"Are You Losing Out?"

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"Are You Losing Out?"

Keeping your payment cycle complete when a health plan sub-contractor "goes under."

Gil Weber, M.B.A.
Contributing Editor

Reprinted with permission of the publisher.
Skin & Aging, Volume 12 - Issue 6
June 2004 - Pages: 32-48


In the late 1990s word began to spread in several states about a frightening and increasingly costly financial crisis that was starting to affect physicians, including dermatologists, and other providers of healthcare services. In the years since, we've seen the problem get worse and spread across the country. Today in every state, some who deliver health care are having problems getting their claims paid when an administrative intermediary is inserted between health plans and the practitioners, companies and facilities providing the care.

The Most Problematic Relationships to Avoid

Here, we'll look at the two most common and problematic relationships for physicians.

In the first, the intermediary builds the provider network and performs the duties of a full-service administrator. In exchange for a monthly pre-payment, it credentials the panel, handles eligibility and benefits verification, provides all of the administrative support that normally would be the responsibility of the health plan and, most importantly, pays the claims.

In the second, significantly different relationship, the intermediary serves as little more than a "paper-shuffler." It contracts with providers on behalf of health plans. It also mandates that the providers follow certain network protocols and procedures and, in some cases, protocols specific to particular health plans. But the intermediary only passes on the claims to each individual health plan, and those plans, not the intermediary, are responsible for payment.

When these administrators falter and, sometimes, default on their responsibilities, physicians, pharmacy networks, diagnostic imaging centers, labs, hospitals and others have been left with stacks of unpaid claims.

In some cases, the financially responsible intermediary stops paying. In other cases the "paper-shuffling" intermediary has no power to enforce the compensation responsibilities of the health plans as described in the physician's provider agreement.

Whether or not this crisis has yet hit your community or practice, you need to be aware of the problem and be pro-active in dealing with third-party intermediaries to minimize or preclude any of this collateral damage cascading down to your bottom line.

Getting Paid

Who's responsible for paying claims if the intermediary has already been paid? As with everything in managed care, it depends. If a health plan pays the intermediary a monthly, fixed amount per covered life, then, in theory, and assuming that the intermediary has done its financial homework and has handled its duties efficiently, there is enough money in the "pot" to pay all claims. And any money left over at the end of the month after all expenses have been paid is the intermediary's profit. At least that's the theory.

But reality has shown that many of these intermediaries don't make a profit. In fact, many don't even break even. And when the red ink starts to flow that's a warning sign that provider payments could be at risk. As soon as there's a pattern of delay or under-payment, you should know big trouble is coming.

If things do turn sour and a third-party intermediary stops paying many or all claims, or files for bankruptcy protection and suspends payment on all filed claims, or goes belly-up and locks the doors, what happens to the providers? Who settles their unpaid claims for authorized, covered services delivered to the health plan's members?

Typically, a dermatologist who's been left with a stack of unpaid claims and can't get anywhere with the intermediary will contact the health plan -- the insurer -- and will try to resubmit the claims. But the claims almost inevitably are returned with a note that says in effect: "We already paid (name of intermediary) for those services. Our contract was with them, and so was yours. So you'll have to seek settlement with them since they already received the money from us to pay you for those services."

Although that answer hurts and frustrates, it's not surprising or outrageous. The health plan did, in fact, prepay the intermediary for all services required by its members. The plan has performed as specified in its contract with the intermediary.

So, though your chance of collecting on these claims is not good (in many cases the claims have to be written-off as uncollectible), the situation is not totally hopeless. If you're left with unpaid claims as the result of an intermediary's financial collapse, then state law ultimately will control any resolution and recovery.

Weak Regulations

In many states it's been almost pre-destined that these contractual arrangements were a disaster waiting to happen, a financial house of cards ready to collapse and trap those unfortunate enough to have been on the wrong end of shaky deals. Over the years, an unfortunate number of contracts have been consummated between HMOs and inexperienced, undercapitalized third-party administrative entities totally unqualified to manage risk. In a surprising number of states, there has been little or nothing put in place to prevent an HMO and intermediary from signing fundamentally flawed deals.

These intermediaries come in many sizes and shapes, including IPAs, PHOs, medical groups, and local or regional single specialty carve-outs. For you, the dermatologist, the default problem presents a bifurcated dilemma.

  1. If you are to see patients from a particular HMO, you may have no choice but to sign on with an intermediary holding the master contract. In order to participate and have access to patients, you're obliged to sign a contract that distances you considerably from the health plan. That sets up the practice for problems if the intermediary falters and your only link to the health plan (weak as it may be) is broken.
  2. Unfortunately, you have no idea as to the terms, conditions and financial adequacy of the deal signed by the intermediary and HMO. Did the deal call for adequate funding to cover each month's utilization? Or, did the intermediary "buy" market share, focusing on covering its own costs and extracting a profit margin off the top, with only secondary regard to what's left for claims? Did the intermediary budget an adequate amount for risk reserves? Did it have access to solid, historical utilization and cost data before signing its deal -- a deal that, ultimately, could put you at risk for unpaid claims if everything collapses?

In deals of this type, your success as a dermatologist depends in large part upon things outside of your control. And that's become a huge problem as more and more third-party intermediaries have been washed away by a river of red ink.

More Involvement

So, as a dermatologist, you're really on the horns of a dilemma. If you want to see patients who are controlled by a third-party intermediary, there's no choice but to sign on to a deal that may be built on a very unstable foundation. But can you seek redress from an HMO when that insurer's duly contracted intermediary fails to meet its claims obligations to physicians? Is the HMO financially responsible to make things right? The answer in recent years appears to be "yes," "no," and "we'll see."

In December 1999, Maryland's insurance commissioner told HMOs that they did have to make good on an intermediary's unpaid claims (including paying interest) even though the plans had already paid once. Needless to say, the health plans were not pleased. On the other hand, in January 2000 the answer from a California Superior Court judge was "no," the HMOs were not responsible for paying twice. And in early 1999 the answer from Colorado's insurance commissioner was "yes," but despite the order some HMOs failed to make good on the defaulted claims.

The battles to settle the issue once and for all are sure to go on in the courts and legislatures for some time. And we're seeing some apparent "flip-flopping" as the parties try to sort out this complicated problem. Just recently, again in Maryland, the commissioner told HMOs that they did have to make good on unpaid claims submitted by out-of-network providers, but they did not have to make good on claims held by those who were part of the at-risk network. An appeals court decision upheld the commissioner's decision.

Many other states have also started to take a serious look at the problem, and they are trying to decide if action is needed at the regulatory or legislative level, or both. Providers left with unpaid claims would certainly opine that something must be done to hold HMOs at least partially accountable for their contracting decisions that offload claims payment responsibilities. At a minimum, physicians argue that health plans should be limited to contracting only with intermediaries meeting a reasonable set of financial and management criteria.

In time, HMOs in additional states will find that they can't wash their hands of the problem and walk away from 100% of the fallout and collateral damage inflicted on physicians by these exclusive deals. At the same time, legislators are starting to appreciate that there are numerous poorly managed, undercapitalized third-party intermediaries that have no business taking these contracts in the first place. Strong regulatory requirements or legislation should put many of the "marginals" out of business, and keep others from getting into the game.

HMOs and their intermediaries will be subject to increased scrutiny in the coming years. For example, California now requires that intermediaries disclose financial information not always shared in the past with their HMO contracting partners. This means that the HMOs are now obligated to pay attention to factors other than the cheapest price. The California Department of Managed Care has the oversight responsibility to keep these houses of cards from being built in the first place.

To various extents, other states will change the financial solvency and risk reserve requirements for intermediaries. By limiting large-scale risk contracting opportunities to fewer, but likely more durable, intermediaries, things should be a little less dangerous for financially vulnerable providers.

How to Minimize Problems

Your best bet is to contract directly with a health plan rather than through a financially responsible intermediary. Even if the intermediary tells you it has an exclusive contract, it never hurts to ask; and although it doesn't happen often, there have been instances of health plans agreeing to add physicians on a direct contract.

If you're unable to contract directly with the insurer and can only participate through an intermediary, then it's essential to understand your rights, if any, under state law. Are you in a state that protects physicians and makes HMOs responsible, in full or in part, for the defaulted claims of their sub-contractors? Or, are you in a state that leaves you to your own devices? You'll certainly want to contact your state's department of insurance to determine what protections, if any, are available. For a list of Internet links to departments of insurance, visit http://www.naic.org/state_web_map.htm.

Remember that no matter what may happen at the legislative or regulatory level, it's always your own responsibility as the doctor to enter into contracts with third-party intermediaries with a complete understanding of the provider agreement. You must also understand the associated risks of being a provider contracted to a third-party intermediary as opposed to being directly contracted to a health plan. Your rights and remedies are probably going to be more favorable (and certainly clearer) when directly contracted to the insurer.

In addition, you must pay attention to what's happening with your accounts receivable (AR). If the AR starts to stretch out much past 30 to 45 days, and if you're having consistent problems of any kind with an intermediary, perhaps that's all the warning you should need. Cut your losses before you're in too deep after convincing yourself that "things have to get better if I just wait a little longer." With an attorney's advice, consider exercising your contract's with-cause termination option. (You did insist on a quick and effective with-cause termination clause, didn't you?)

You probably have little or nothing to lose by cutting your losses. After all, what good is it to continue seeing patients if it's increasingly likely you won't get paid in full and on time? This is even more urgent if you're in a state where the insurer is not held responsible for an intermediary's default.

Spotting Warning Signs

In the second of our most common scenarios, the intermediary is little more than a "paper-pusher." It forms the physician network, but passes on the claims to a financially responsible insurer. Here, the provider agreement between physician and intermediary is little more than a permission slip from the intermediary allowing the physician to see patients and bill someone else for services.

You should be able to spot the first clue to potential problems when reviewing the provider agreement. Almost inevitably in the opening section titled "Witnesseth" (or sometimes in a list of definitions), you'll see verbiage generically along these lines:

"WITNESSETH: XYZ is a preferred provider organization (PPO) engaged in the business of administering quality healthcare services at an affordable price through its products (XYZ Health and Welfare Network, XYZ Worker's Injury Network, XYZ Medicare Select HMO), and provider desires to provide services for the members (hereinafter referred to as ‘INSUREDS') of various group accident/health plans, work related injury/illness plans, motorist medical plans, Medicare Select plans, Health Maintenance Organizations, and self-insured employers, which have entered into agreements with XYZ, (hereinafter referred to collectively as ‘INSURERS')..."

When you see "...engaged in the business of administering...healthcare services..." or something similar, the hair on the back of your neck should go up. And you should be concerned, for a big red flag is likely going to pop up soon thereafter, typically in the compensation section. That red flag verbiage will read something along these lines:

"Provider agrees and acknowledges that XYZ is administering healthcare services on behalf of INSURERS under this Agreement. XYZ will not be responsible or liable for the cost of any services provided to INSUREDS by provider or for the payment of any claim to provider."

Hopefully, you didn't skip over these critical words that make it clear your contracting partner, the intermediary, has no financial responsibility for the services you deliver.

Furthermore, a provider agreement signed by you and a non-responsible intermediary probably establishes no direct contractual relationship between you and any financially responsible party.

At most, elsewhere in the provider agreement it says you agree to look only to the insurer for payment, but nothing in the document you sign binds that insurer or insurers to pay your claims. In other words, you have little, perhaps nothing in the way of legally binding protection if an insurer fails to perform as the intermediary represents it will.

The only financial lock among the parties is between XYZ and its client payers. The payers have agreed to pay XYZ for its administrative services. But you become, in essence, an unsecured peripheral party to that deal. It's an incredibly vulnerable position to be in, and states have not provided adequate protection to vulnerable physicians.

Where to Turn

So now imagine that you're in one of these deals with an intermediary that has established it's not financially responsible for your claims -- it only moves paper. If you're really lucky, then nothing goes wrong. But maybe one or more of its payer-clients stops paying your claims, or is not properly settling them. You complain to the intermediary but you're told they're not responsible, and they either can't, or won't, do anything for you.

Now what? Whom do you call? The insurers? You don't have a contract with any of them, so you don't have contact names in the plans' provider relations departments. You may not even have phone numbers or contact names in the claims departments.

If you do manage to get to someone at an insurer, the not-so-surprising response is probably along the lines of: "We never received your claims from XYZ. You'll have to contact them or resubmit the claims to XYZ."

And, of course, XYZ then says the claims were sent, and they've done all they can do.

When you're in one of these arrangements with an intermediary that only pushes paper, you don't have a direct, enforceable contractual link to the financially-responsible party(ies) and, therefore, you very well could end up out of luck. You can battle with the health plans until you're blue in the face, but unless you're in one of the few states that does something to protect physicians from such potentially problem-fraught arrangements you're just going to be on your own. And, like Don Quixote, you could find yourself tilting at windmills.

Protect Yourself

When you see the yellow and red flag type of contract language described previously, you must stop for a moment and think very carefully if that's a deal you really want and/or can afford. When doing contract analysis and making recommendations, I typically caution my clients to consider contracts by imagining the worst possible scenario unfolding. What is the downside risk? How much could it cost the practice before you can extricate yourself from a deal gone bad? Can you negotiate the shortest possible termination notice period so that you're stuck in a bad deal for the fewest possible days? Can you negotiate favorable "with-and-without cause" termination provisions covering any situation where you're not paid or are improperly paid?

Obviously, you must get expert help understanding exactly what the contract does and does not say. And you must show the contract to your experienced attorney who can advise you as to what contractual rights and protections, if any, are available to you through state law.

If you do decide to pursue such an arrangement, then one of the first things you must do is ask your attorney to draft some language that you'll present to the intermediary for inclusion in the provider agreement. At a minimum, you'll want to secure certain essential protections. Here are three of the most important:

  1. The terms of your agreement with the intermediary should be consistent with the terms of all agreements between the intermediary and insurers (so that each insurer is obligated to perform to the terms you negotiated with the intermediary).
  2. The agreements between the intermediary and each insurer should make you a third-party beneficiary to those agreements (so that it is clear each of those parties intended that you would be paid for your services. Remember, you have no direct contractual link to any of the insurers.).
  3. You should have the right to selectively opt-out and decline to see patients from any particular insurer without affecting your continuing right to see patients from other insurers (so that you're not obligated to continue with problematic insurers in order to maintain the contract).

You'll certainly also want to establish a personal link to each financially responsible party. Ask (demand) that the intermediary provide you with a contact name and phone number into each insurer's provider relations and claims departments. If the intermediary's contract could bring you patients from 16 plans, then get 16 sets of contact names/numbers and call each of them to verify the information. If it's not accurate, demand updated names/numbers.

Then, from time to time, call each of those persons just to confirm that the contact information is current. If problems arise thereafter, at least you'll have as direct a link as possible to the parties who are supposed to be paying your claims. Don't let the intermediary give you any nonsense about not being able to release such information. If that's the story you're given, run, don't walk, away as quickly as possible, before you suffer the inevitable financial damage.

Intermediaries Aren't All Evil

Now all this worrisome discussion should not cause you to think that all third-party intermediaries are the embodiment of evil. Some are reputable, they will bring patients to your office, and you'll have relatively few problems getting paid.

But there are enough bad actors out there that you simply must be on your guard. Expert help can assist in sorting the wheat from the chaff, but even then deals that seemed okay at the start can turn into something quite different months or years later.

So when participating in any deal where you're providing care through a third-party intermediary, the three most important words to live by are monitor, monitor, monitor.


This article is not intended as legal advice, nor is the author engaged in rendering legal services. The materials are not intended as a replacement for individual legal or professional advice. Information contained herein is presented only for illustrative purposes, and it should not be used to establish any fees or fee schedules, nor is it intended and it should not be construed as encouraging any user of the materials to take any action that would violate any state or federal antitrust laws, tax laws, or Medicare or Medicaid laws.


Gil Weber is a nationally recognized author, lecturer and practice management/managed care consultant to physicians and industry. He has served as Director of Managed Care for the American Academy of Ophthalmology.

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