82 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
capitated payment systems, which are discussed in Chapter 5. e simple fact is that medical
necessity is a subjective process generally relying on the expertise of physicians and other health-
care providers. While a contract cannot really dene medical necessity, certainly the process that
is used to determine medical necessity can be spelled out. Typically, a clinical reviewer such as a
physician, nonphysician practitioner, or nurse will review a case to determine if the services were
medically necessary. ere should be some sort of an appeal process relative to medical neces-
sity denials. Also, urgent and emergent care should be exempt from undue medical necessity
challenges.
Other coverage issues may be addressed through the use of preauthorizations. While this
process may concentrate on surgical procedures, there may be other instances in which preautho-
rizations must be obtained. Again, the contract can cover this issue from a procedural perspective,
that is, the process for gaining preauthorization approval. ere should also be an appeals process
that can be pursued in a timely fashion. Case Study 4.13 gives a little glimpse into how medical
necessity and preauthorization can become complicated.
Case Study 4.13: Hydration Preceding Cardiac Catheterization
Stanley’s cardiologist has ordered a cardiac catheterization to check for any coronary blockages.
Stanley also has been seeing a nephrologist. While the cardiac catheterization would normally be
provided on an outpatient basis, the nephrologist wants Stanley to be admitted to the hospital and
hydrated overnight with medications that will reduce the toxicity of the LOCMs that will be used
during the cardiac catheterization.
ere are really two issues in Case Study 4.12. First, there is the question of admitting Stanley
to the hospital. A payer may argue that performing this service on an inpatient basis is not neces-
sary and thus not covered. Second, is this hydration and medication administration really needed?
is may be a protocol that is not generally accepted by the payer. e payer may come back and
indicate that the procedure will be paid only on an outpatient basis, and that the intravenous
medication is not medically necessary.
Some additional examples are discussed in the next section.
Administrative Proceedings
MCO contracts involving the payment, and possibly management, for medical services can never
cover every possible situation that might arise. Even though the contract itself may refer to various
companion manuals or other informational resources, there are still distinct possibilities that co nicts
or disagreements will arise.
Case Study 4.14: Special Medication Regimen
A gastroenterologist has an MCO contract for services. is physician has found that for certain
illnesses a special combination of drugs is particularly eective. e drugs are quite expensive, and
the physician is using a drug combination that does not conform to pharmacy label instructions.
e MCO is claiming that the use of this particular drug combination is experimental and is thus
not covered.
Case Study 4.15 is an extension of Case Study 4.7.
Contractual Payment Systems ◾ 83
Case Study 4.15: Compounded Dermatology Prescriptions
A dermatologist in Anywhere, USA, has an MCO contract for a large number of patients. e
contract covers most pharmaceutical items. However, the dermatologist prefers to prescribe certain
ointments and salves that must be compounded by a pharmacist. e MCO is balking at paying
the extra cost and has contacted the dermatologist to make certain that only o-the-shelf ointments
and salves are prescribed.
Case Study 4.16: Hospital Inpatient Stay Changed to Observation
e Apex Medical Center has a number of dierent MCO contracts. An issue that frequently arises
is that a patient may be admitted as an inpatient and remain in the hospital for up to four days. A
proper claim is led in a timely fashion, and then the MCO responds by indicating that the case
should have been an observation case and makes payment at a much lower rate.
Presumably, for Case Study 4.16, the payment mechanism for the inpatient services is vastly
dierent from the payment process for the outpatient services. Based on the information in this
case study, apparently the MCO is concerned primarily about reducing the payment to Apex. is
case study illustrates the need to establish agreed-on criteria for the type, level, and location of
services.
Case Study 4.17: Location of Service
Sarah needs to have elective surgery. is surgery can be performed at the local ambulatory surgical
center (ASC), at the Apex Medical Center as an outpatient, or at the hospital as an inpatient.
e decision regarding where Sarah’s surgery should be performed is really a medical decision
that will or should be made by the surgeon. However, an MCO will certainly be interested in
which location is chosen and why that location was selected. Most likely, the overall payment is
the lowest for the ASC, a little more expensive for hospital outpatient services, and probably much
more expensive on an inpatient basis. ere will probably be dierent payment mechanisms for
the various locations.
Access to Records and Audits
Typically, healthcare payers establishing a contract with healthcare providers will include provisions
so that medical records can be reviewed. is may be in addition to requests on the part of the payer
to receive copies of specic records related to an individual case. Payers will also want the ability to
audit records to determine medical necessity, proper documentation, orders in place forthe service,
proper coding, and the like. Note that access to records may go beyond medical or clinical records.
Itemized statements and claims are generally included in the right to access records.
Because of the wide variety of payment systems, nancial information may also be requested
in various forms. For instance, if a hospital is being paid on percentage-of-charges basis, then the
payer will certainly want to have access to the hospital’s chargemaster and associated charge struc-
ture information at least on a periodic auditing basis.
Note that most of the information that would be requested by a payer falls under the ambit
of PHI and thus under the HIPAA privacy rule. e contract should address any privacy issues
related to access to records.
84 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
Negotiating and Analyzing MCO Contracts
We have been discussing a number of features and issues surrounding contractual arrangements
for paying for healthcare services. Virtually all healthcare providers will have multiple contracts,
some of which are quite dierent. We now look at a very general process that can be used to
approach the negotiation and maintenance of managed care contracts. Keep in mind that some
contracts that we term managed really have few management features, while others have signi-
cant management of healthcare services.
Here are the main activities:
◾ Precontract data gathering
◾ Contract and relationship analysis
◾ Financial modeling and analysis
◾ Compliance analysis
◾ Operational monitoring
◾ Renewal and termination
Contracts are between the healthcare payer and the healthcare provider. You can take either
perspective. Because these contracts tend to be written by the healthcare payer, we will take the
provider perspective because, if anything, the contracts will be slanted to benet the payer.
Precontract Data Gathering
Both parties really need to know about each other. From the providers’ (e.g., physicians, hospitals,
etc.) perspective, information about the insurance company or MCO is essential. For instance, the
market share, geographic service area, stability, solvency, reputation, and other healthcare provid-
ers under contract should all be determined. Any competitive situations with other similar provid-
ers under the contract will be of interest. If possible, patient satisfaction with the payer should be
investigated. Ownership is another issue. Is this payer part of a larger group or corporation? Also,
with what employers and other organizations does this payer have relationships? What kind of
turnover is there with other healthcare providers?
Answers to these questions will give the provider some idea regarding what may or may not
be in the contract itself. If the patient population views the payer unfavorably, then this may be a
payer to avoid unless there are specic circumstances that suggest otherwise.
Contract and Relationship Analysis
e contract itself should be carefully reviewed for terms and conditions, some of which we
discussed previously in this chapter. Also, coding, billing, and claims-ling conditions should
be reviewed. ese contractual guidelines may not be in the contract itself but may be refer-
enced in the contract. Often, there are companion manuals or guidance provided through
other means (e.g., payer website). Claims-ling requirements can include such things as how
long the provider has to le a claim (e.g., 120 days), how quickly the payer will pay a clean
claim (e.g., 30 days), or how long a provider has to appeal a payment denial (e.g., lack of medi-
cal necessity).
e terms and conditions provided in the contract should be reviewed. Always look at the
denitions because the denitions may be overly broad or too narrowly dened. Issues such as
Contractual Payment Systems ◾ 85
medically necessary services or noncovered services should be well dened. Generally, covered
services should be listed with some specicity. Also, the healthcare provider may or sometimes may
not be prepared to provide some services relative to the facility involved or the skill or expertise of
the individuals providing services. Medical necessity is a major issue when providing healthcare
services. While it is dicult to dene medical necessity, at least the process used to determine
medical necessity for given situations should be delineated in the contract.
Standard-of-care issues can also be of concern. e rather nebulous phrase community standard
of care may appear. What, exactly, does this mean? Obviously, the use of undened and sometimes
nebulous terms and concepts can lead to disagreements and conicts.
Note: Due consideration should be given to having legal counsel review contracts.
Financial Analysis and Modeling
Performing nancial analyses of the provisions in a contract, particularly the assessment of the pay-
ment mechanisms and their impact on reimbursement to providers, vary signicantly. For instance,
a three-physician family practice clinic in a smaller community may only make a cursory assess-
ment of what a given contract will pay. In some cases, the contracts are simply signed and put into a
drawer. At a hospital, the proposed contracts, at least from major third-party payers, may be nan-
cially assessed on a quick review basis. At an IDS, there may be nancial analysts who will really
dig into the contracts and develop models based on the case mix of services provided by the IDS.
Financial modeling is not the only consideration for contracts, but great care must be taken
to reasonably ensure that the given healthcare provider will not lose money under the contract.
Case Study 4.18: Payment Averaging
A consultant has recently been analyzing cases at the Apex Medical Center. e consultant has
found that Apex is being substantially underpaid for cardiac and vascular catheterization services
from one of its largest third-party payers. e nancial analysts at the hospital are contacted. is
underpayment is fully recognized, but the loss is more than made up by generous payments for
inpatient services.
Whether the circumstances in Case Study 4.17 are reasonable is an interesting question. Is it
possible that the underpayments, although oset by other, more generous payments, could create
some problems from other third-party payers? Could problems occur down the road when the
payer wants to lower the inpatient payments and not increase the payments for the catheterization
services?
Operational Monitoring
As with levels of nancial analysis, the operational monitoring of contracts is certainly important.
However, for a small operation such as the three-physician clinic, any sort of operational monitor-
ing of how the contract is working and whether payments are correct will probably receive only
basic review. Moving up to the hospital and system levels, the resources dedicated to contract
monitoring will increase signicantly. Most likely, specialized software will be used to track and
assess how well a given contract is working. Certainly, the nancial reimbursement will be care-
fully tracked along with identifying any problems that are generating a realization rate that is less
than that anticipated.
86 ◾ Cost-Based, Charge-Based, and Contractual Payment Systems
Renewal and Termination
For small healthcare providers, MCO contracts are often signed, placed in a drawer, and then
allowed to renew automatically without much further consideration. At the hospital and system
levels, more attention is devoted to renewing contracts with due consideration to making adjust-
ments, negotiating changes in the contract, or dierent payment mechanisms. In some cases,
healthcare providers do nd it necessary to terminate contracts that create unfavorable results.
e nancial analysis, operational monitoring, and then consideration for renewal or negoti-
ating changes all require specialized personnel who can perform these types of services. In other
words, the healthcare provider must decide what kind of personnel will be devoted to developing
and maintaining these contractual relationships. As indicated in our brief discussion of these top-
ics, the infrastructure to support contracts will vary signicantly based on the size of the health-
care provider. e range seems to go from virtually no personnel assigned on up to departments of
specialized technicians and analysts who study and assess contracts on a regular basis.
Medicare Advantage Plans
As mentioned in this chapter, even the Medicare program uses an HMO or PPO approach.
Medicare’s approach is called Medicare Advantage (MA). ese MA programs are referred to as
Part C. Part A is generally for hospitals and institutional providers; Part B is for physicians, clinics,
and other suppliers. Part D is the Medicare drug program.
Note: Be careful when using these dierent parts of the Medicare program. Exactly how these
dierent parts t together, or not, is not always readily apparent, particularly for compliance
requirements.
ere are several dierent approaches for MA plans, of which the following three are typical:
◾ HMO plans
◾ PPO plans
◾ Private fee-for-service (PFFS) plans
ere are some additional approaches, including special needs plans (SNPs), HMO point-of-
service (HMOPOS) plans, and medical savings account (MSA) plans. A full explanation of all these
approaches would require considerable discussion. We touch lightly on this topic in the context of
our overall discussion of payment systems and contractual arrangements with healthcare providers.
However, the basic process involves several concepts that we have discussed in this chap-
ter. ere must be some sort of organized delivery system, which may be referred to as a net-
work of providers.* Regardless of the specic MA plan, healthcare providers of all types may be
approached by an MA HMO, MA PPO, or MA insurance company to join a network of providers
under the MA plan. is, of course, will involve a contractual agreement that must address all of
the issues we have discussed, including how providers will be paid, coverage, coding and billing
issues, medical necessity, and so on.
Figure4.1 shows a simplied diagram distinguishing the open network of traditional or origi-
nal Medicare compared to the closed network used with an MA plan. e Medicare Advantage
*
You may see that traditional or original Medicare is an open network of providers.
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