 30 days notice but will insist that you drop out at that point if you won't accept the new terms. If that's all you can get it's better than being stuck without recourse.
Another important point you'll want to insist upon is that your signature is mandatory to indicate acceptance of any change. Many plans will stick in a line that says you have 10-15 days to sign and return the amendment. But they also attach a little "zinger" that says your failure to respond within the time described is indication that you accept the change(s). In my opinion any such failure to reply provision should also be struck.
3) Special Problems For Capitated Agreements
The typical capitated agreement is written for one or two years with automatic renewals. One issue that makes automatic renewal a huge problem for capitation is that collecting and analyzing utilization and cost data takes a long time. IPAs in particular are notoriously slow reporting performance data to their capitated specialists. The lag time can often be many months.
I've seen numerous instances where it was nine months or more before an IPA sent its capitated providers reports on the first six months of activity. Even experienced networks have a hard time with capitated data analysis
assuming it's reported in a timely manner. For any provider or network, particularly one without a lot of risk contracting experience, if the data is late or incomplete it pushes the decision process dangerously close to the "drop dead" date. And this means that networks commonly are forced to decide yes or no on automatic renewal without solid data or the time to make an educated decision.
And even if there is some data in hand by June or July, that data reflects activity during the start-up period when providers and administrators were trying to shake bugs out the system and get it running smoothly. It may not reflect the next six month's activity when, hopefully, things should be running a bit more smoothly. Unfortunately, by the time there's adequate data in hand and the analysis is done there's precious little time to get the HMO or IPA to the renegotiations table. So what to do?
I recommend asking for a contractual provision that obligates the payor to meet with you, negotiate, and finalize any changes prior to your "drop dead" date. (In the example at the start of this bulletin, that means everything would have to be finalized no later than October 30th.) You're specifying that well in advance of your yes/no decision day both sides agree to have the process under way
in fact, completed. (Note: the plan will not like this at all, but you need something in place to prevent the other party from delaying the process past your decision date and backing you against a wall.)
Further, I suggest you also request a provision stating if renegotiations are not completed by the "drop dead" date that you retain the right to continue the contract under the original conditions for another term. That is, if the plan delays the process past the "drop dead" date, then you can roll-over into another term under the original provisions. The plan could certainly counter and say that you could then delay the process as a ploy to continue under terms it finds unacceptable. And clearly that's a valid point from their perspective. This then becomes a bargaining chip you can drop if necessary in favor of something more important. That's all part of the negotiations game
give and take, and figuring out what's most important to fight for.
And, finally, you'd like a provision that if the renegotiations are not completed your "drop dead" date is moved back so that you only need give 30 days advance notice to terminate if you ultimately decide the negotiations will prove fruitless.
What's the purpose of all this? (Yes, I know you're thinking that all it does is make the plan people mad.)
First, it puts the plan on notice that a deal is a deal unless both parties agree to any changes, that you will not accept unilateral changes, and that no change goes into effect without your prior written consent. Further, it tells the plan that you expect it to negotiate and renegotiate in good faith and in a timely manner which will allow you reasonable and fair time to make the yes/no decision on automatic renewal. Finally, it gives you a longer time frame in which to terminate if it's an important contract, negotiations are slow, but want to try and save the deal. By lengthening the notice window you make it harder for the plan to continue delaying the negotiations process and force your hand into an unfavorable continuation.
Now, what's the downside? Well, obviously the plan can decide that you're something of a pain in the backside and may say "No, take it or leave it." And then it's your choice.
Or it can decide that you're more trouble than you're worth and send you an immediate termination without cause notice. And that's certainly a risk you must consider.
But if that's how the payor plays the game, and if they want to make onerous changes to the contract mid-term without your chance at input, what are you losing? Only a bad contract. Is that worth protecting and possibly going into a financial or administrative black hole? Is that what you want to deal with for another year or two?
I'd urge you to think carefully before walking meekly to slaughter. At some point you must be willing to draw a line in the sand when it comes to managed care contract negotiations. A bad deal does not get better with time. The reality is that no contract is better than a bad contract, and plans that won't negotiate in good faith deal out bad contracts more often than not.
I urge you to weigh the practical and logistical sense of getting into or continuing in a contract that's subject to a payor's capricious, unilateral changes -- especially if you're locked to an automatic renewal.
Please note: I've been drafting and reviewing managed care provider agreements for more than 20 years. I'd be pleased to review any of your agreements and provide a business opinion. Since time is of the essence I'm offering special rates for this service during the months of July and August. Please contact me for details.
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