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Three Rules For Negotiating Managed Care Contracts

Three Rules For Negotiating Managed Care Contracts

Dermatologist-attorney Noah Scheinfeld discusses how the business of health care has come to dominate the practice of health care and flags what he considers the three key rules for negotiating managed care contracts and traces. Before the advent of Medicare, the dance between the practice of medicine and the business of medicine was easy to follow: The practice of medicine led the way. Between the 1960s and 1970s, the dance became more complex, and by the 1980s and 1990s, it was a tangled mess. This brings us to the 21st century and the roles are now reversed: Now it is clearly the business of medicine that leads the dance, and those who fail to accept this reality face ruin and failure.

Rule 1: Recognize That Size, Importance and Prestige are Key Determinants of Contract Strength

Given that medical care provision is a business now, the objective of health maintenance organizations (HMOs) is driven by the principle that the lowest possible price should be paid for medical services. On the other side of the equation are the powerful providers who dominate markets; their goal is to use their might to negotiate the highest fees possible from the HMOs.

Solo Practitioners Losing Traction Among the Giants

Merely providing quality medical care alone — even if you possess some unique expertise — will rarely impel an insurance company to pay more than its standard reimbursement rate, as cost-effective care is of little importance to an insurance company during contract negotiations. This lack of traction in negotiations is most marked among solo practitioners, a point made to me 3 years ago by a dermatologist in his 60s with whom I shared a train ride back to New York after an advisory board meeting in Philadelphia. My companion was a solo practitioner in Westchester, NY, where he was on staff at half a dozen small hospitals (to get referrals, he explained) and had a dozen employees. He lamented that he had no choice but to work 300 days a year because a large multi-physician multi-specialty group in his catchment area, which had contracts he believed to be 30% to 40% higher than his, tried to steer all specialty visits to doctors in their group. My own experience with contract inequality came 2 years ago when I tried to convince an insurance company to increase my rates because I was a board-certified pediatric dermatologist. I paid $1,000 to a consultant, whose contacts at the insurance company in question claimed they had no specific need for a pediatric dermatologist in their network as no policy holders had told the company that they could not get a dermatologist for their children.

Practical Implications of Practice Consolidation

Gary Goldenberg, MD, wrote about the waning era of the solo and small practice in the December 2009 issue of Skin & Aging in an article entitled “Is the Solo Practice a Thing of the Past?” While Dr. Goldenberg’s focus was on its impact on patient care, the trend toward practice consolidation has practical implications, as the aforementioned tales illustrate. While technically there are no unions for private practice physicians, hospitals and multispecialty groups make up bargaining units that are licit, respected, acknowledged and feared negotiating partners for HMOs. Bottom line: the bigger the practice, the stronger its bargaining position.

Big Bargaining Power in Action

An article that appeared in the August 25, 2008, edition of the Wall Street Journal offered a worrisome example of how bargaining power can get out of control. The article, “Nonprofit Hospitals Flex Pricing Power,” by John Carreyrou reported on what in mergers and acquisitions lingo is called a consolidation play. He described the formation of what became the Carilion Health System in the Roanoke Valley, a region in southwestern Virginia with a population of 300,000. There the hospitals merged into a single entity, and nearly two decades later, the cost of health care in the Roanoke Valley soared, as health-insurance rates went from being the lowest in the state to the highest. Mr. Carreyrou reported that Carilion was able to charge $4,727 for a colonoscopy, which was four to 10 times what a local endoscopy center charges for the procedure and billed $1,606 for a neck CT scan, compared with the $675 charged by a local imaging center. Mr. Carreyrou painted a picture of a health system that was more like a schoolyard bully, using its domination to raise rates and aggressively pursue patients who failed to pay their portion of their exaggerated bills, and decrease the business of physicians not in the system. According to the WSJ article, the hospital system asked physicians in Carilion not to refer patients to doctors it didn’t employ, calling such referrals ‘leakage.’ Also according to Mr. Carreyrou’s story, Carilion attempted to foster a news blackout on its activities and rates to consolidate and maintain its power. And there is no happy ending here, at least not for those seeking fair compensation for physicians and affordable health care for patients. As a result of its effort to slay the HMO dragon, Carilion became and is up to this day as great a dragon as any HMO, with its CEO making a salary deep into the seven figures and the power to crush those who stand in its way to total monopoly power in the name of enhancing patient care.

Prestige Pecking Order in New York

No one has Carilion’s market power in my hometown of New York City, but the Carilion rule holds in a more limited sense. In New York City, the conventional wisdom is that Columbia University, College of Physicians and Surgeons, the most prestigious large player, gets the highest rates from HMOs, followed closely by Cornell and then less closely by NYU and even less closely by Mt Sinai. A small hospital that lacks a US News ranking like St. Vincent’s appears to garner only the rack or standard rate. Of course, the highest rates can be obtained if a hospital is just paid its list price but this is less possible with the slower economy. The great and US News highly ranked Sloan Kettering Cancer Center, which had only accepted Blue Cross for decades, recently signed a contact with Oxford which I think is more a sign of weakness (every other hospital in New York City wants to be a Center of Cancer Excellence) than of any impulse to help patients or save them money.

How Solo Practitioners Can Improve Their Bargaining Position

Nietzsche said that to slay a dragon one must become a dragon. Therein lies the answer to how to get paid more by insurance companies: Join with others, form a negotiating juggernaut and to parody Accenture’s catch phrase, find your inner negotiating dragon. So then what is to be done? Merging with other practices, as Dr. Goldenberg has said, is the dominant trend. This also would allow a group to capture dermatopathology, Mohs and patch and lab revenue. Another possibility is to see if the hospital you are associated with has an independent practice association that negotiates on behalf of doctors in its group — that is, that the hospital allows you to get the same rate that it gets from insurance companies.

Rule 2: The Contract's Language is as Important as the Contracted Rates

The provisions of the contract are nearly as important as the rates the contract pays. For example, one clause in managed care contracts requires that all referrals to other doctors be in-network. As insurance companies have lost payment battles in large class action suits, they have tried to add language to contracts that puts them in control. The mighty Carilion Health System may have the power to refuse to accept onerous language, such as that all referrals must go to doctors on an insurance company’s panel, and if patients go out of network, the insurance company can charge the cost of referral back to the doctor on its panel who made the referral, or that the insurance company can change providers’ fees at any time in the future. But less powerful negotiators must take care to read their contracts carefully to be aware of just what they are agreeing to. The managed care contract should answer the following questions about submitting claims and making payments: 1. Within how many days after services are provided must the provider submit the claim, and what is the grace period, if any? 2. What documentation must the provider supply to the payer? 3. Within how many days after a claim is submitted must the payer remit payment? 4. Will interest be added to any late payments? 5. Will the payer be required to post a performance bond or other guaranty of payment? 6. Who will be responsible for determining the existence of other insurance coverage for a particular patient and calculating any billing allocations under coordination of benefits rules? 7. How long does the insurance company have to reclaim monies that it claims might be overpayments 8. Does a practice have to accept the insurance at all locations and for all practice members. 9. Who determines what is medically necessary 10. What type of credentialing is needed to be a network physician One unnamable HMO in New York City does not pay for charges submitted to them with any regularity and never pays for procedures in my experience. This, of course, is not plainly stated in the contract, but to get approval for a procedure such as freezing a wart, pictures must be submitted to the medical director, who has never seen a wart that he thinks his HMO should be enjoined to reimburse for treatment. Thus dealing with this HMO in any fashion that avoids financial ruin would require clear contract language that obviates their tricks and misdirections — something not easy to do.

Rule 3: Information Needed to Negotiate the Highest Reimbursement is Seldom Available and Rarely Usable in Negotiations

In the movie The Matrix, Morpheus tells Neo while in the Matrix, no one can be told what the Matrix is although it is everywhere. The same is true of managed care contracts. They define all aspects of payment and yet they are also accompanied by secrecy clauses precluding the sharing of the rates and terms of the contract with those who are not parties to the contract. That the Carilion Health System’s rates ended up in the WSJ article cited, is a rarity. No hospital will tell you their rates. No multispecialty group that dominates care in a 50 mile radius will share their contract language. What’s more, even if somehow this information comes your way, it is not really useable in negotiations. Thus, it is not possible or legal to go to an HMO and confront them with what you know to be true — ie, that Cornell is getting 150% of Medicare for 11100. They would just point out that possession of such information is a theft of a trade secret. The only way to negotiate a contact is from strength, and strength comes from numbers and monopoly power.


To sum up, effective negotiations with HMOs are not easy. While dermatology reimbursements, even at the rack rate, fare better than many other specialties, the business of medicine is making the practice of medicine more complex. Only if an HMO needs you more than you need them can an advantageous contract be obtained with ease. I think that if you keep the three rules that I have set forth in mind, you have a starting point for undertaking effective negotiations. n Dr. Scheinfeld graduated from Harvard Law School in 1989 and Yale Medical School in 1997. He’s an Assistant Clinical Professor at Columbia University. Disclosure: Dr. Scheinfield has no conflicts of interest with any material in this column.

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