"Eye on Managed Care: Be Careful What You Wish For"

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"Eye on Managed Care: Be Careful What You Wish For"

Changing or eliminating a poor contract may involve hidden pitfalls. Here are two things to look out for.

by Gil Weber, MBA
Consulting Editor

Adapted with permission from Ophthalmology Management
© Copyright, 2002. All rights reserved.
May 2002


Managed care is a challenge for physicians and practice administrators in the best of times. So when you have a chance to rid yourself of a headache by dropping or significantly changing a problematic contract, you may be tempted to jump at that "golden" opportunity without giving full consideration to the potential consequences.

Recently, two of my clients had exactly this kind of opportunity. In both situations what appeared to be desirable change could have ended up putting their practices in worse positions. Here, I'd like to share their experiences, in an effort to help you avoid an unpleasant surprise should you find yourself in the same position.

From Capitation to Fee-For-Service

The first of these two physicians had been a capitated provider for a major delivery system for several years. He dealt well with the realities of capitation and understood how to manage a patient population; his utilization and cost structures were good, and his patients were happy with the care he provided. Fortunately, the patient load from this capitated plan didn't displace large numbers of patients from better paying plans -- always a major concern with capitation contracts.

The problem was that this contract's capitation rate was far too low, even though it was typical for the area. Plus, it hadn't been adjusted for a long time. When I ran the numbers I found that the cap rate was only a little more than 40% of what Medicare paid. Clearly, the compensation structure of this old contract needed to be changed.

Coming up with a more desirable alternative wasn't hard. We designed a hybrid compensation arrangement that would pay no less than twice the current cap rate, while excluding a few key surgeries that would be paid according to a negotiated fee schedule. My client was willing to stand firm and give up the contract if the payer wouldn't make significant adjustments.

However, the doctor also wanted to have a fall-back position: converting the entire contract to fee-for-service. To many, that might seem the ideal resolution; simply dump capitation and all its worries. But I cautioned my client not to go down that road unless he was properly prepared. Why? Because total conversion to fee-for-service can cause unexpected fallout.

Conversion Backlash

When a capitation contract converts to fee-for-service, your practice will face a significant cash flow disruption -- one that could go on for several months. Under capitation you receive prospective payment each month for the entire covered population without having to submit claims and wait for them to be processed. Upon conversion, that steady and guaranteed revenue stream ends.

Let's say your contract converts on January 1st. The cap checks stop and you begin sending in claims. Depending on how often you submit claims and how quickly a payer processes those claims, you could be looking at several weeks -- or months -- before the dollars once again start flowing steadily on that patient population. Meanwhile, you have on-going expenses for the care of those patients and for the office in general. Also, when a plan pays on a fee-for-service basis, your staff has to deal with a lot more paperwork -- referrals, prior authorization, filing claims, tracking a new category of receivables, and so forth -- that they didn't have to deal with under the cap contract. All these financial and administrative disruptions could be problematic for as long as it takes things to settle down.

To minimize this potential problem, I advised my client to ask for an advance equal to 1 or 2 months' anticipated claims exposure (based on historical utilization numbers) if negotiations went in the direction of abandoning capitation. He would agree to pay that money back gradually over several months so that his cash flow transition would be as transparent as possible. This kind of arrangement is simple, logical, and financially sound for both sides.

The lesson? If you have the opportunity to dump a capitated contract, be certain that you're prepared financially and administratively for the transitional fallout. It's not a simple matter of turning off one spigot and turning on another!

Getting Out While the Getting's Good

The second doctor asked my opinion of a paragraph in a provider agreement he was considering signing. The provision stated that he could terminate with cause if the payer lost its legal status and could no longer provide insured care in the state. He was aware of numerous payer financial failures around the country in recent years, so he felt that this was a serious concern.

The doctor knew that if the plan went out of business he could be caught with extended receivables. He assumed the provision's wording meant that if this happened he'd have a measure of protection; he could get out of the contract quickly and easily, relieved of any further patient care responsibilities and adverse financial exposure. Consequently, he believed this was a very good provision to have in the contract.

Well, maybe -- and maybe not. I cautioned him that other contract wording could contain a hidden problem: It might allow assignment (transfer) of the contract to another entity without the physician's signed agreement. If that new entity was unknown to the physician, or was an entity he knew should be avoided (such as a slow payer and/or downcoder) the valid assignment could become an obligatory, on-going nightmare.

How can you prevent something like this? Before signing any provider agreement, make sure it contains two protections. First, confirm that your professional services can't be assigned to another entity without your signed consent. Second, demand a provision that the contract terminates immediately if the original payer ceases operations.

With those protections in a provider agreement you'll be better positioned to avoid negative consequences if the provider's business fails. That way, what you wish for won't turn out to be worse than what you already have.


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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