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Managed Care Contracting Tips In a Consolidating World  
Health Law Perspectives, May 2014
May 1, 2014

The surge in consolidations, mergers and acquisitions over the past few years has increased the importance for providers to devote extra attention to contract language affected by these events.  Failure to address it during contract negotiations can lead to financial loss and legal disputes down the line – whether months or years later.  Moreover, the prevalence of arbitration clauses means that many of these issues have not been vetted by the courts in the managed care context.  As a result, there is less formal court authored guidance on risk areas in this field.

Below are some of the key areas where extra attention is warranted in provider-plan contracting to avoid future disagreements:

  • Affiliate.  How does the contract define an Affiliate of the Provider?  How about an Affiliate of the Plan?  Are both defined?  If so, does either definition include just current Affiliates?  If so, which current Affiliates are included?  Which are excluded?  What about future Affiliates?  What type of entity can become an Affiliate in the future?  Are there any limitations on Affiliates being added?  Is there a notice provision to add an Affiliate?  Is there an acceptance requirement?  If so, must acceptance be affirmative, or does silence constitute acceptance?  What grounds permit a party to decline to accept? If the agreement covers benefit plans offered by an Affiliate, who is responsible for payment – the Plan, the Affiliate, both?  If it’s the Affiliate, and the Affiliate isn’t a party to the contract, what rights does the contract give the Provider to recover payment if there’s a dispute?  Does the contract require the Plan to have an agreement with the Affiliate that requires the Affiliate to pay?
  •  M&A.  Some contracts have express provisions addressing what will happen in the event of a merger or acquisition, either by the Provider, or by the Plan, or both.  Unfortunately, some contracts do not address this issue expressly, which creates risk of future dispute.  From the Provider’s perspective, it may be helpful to clarify whether acquired facilities automatically become covered by the contract, and if so, how rates will be determined for the acquired facilities.  Similarly, if the acquired facilities are not automatically covered, what conditions might allow for adding them to the contract?  The problem can become even more complicated if the acquired facility has contracts with the same Plan.  In these cases, a contract that allows the acquiring Provider to elect to continue the acquired facilities’ pre-existing contracts, or alternatively, to bring them under its own contract, can avoid much heartache and disagreement down the line.  Similar issues arise if Plans consolidate: which contact will survive the consolidation, and what choice does the Provider have in the matter?
  •  Ownership / Control Changes.  Some contracts have express provisions addressing changes in Ownership or Control.  Others ignore the possibility, either for the Plan, or for the Provider, or both.  This is not advisable.  Issues similar to those that come up with an M&A situation also can come up when Ownership or Control of a company changes.  Does the provider really want the contract no matter who Owns or Controls the plan?  Or vice-versa? 
  •  Provider.  How is the Provider defined?  By name only?  By address only?  By tax ID number?  By cross-reference to Affiliates?  A combination of more than one of these?  Although the identity of the contracting entity might seem like something that should be straightforward, the choices made in this definition can affect the scope of the contract in the event of subsequent acquisitions.  Typical places to look for this definition include not only a formal definition section, but also the introductory paragraph, the signature page, and the schedules behind the signatures.  Moreover, matters can become more complicated if both the acquiring provider and the acquired provider have contracts with the same Plan. 
  •  Plan.  This definition parallels the one for the Provider, and is meant in this article to refer to the entity that is the other party signing the contract (as opposed to other ways this term is sometimes used, such as to discuss coverage offered – see below).  How is the Plan defined?  Once again, is it by name only, address, cross-reference to Affiliates, or otherwise?  Once again, the choices can affect the scope of the contract in the event of subsequent acquisitions, and it can be more complicated if both the acquiring Plan and the acquired Plan have contracts with the same Provider.  Like above, typical places to look for this definition include not only a formal definition section, but also the introductory paragraph, the signature page, and the schedules behind the signatures. 
  •  Product.  There are a variety of terms that Plans sometimes use to define each of their products.  Some examples are program, product, plan (not the entity signing, but the coverage offered to members), etc.  Unfortunately these terms are not always used in a uniform fashion.  They can vary among Plans, or even vary within a single Plan.  They also can be used in overlapping and inconsistent ways, such as a contract with a particular “Plan” entity that is written to include all of its coverage “plans.”  Covered Products sometimes include those of Affiliates, and/or Products offered by third parties that the Plan administers.  These problems become even more complicated when a Plan has, buys or sells one or more Affiliates.  To avoid future disputes, Providers should strive to define the “Product” covered by the contract to make clear exactly what constitutes the Product today, what type of future Products will or will not be automatically covered, what rates will apply to future Products, how the Product differs from the contracting party, and what factors define different Products.  For instance, is the Product defined by the network, the scope of the member’s financial responsibility, the level of a member’s out-of-network rights, or in some other way?
  •  Payor.  The term Payor also sometimes gets convoluted in contracts with the term Plan, or the term Product, and can create room for disagreement absent consolidation, but even more so when consolidation occurs.  The same cautions that apply to the definitions of Plan and Product also apply to the definition of the term Payor.  Furthermore, sometimes the term Payor is used interchangeably, or with reference to, the term Affiliate.  A Provider can avoid many problems by picking only one term for each of these concepts, defining it expressly, and using it exclusively for that purpose only.
  •  Network.  The term Network has seen increasing room for dispute in more recent years, and as with several of the other terms discussed above, can cause problems when two Plan entities join forces, whether through consolidation, merger, or even something they might term an affiliation, even without becoming legal Affiliates.

In sum, there are several different ways that a contract might directly or indirectly affect payment when either providers or plans change ownership.  This is not meant to be an exhaustive list of all the terms and issues that can be impacted when managed care entities consolidate.  Each set of parties, and each contract between them, can have its own unique set of terms that merit attention to avoid problems when subsequent purchases, sales or other typical and atypical corporate changes occur.  These parts of a contract are sometimes discounted, regretfully, as mere boilerplate.  But what is boilerplate anyway?  Long before managed care, businesses had “boilers,” which needed sufficiently strong “plating” to protect against explosions.  In managed care, the explosions from poor boilerplate language may be less deadly, but the financial and relationship consequences of ignoring it in a contract can have serious or even devastating business consequences.

Hooper, Lundy & Bookman, P.C. has represented providers in contract negotiations with national, regional and local payors. For additional information or assistance, please contact Glenn Solomon in Los Angeles at 310.551.8111 or Paul Smith in San Francisco at 415.875.8500. 

For media inquiries, please contact Barrett McBride at bmcbride@health-law.com or 916.456.5855.