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Exit Strategies: Planning for Managed Care Contract Termination

By their very nature, managed care contracts carry a great deal of business risk, including the insurance risk that contracted rates may not cover costs; the financial risk of being paid late, or even underpaid; and the legal risk of being contractually barred from pursuing the patient, the employer, or even the payer, under certain circumstances.

In addition to the business risk of entering a managed care contract, there is considerable risk in leaving a contract. Because community reaction is often unfavorable in contract disputes, providers risk losing community support as well as a source of patients if an exit is not well executed. Entering into any new business without a clear exit plan is unwise. The complexity of unraveling a business relationship needs to be addressed before the business fails. In managed care, an exit plan guides the organization in considering and possibly implementing a managed care contract termination. Managed care business is significant enough today that providers need to plan the requirements of a termination.

Why Plan for the Worst?

Contracts, by their very nature, are meant to minimize disputes. Payer and provider disagreements, however, still occur. They can result from a variety of causes, including inadequate rate increases or inability to agree on rate increases, claim payment problems (including underpayments, late payments, denials, or overpayment recoveries), concern over payer solvency, and growing or onerous administrative requirements of the contracts.

Although contract language can address many of those concerns, sometimes this language is missing or inadequate. Dispute resolution language can provide avenues to resolve problems arising from such shortcomings. Options for dispute resolution include internal appeal processes, external arbitration or mediation, or even legal action for breach of contract.

However, even with these remedies, there are times when providers must consider contract termination. A clear exit plan is essential for any managed care contract, and should help determine when termination is necessary and how this decision is reached.

Project plan.

Leaving a contract with any significant membership or employer group affiliation is a complex project that deserves the development of its own plan. The exit plan’s project plan outlines steps to be taken in event of termination. Responsible parties are assigned to each major task, and duration of each step is established. Sequencing of steps is laid out, including any dependencies of actions on prior acts. As a result, resource levels are identified. The project plan addresses each of the stakeholders involved, incorporates the timing assessment, and ensures that the overall plan can be executed. One provider failed to develop a project plan for its re-contracting efforts, and suddenly found itself unable to reach agreement with a large payer. The payer allowed the automatic termination provisions of the existing contract to activate. With no project plan to guide its re-contracting efforts, the organization had less than three months before the major open enrollment period in the market to try to retain patients. Employers had already renewed with the payer, expecting the provider to remain in the network. The provider and payer both lost favor in the ensuing months as both parties tried to reestablish a contract.

When to Consult Your Exit Plan

Learning that your contract has automatically terminated due to failure to agree on new terms with the payer is not the ideal time to develop an exit plan. Yet this unplanned disruption happens frequently to providers and their patients. Once you have assembled the elements of an exit plan, there are three key times to consult the plan.

Before contracting: Establishing up front with the executive team your organization’s performance requirements for all managed care contracts is critical. How much margin and volume should each contract carry? How should margin vary—by service, volume, or other factors? How far can actual performance vary before triggering an examination of exit alternatives? With strategic contracting and pricing guidance established corporately, the chances of internal disagreements over what constitutes adequate performance are reduced; the opportunity to proactively identify underperforming contracts in a timely manner is increased. With the exit plan’s guidance, your organization is equipped to actively manage contracts.

Before signing: Contracting includes reaching agreement on a variety of business and legal terms and conditions. Your internal contract language checklist should ensure a variety of provisions to protect your organization in the event of a contract transition. Rights to timely termination, communication with patients, and other key provisions are necessary to ensure maximum flexibility in any future transition.

Once under contract. Turning around an underperforming contract is like turning around a battleship - it takes a great deal of time, analysis, and skill. Waiting three to six months prior to contract renewal is not the time to start contract evaluation. Without early warning, your organization will not have the time to execute a successful transition.

Planning Now for the Long Run

Healthcare organizations plan for a multitude of medical disasters with detailed plans and even drills to ensure strong execution should an emergency arise, yet they generally address contract termination only when a crisis arises. An effective exit plan minimizes the financial and public relations damage that contract disputes can cause. It also establishes the exit strategies that may be pursued if the contract is not performing adequately. Contract termination is just one option in the provider’s arsenal of tools to maintain reasonable performance of its managed care contracts. Challenge your organization to a new way of thinking. Before signing new managed care contracts or renewing existing contracts, think about what is required to exit those same contracts if they do not live up to expectations. Starting with the end in sight can minimize financial and community relations issues for providers and their patients.

By Phoenix Services Managed Care Consulting, Ltd.
Healt Care Consutants and Advisors
ABOUT THE AUTHOR: Pam Waymack, FHMFA, MBA and Gwen Lohse
Pam Waymack, FHFMA, MBA is recognized for her expertise in bridging the gap between contracting and getting paid under managed care. She has consulted to over 100 organizations over the past thirteen years including providing expert witness support to attorneys and their clients.

Pam is the lead author of Denial Management: Key Tools And Strategies For Prevention And Recovery published by hcPro in 2005. She is a frequently requested speakers nationally on current issues in payor contracting including slow payment, low payment (underpayments and silent PPOs) and no payment (claim denials).

Prior to consulting Pam held senior management positions at Children’s Memorial Hospital, Northwestern Memorial Hospital, The University of Maryland Medical Center and Johns Hopkins Hospital for over 15 years. She is a fellow of HFMA and holds an MBA in Health Care Administration and Finance from the University of Chicago and a BA in Economics from the College of William and Mary.

Copyright Phoenix Services Managed Care Consulting, Ltd.

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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