Managed care contracts demand careful strategy

June 3, 2006

Radiology groups are producing more work per full-time equivalent than ever before. Yet in many cases, their incomes are flat or decreasing. One of the major factors contributing to this phenomenon is consolidation within the healthcare insurance industry. This consolidation has fueled new rounds of cost-cutting by the major carriers. To remain competitive, other insurers are following suit.

Radiology groups are producing more work per full-time equivalent than ever before. Yet in many cases, their incomes are flat or decreasing. One of the major factors contributing to this phenomenon is consolidation within the healthcare insurance industry. This consolidation has fueled new rounds of cost-cutting by the major carriers. To remain competitive, other insurers are following suit.

Anthem has acquired WellPoint Health Networks, creating the nation's largest health insurer with more than 28 million members. The combined WellPoint covers one-third more people than its next largest competitor, UnitedHealth Group. It's interesting to note that in the merger, 293 WellPoint executives will receive retention or severance bonuses totaling $356 million. That's an average of $1.2 million each.

UnitedHealth Group acquired Oxford Health Plans, Definity Health, and Atlantic Medical Services. With that acquisition, the company now insures 18 million members and is the second-largest health insurer in the nation.

The carrier with the lowest medical loss ratio (payments for medical claims) is able to offer the lowest premiums to employers and sell more of its product. The medical loss ratio represents roughly 80% to 90% of the total costs for health insurance carriers. Because medical claims represent such a high proportion of insurers' costs, it's not surprising that there is a well-managed effort by carriers to keep a downward pressure on physician fee schedules.

The new megacarriers are exercising their market clout in their negotiations with radiologists. There are two reasons for their aggressive stance when dealing with physicians: competition among payers and market pressure for profits (to prove that these consolidations are a good idea).

Industry consolidation has made contract negotiation more challenging. It is also just a matter of time before aggressive insurance carriers adopt the technical payment reductions contained in the Deficit Reduction Act of 2005. But providers have ammunition to negotiate tighter contracts. They can point to the big carriers' executive bonuses and dubious claims processing tactics.

THREE SIMPLE RULES

Every radiology group should have a managed care contract strategy. Contracting for your practice should be approached with a well-conceived goal in mind. The best way to approach this goal is to develop a contracting strategy consisting of the following three steps:

- internal assessment of the current major payers and the rates they are paying the practice;

- strategy implementation; and

- renegotiation.

The payclass distribution of a typical radiology practice is similar to that shown in the table. As you can see, self-pay, Medicare, and Medicaid make up 48% of the practice. This means you are unable to influence the reimbursement representing almost half of your practice. This fact also makes your contracting strategy with the remainder (managed care) all the more crucial.

During an internal assessment of the practice, you should analyze the payclass distribution and calculate the average payment per procedure (APPP) for each financial class. Later, you will use this information to measure the success of your efforts. During the internal assessment, all physicians should meet and agree on a strategy to make sure expectations are in line and to discuss the factors that will become relevant when opening contracts for renegotiation. The group should also determine the revenue goals to be achieved during recontracting. You will need to set realistic expectations based on current compensation, reimbursement in the region, and requirements for the recruitment and retention of high-quality radiologists.

Before a contract is opened for renegotiation or termination, the physicians need to consider how payers may react. For instance, what is the group's tolerance for balance billing and the resulting complaints from patients, hospital administrators, and referring physicians? Another consideration is whether a short-term drop in revenue, as part of the negotiation process, is tolerable. The group should also take time to educate hospital representatives, referring physicians, office staff, and employers before the process begins about what to expect.

Next, the practice should plan tactical implementation and the overall direction of the contracting strategy. The relationships among carriers should be considered, and carriers should be ranked based on importance to the practice. Develop a timeline to address how and when contracts will be opened, the order of renegotiation, and how involved, if at all, the hospital should be in the process. Also decide what, if any, external communications should be developed and released. Your chance of success is much greater with a well-defined plan.

CONTRACTING TOP 10

It does little good to obtain a healthy increase in fees if denials increase at the same or a higher rate. Both language and rates need to be effectively addressed in any new contract. The group needs to eliminate one-sided clauses and unreasonable restraints placed on the practice. Other sections may require language to be added. The following list describes the top 10 situations to consider when evaluating contracts and some best-case scenarios. Of course, the list isn't all-inclusive. Each contract should be evaluated on its own merits.

1. Make sure the contract addresses inappropriate denials. In general, consider all denials inappropriate, except in cases where the patient lacks coverage. An example of an inappropriate denial is rejection of CPT code-bundling combinations outside of the national correct coding initiative.

2. Lack of certification should not be the basis for denials, and the contract language should reflect this. This safeguard is important because hospital-based radiology practices have no way to verify precertification of exams.

3. Rapid termination language is typically in the best interest of the practice. Ideally, you should be able to terminate with 60 days notice, although 90 to 180 days is more typical. In addition to the termination rule, it should be made clear that the group will not be forced into arbitration or mediation in the event of a dispute.

4. The contract should address medical necessity issues. All exams with medical necessity criteria should be documented in the contract. Any exams not included should be contractually exempt.

5. Do not agree to language that is simply beyond the scope of the agreement. For example, the payer should not be allowed to approve new locations or approve mergers with other groups. Do not allow the payer to ask for limitations on class action lawsuits in the event of termination.

6. Verify that the managed care company has the ability to assign only the payment mechanism and not payment responsibility.

7. Delete product provisions in which the managed care company can sell the network, but the practice cannot determine who is to pay or how much is to be paid.

8. Verify that the contract clearly provides the radiology practice with remedies to recover monies for denied claims.

9. Demand a full rate schedule for payment compliance. Proper payment compliance cannot be achieved with an abbreviated schedule. Also, get a complete list of all denial codes. You need a full schedule for contract compliance and denial evaluation.

10. Eliminate unilateral change provisions and decision- making for the managed care company.

MEASURING PROGRESS

At various intervals in the future, you should recalculate the APPP. If the APPP is increasing, you are making progress! However, you should keep in mind that an increase in the APPP of just 1% to 2% is typically due to a shift to more expensive modalities within the practice. The goal is to create conditions where the APPP is increasing by more than 3%. When you achieve this increase, you have received a pay raise and are not just working harder.

In addition to reimbursement increases gained from this process, equally significant are the changes secured in the contract language. These changes can eliminate the hidden discount that managed care companies take in the form of denials and other methods of nonpayment.

With the proper contracting strategy, your practice will be appropriately paid, have the financial wherewithal to compensate physicians properly, and be able to recruit and retain high-quality radiologists.

Mr. Reinitz is president of Comprehensive Medical Data Management in Powell, OH. He can be reached by e-mail at kirk_reinitz@cmpminc.com.