In understanding the contractual side of the health care industry today, health care practitioners need to look at the driving forces in their market.

Managed care is here to stay. There is no doubt that it will continue to grow; however, it may grow in different directions than it has in the past. But underlying the growth of managed care is a trend that is even more important to recognize: all health care providers are currently heading toward negotiating some type of contract. That translates into the fact that the provision of health care in the United States today is a business. And to be successful in the health care business of the future, RTs, as well as all other providers, must understand certain aspects of business and particularly the aspects of the contract.

Understanding The Contractual Side Of Health Care
As background for understanding the contractual side of the health care industry today, we need to look at the driving forces in the market that are creating the changes impacting health care. It is widely understood that health care has grown from a cottage industry to a business worth well over $1 trillion a year in the United States. However, even though health care now represents one-seventh of our total US economy, in many ways we have not gotten away from the cottage industry approaches of the past. This is particularly true with understanding your marketplace. Each medical service area in the United States seems to have some unique qualifiers and has also created changes within that particular area at a unique pace. We need to try to anticipate what the market will require in our contacting activities within a given medical service area, and to do so, we have to look at the driving forces within each of our marketplaces.

Depending on the size of each market area, your driving forces will create a different impact and speed of change based on some of the following key factors:

  • Is there an oversupply of hospital beds?
  • Is there an oversupply of physicians, particularly specialists who admit patients to hospitals?
  • Has there been consolidation among hospitals?
  • Has there been integration among physician groups?
  • Have employers banded together to create health care buying coalitions?
  • Have for-profit entities, like physician practice management companies (PPMCs) or management service organization (MSOs), made inroads into the service area from a contracting standpoint?
  • Has reimbursement for health care providers from managed care organizations moved from discounted fee for service reimbursement to capitation?
  • Is there considerable competition between managed care organizations or health care provider organizations?
  • Has your state encouraged/approved managed care entities for the Medicaid and Medicare populations in your state?

As an example of the above factors impacting health care providers in a marketplace, I would like to use my home medical service area as an example. The Greater Minneapolis/St Paul Metropolitan Area has seven counties and an approximate 2.5 million population. As most people know, this area is one of those most heavily influenced by managed care, with more than 80 percent of the population involved with a managed care program of some type. The growth in managed care penetration here has taken place over the last 25 years. During that time frame, the number of hospitals in this medical service area has been reduced from 44 to 22 through mergers, acquisitions, and closures. This is the type of understanding that you need to have for your total medical service area–not only the impact of various market forces but what might occur in the future based not on what has happened in the past but what is likely to change down the road.

In mentioning the managed care penetration in our medical service area of Minneapolis/St Paul, I need to point out that I am referring to more than health maintenance organizations (HMOs). We have approximately the same number of preferred provider organizations (PPOs) as we do HMOs. Having said that, we need to recognize that, in addition to HMOs and PPOs, employer organizations will often get involved with doing direct contracting with provider organizations as markets become more mature from the standpoint of contracting of health care. For example, in the Minneapolis/St Paul marketplace, we have the Buyers Health Care Action Group, which is a coalition of approximately 24 companies that started in 1992 with 12 companies. These 24 companies represent more than 400,000 employees and their dependents and have developed mechanisms whereby they are directly contracting with some provider organizations to provide care to their employees. I must stress that they do this through a very rigorous contracting approach, which includes basically paying a set sum of money to various provider organizations; if a managed care company were doing the contracting with the providers, it would be called capitation.

Another point that is extremely important to recognize is the fact that most HMOs and PPOs have multiple types of contracts for providing services through provider groups. Therefore, when we recognize that there are over 650 HMOs and over 1,000 PPOs in the country, all with multiple contracts, we need to note that the contracting aspects of health care today will be changing depending not only on the market forces but also on whom you are contracting with and what type of contract they are offering you.

Assessing Quality
The results of the differences in contracts may be seen in the disparities that exist nationwide in the quality of clinical care provided through various HMOs. This is an important consideration for providers should they have the opportunity to be selective in their managed care contracting. As an example of why this is important, one of the largest HMOs in the Minneapolis/St Paul area is HealthPartners, which screens 78.4 percent of their enrolled women for breast cancer, while the national average for all plans in a study conducted by the National Committee for Quality Assurance was 71.23 percent. As managed care organizations become more similar from a premium standpoint, their marketing activity will shift to focusing on quality care issues such as mammography screening. This factor is important as providers like RTs need to recognize those managed care organizations in their service area that provide quality care, since, in the long run, such organizations are most likely to be able to enroll the most patients.

Evaluating Your Marketplace
Herein lies the key to evaluating your marketplace: from a contracting standpoint, you want to align yourself with organizations that are going to be most successful in marketing effectively, which includes appropriate pricing so there are sufficient patients in their systems. That makes it worthwhile for the provider organizations to contract with that MCO.

If you have worked through the dynamics of understanding the changing market forces in your medical service area as outlined above, you have taken the first step in being successful in managed care participation. There are several other critical success factors that I want to point out to you including:

  • As providers, you need to know the costs of providing your services. This is basic to successful contracting, as you need to have a base from which to negotiate upwards and that base needs to be set on your particular overhead, obviously including salaries, facilities, and equipment.
  • Your provider group needs to understand the significant difference between accepting financial risk with capitated reimbursement, as opposed to more traditional reimbursement, such as discounted fee for service. If your organization is offered a capitated contract, which is a growing trend today for specialty care through carve-out contracts, you need the ability to track and evaluate whether you are making money or losing money through capitated reimbursement.
  • Depending on the size of the practice, you should have an appropriate computer/information system to measure not only your cost and potential profit through reimbursement but also the results and outcomes of your services.
  • Each group of RTs, or even individual RTs, needs to take an active role in developing appropriate relationships with those people and organizations that they may be contracting with in the future.
  • Somebody within the organization needs to take a leadership role in setting standards, developing protocols, and making the service provided as cost effective as possible. The practice should promote teamwork and be committed to modifying current patterns and/or methods of delivering care since those factors can change with different managed care contracts.
  • As the typical managed care contract runs 20-40 pages, with some more than 100 pages, it is often appropriate to get professional help in negotiating the contract terms. Contracts are usually for a set period of time–1, 2, or 3 years–and therefore, there is a need to recognize that what happens during the course of the term of the contract needs to be appropriately evaluated so the contract can be renegotiated on favorable terms to you or your organization.
  • Understand and implement appropriately all aspects of the contract. As previously mentioned, the average managed care contract is at least 20 pages and usually only one of those 20 pages refers to reimbursement for the services that you will provide. There are many other aspects to the contract, and certainly the implementation of those other aspects is equally important to the amount of the reimbursement received in order for you to be financially successful with that particular contact. Specifically, you need to understand the scope of the covered services that should be outlined by the contract, hopefully by CPT-4 and ICD-9 codes. Not only do you need to be aware of the services to be provided, but you also need to look at the timing for providing those services, for instance, 24 hours a day/7 days a week, as well as where those services are to be provided. In certain instances, providers sign contracts and then find that they have to add additional staff in order to meet such requirements; the cost of the additional staff means that they in essence will lose money on that contract.

An Opportunity For Growth
In one of my books, Capitation for Physicians, published by McGraw Hill in 1997, I use the premise that providers can be financially successful with capitation. The same is true for all managed care, even though that has not been every provider’s result. I strongly believe that managed care can be looked at as an opportunity for growth and profit, not just as some type of entity that is designed only to control service to patients and reimbursement. To be successful in managed care, you must take the approach that managed care, contracting, and providing service under those contracts by implementing them correctly can be a rewarding challenge and opportunity.

We have already talked about understanding your marketplace and some of the keys to successful managed care contracting. Next we should cover the development of a strategic managed care approach for you and your organization’s services under managed care. There are a number of key issues here that need to be recognized and worked through in the development of your strategic approach. They include:

  • Making an assessment of your current practice activities and reimbursement;
  • Doing a strategic planning session to create goals for your practice in the future;
  • Ensuring that you and all of the staff who may be impacted by the managed care contract are prepared to deal with managed care. Understanding whether or not you will need more or fewer employees and a more effective approach to controlling costs by the entire staff;
  • Creating a system to monitor changes in both patient demographics as well as reimbursement for patient services covered under one or more managed care contracts;
  • Recognizing that the goal of new managed care contracts is to increase patient services/volume, determine capability to grow, and provide additional services. Therefore, the contracting strategy that you create should be flexible enough to meet the needs and interests of the managed care organization, as well as appropriate and practical enough for your organization to provide the services and make a profit;
  • Understanding the likely response and reaction of other members of the medical staff to the successful contracting by you and your associates;
  • Determining whether any other provider/organization could capture the same market share that you are trying to achieve through contracting by providing the same services in a different location or at a reduced rate. Determine if you and your associates can provide all the services that a managed care organization may want you to provide or whether or not some services will need to be outsourced and, if so, at what price;
  • Writing up a detailed action plan that includes: What new resources will be necessary to compete successfully in the managed care market?; What action steps need to be achieved in order to be ready to first contract and then secondarily implement a contract?; What are the specific dates to achieve the actions necessary?; Who has the responsibility for successfully implementing those actions?; Determine, in advance, how you will measure your success for the action plan and managed care contract.

In summary, I would like to leave you with some closing thoughts on how to be successful in your managed care contracting:

1) Constantly remember the importance of the written contract as the basis for current and future health care delivery;

2) Recognize that contracts are covered under business law in the courts and yet managed care contracts need your special understanding because of the need for implementation of those contracts once signed;

3) Remember that health care is constantly changing and the focus and implementation of a given managed care contract may change from year to year, even with the same managed care organization.

John McCally is vice president of Healthcare Consulting Endurant Business SolutionsT in St Paul, Minn.