"Swimming Against Downstream Risk"


"Swimming Against Downstream Risk"

The failure rate of managed care intermediaries is increasing -- but you can take steps to avoid losing all payment for services.

by Gil Weber, MBA
Consulting Editor

Adapted with permission from Ophthalmology Management
© Copyright, 2001. All rights reserved.
June 2001

In the April 2000 issue of Ophthalmology Management, I discussed what was becoming a problem for physicians across the nation: third-party intermediaries -- including independent practice associations (IPAs), physician hospital organizations (PHOs), medical groups and single-specialty carve-outs, such as vision and eyecare networks -- collapsing financially and leaving medical practices with fists full of unpaid claims.

Now, a year later, this problem of "downstream risk" (see explanation below) and determining ultimate financial responsibility is even worse. Intermediaries are failing in record numbers, and physicians and patients are suffering the collateral damage of unregulated, poorly conceived deals gone sour.

Everyone is desperate for solutions. Providers are looking to be paid what they're owed, or, in some cases, simply paid enough to keep their doors open. HMOs are worried that they'll be forced to pay twice, once to the intermediary and, again, to the providers when the intermediary collapses. Patients are caught in the middle, wanting to see their doctors but finding the doctors reluctant to provide care that they fear will be uncompensated. Regulators and legislators are feeling the heat from all sides.

In this article, I'll bring you up to date on what's been happening with regard to this problem and possible solutions. Then, I'll outline steps you can take to protect yourself.

Evidence of escalation

Consider yourself lucky if you're not in California. These days, the Golden State is anything but golden for healthcare providers. Financial collapse seems to be the rule rather than the exception.

For example, KPC Medical Management failed last year, creating chaos in many large healthcare delivery systems. The California Medical Association estimates that physicians have been left holding $40 million in unpaid claims.

And KPC was not an isolated case. Some 25 California IPAs failed in 2000. And in the past 5 years an estimated 125 other IPAs and medical groups failed, leaving doctors and other providers unpaid, patients without access to their doctors, and creditors scrambling for the few, almost laughable crumbs.

California isn't the only state experiencing these nightmare collapses. Rather, it's just the most obvious, repeated site for their occurrences. Several states are awakening to the problems and have begun to address the issues of downstream risk and determining who ultimately must pay the doctors if one of these intermediary relationships collapses.

What is "Downstream Risk"?

"Downstream risk" is a term you'll be hearing more and more. It describes situations in which an intermediary (e.g., an IPA) signs a master, capitated contract with an insurer (e.g., an HMO), and then signs subcontracts with individual physicians or groups. As so often happens, if the deal isn't actuarially sound or if the intermediary isn't up to managing the task, the risk and the adverse consequences ultimately are passed to the doctors, who don't get paid for their services despite the fact that the IPA was paid.

And because the doctors don't hold direct contracts with the HMO and are subject to the IPA's management decisions, they're helpless, at the bottom of the food chain. They're "downstream," where all the problems eventually flow.

States taking action

Most recently, New York has been in the news. The state is about to implement a set of regulations that will establish the circumstances under which a payer can transfer financial risk to providers through an intermediary. In this case, the state will oversee entities contracting for at least $250,000 in annual capitated payments. Intermediaries accepting capitation on behalf of subcontracted providers will be required to place no less than 12.5% of the annual revenue into a reserve account.

So, the regulations write into law stipulations covering the two most important aspects of risk contracting: They define which entities can accept risk, and they define the details, the "nitty-gritty," if that risk is to be transferred. (Note this important point: The reserve requirement applies only to an intermediary that arranges for the provision of services by others and doesn't actually provide the services itself. The rules still allow providers to accept risk contracts directly without posting the 12.5% risk reserve.)

As of March 2001, some 20 states are hot on the trail of solutions to this financial crisis. Eight states (California, Colorado, Georgia, Iowa, Kentucky, Minnesota, New York and Oklahoma) have taken the regulatory route to license downstream risk. Many other states are looking at legislative action as a fix.

The proposed fixes take one of two approaches:

  • requiring the intermediary to post a significant reserve account (New York's approach),
  • forcing the health plan to make good on any money owed to providers, even if that health plan had already paid the intermediary for the services (Maryland's approach).

As you might imagine, health plans are particularly worried by the Maryland method of handling financial responsibility.

The specter of bankruptcy

If you're thinking about signing with a third-party intermediary, it's essential that you do your homework and check the intermediary out beforehand. Then, once you sign, it's essential to continuously monitor that entity's financial health, keeping a wary eye open for the first signs of trouble. (See "Checking Credit Ratings," below)

You might be seeing the first signs of trouble if your claims payment lag time steadily increases, or if unusually large numbers of claims are rejected, downcoded or sent back for additional information. You might hear of problems from your colleagues or from friends at the local hospital. These may be warning signs that the intermediary doesn't have enough cash to meet its outstanding obligations -- or even its current obligations.

If you suspect that the intermediary is having trouble and might be on unsteady financial footing, it's essential that you act. If the possibility of a Chapter 7 (liquidation) or Chapter 11 (reorganization) filing exists, you're at significant risk if you wait to end your contractual relationship.

Here's how attorney Mark Abruzzo explains it: "Once a company goes into bankruptcy, the bankruptcy courts take over. A new set of laws and procedures apply. All contractual rights are out the window.

"I've seen managed care contracts that detail certain rights a party will have if the other files for bankruptcy. You may think you're protected or that you have some higher standing than other creditors because of such contractual provisions. But, instead, once bankruptcy is filed, such contractual provisions generally lose effect."

Federal bankruptcy or state insolvency cases can take years to settle, and then may pay only a small fraction of the money owed. Unfortunately, physicians are at the bottom of the creditor totem pole. Higher up are any entities with secured loans. Also higher up are the intermediary's employees. Physicians, as unsecured creditors, share only in the crumbs left after that.

Furthermore, you might have assumed that if an entity files for bankruptcy you can simply terminate the provider agreement and cut your losses. Unfortunately it may not work out that way.

The bankruptcy court can obligate you to continue providing services under your provider agreement, even if you give appropriate notice. That court is more concerned about continuity of patient care than your immediate financial worries. (In theory, the entity entering bankruptcy assures the court that it will pay future obligations in full while the court settles its past debts.) And don't be surprised to find that noncompete provisions are still enforceable.

Checking Credit Ratings

You should check the credit ratings of entities with which you're thinking of contracting. Try these resources:

Dun and Bradstreet   www.dnb.com

Weiss Ratings   www.weissratings.com

Standard and Poor's   www.standardandpoors.com/ratings

Moody's   www.moodys.com

State Departments of Insurance   www.naic.org/1regulator/usamap.htm

Bankruptcies in Healthcare: A Physician's Guide   Published by the American Medical Association www.ama-assn.org/ama/pub/article/1613-3587.html

How to protect your interests

So, what should you do to protect your interests? Make these moves:

  • First, try to terminate your contract as early as possible, upon seeing any early indications of problems, and preferably well in advance of any bankruptcy filing that might take place. After the filing it may be too late. (See "Terminating Your Provider Agreement," below.)
  • Work with an experienced bankruptcy attorney who can guide you through the process and help protect your (limited) rights. For example, you need to file a properly constructed claim with the bankruptcy court, and you must file within prescribed time limits. Failing to do this might preclude or seriously limit your rights to recovery.
  • Work carefully with your attorney and accountant as you apply payments received from the entity. This is particularly important for the period immediately preceding a bankruptcy or insolvency filing.

Here's why: Let's assume that an intermediary sends you a check immediately preceding its filing. The bankruptcy court can consider that payment as preferential and unfair to all other creditors. In making this determination, the court can then order you to return any money received from the entity within 90 days prior to a federal bankruptcy filing and within 120 days prior to a state insolvency filing. The court's position will be that such payments should be distributed among all creditors.

If you typically apply payments against your accounts receivable and clear the oldest items first, you're at high risk for having to return the money. However, if the payment isn't tied to specific claims, and if you're able to apply the money against your most recent claims rather than the oldest, you might be able to keep the check(s). This rather puzzling possibility revolves around a legal concept called "contemporaneous exchange." Essentially, if you receive money for services recently provided (i.e., within the 90- or 120-day period described above) that money can be protected and may not be subject to the court's demand for return. However, this may not be possible if the check specifically states that the money is tied to older claims.

Be sure to talk to your accountant and attorney about contemporaneous exchange. It may offer you some measure of security in what's surely going to be a tumultuous and insecure time for you.

Doing what you can

Bankruptcy is simply awful for everyone caught up in the process. At best, you can hope to receive some reasonable percentage of the money owed to you. At worst, you get shellacked. There's nothing you can do to prevent the other party from filing for bankruptcy protection, but you can take steps to minimize the collateral damage that cascades down to your practice.

Terminating Your Provider Agreement

Typically, managed care provider agreements contain provisions for two types of termination: with-cause and without-cause. You need to understand the differences, particularly if facing the types of problems addressed in this article.

Without-cause termination should be simple and clean. You don't need to provide any reason for your decision. You simply notify the payer, usually with 60 or 90 days advance written notice, that you're exercising your option not to renew at the anniversary date (or earlier, at the end of the notice period, if your contract allows that). Of course, you're obligated to meet all contractual obligations during the notice period and until the contract terminates.

However, in the situation where you suspect or know of a bankruptcy or insolvency filing, without-cause termination probably won't help. That's because if a payer gets into this kind of financial trouble you can't afford to drag things out during a 60- to 90-day without-cause notice period. You need to get out before your provider contract can be put under the control of the bankruptcy court. And you certainly can't afford to wait until the contract term runs out. So you'll probably need to rely on with-cause termination.

With-cause termination means exactly what it sounds like. You're alleging a material breach of the agreement by the payer. With-cause provides a faster means to get out than without-cause termination, but it carries additional requirements.

You must give the payer a reason for early termination. Typically, you provide 30 days advance written notice of your intention to terminate immediately, not at the anniversary date, based on a material breach. (Note: In many cases the provider agreement includes a list of with-cause reasons. For example, it might state that the payer is considered in breach if it doesn't pay its claims in the time frame specified. Note also that the agreement might include a "cure period" provision, which may defeat or delay your attempt to get out quickly.)

No matter what you decide to do, it's essential to make your moves only on the advice of qualified counsel, an attorney who understands both managed care law and bankruptcy. In many cases, the attorney who helped you buy or lease your building or set up your retirement plan may not be the one who should advise you here.

Obviously it's not a simple decision to terminate a contract and lose those patients. It means taking a financial hit, at least temporarily. But the risks of being trapped in a contract with a payer that's going through bankruptcy are significant, and the long-term consequences of delaying too long may mean even bigger losses down the road.

Gil Weber is an author, lecturer and practice management consultant to the managed care and ophthalmic industries. He has served as Managed Care Director for the American Academy of Ophthalmology.

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