Physician contracting in managed care

Physician Physician Contracting in Contracting in Managed CareManaged Care

Brian A. WellsBrian A. WellsUniversity of FloridaUniversity of FloridaNovember 13, 2003November 13, 2003

What is Physician What is Physician Contracting?Contracting?

Physician or physician groups Physician or physician groups entering into a contract with a MCO entering into a contract with a MCO to provide medical services for its to provide medical services for its members.members.

Can have various reimbursement Can have various reimbursement schemes for the provider includingschemes for the provider including Discounted fee-for-serviceDiscounted fee-for-service CapitationCapitation Bonuses and/or withholdingBonuses and/or withholding

Statistics and TrendsStatistics and Trends In California, the state where risk-In California, the state where risk-

based, capitated contracts have the based, capitated contracts have the longest history, doctors receive monthly longest history, doctors receive monthly fees ranging between $35-$50 for each fees ranging between $35-$50 for each patient they see who is covered by a patient they see who is covered by a commercial plan. They must manage commercial plan. They must manage the total care of that patient for that the total care of that patient for that amount. If a patient needs extensive amount. If a patient needs extensive care, that patient becomes a money-care, that patient becomes a money-loser for the physician's practice.loser for the physician's practice.

Source: Peter Bowland – Source: Peter Bowland – The Capitation SourcebookThe Capitation Sourcebook

Statistics and TrendsStatistics and Trends According to PriceWaterhouseCoopers, According to PriceWaterhouseCoopers,

10 percent of the medical groups in 10 percent of the medical groups in California are operating under Chapter California are operating under Chapter 11 protection, while one-third of the 11 protection, while one-third of the medical groups are at or near medical groups are at or near bankruptcy. bankruptcy.

The cause: Doctors are not able to cover The cause: Doctors are not able to cover the operating costs of their practices the operating costs of their practices based on the reimbursement rates of based on the reimbursement rates of these risk arrangements.these risk arrangements.


Statistics and TrendsStatistics and Trends The number of patients doctors have in The number of patients doctors have in

capitated, risk-bearing contracts varies capitated, risk-bearing contracts varies from practice to practice. However, when from practice to practice. However, when as little as 25 percent of a doctor's patient as little as 25 percent of a doctor's patient pool is capitated, that provider will pool is capitated, that provider will generally treat all patients as capitated, generally treat all patients as capitated, meaning he or she will become cost-meaning he or she will become cost-conscious indiscriminate of the fact that conscious indiscriminate of the fact that many are covered by traditional indemnity many are covered by traditional indemnity health plans.health plans.


Physician Contracting Physician Contracting StrengthsStrengths

Creates a cohesive network for the Creates a cohesive network for the members of the MCO.members of the MCO.

Enables greater access to care for the Enables greater access to care for the members.members.

In some situations, it can reduce the cost of In some situations, it can reduce the cost of care to the member through the use of care to the member through the use of utilization review and cost-effective utilization review and cost-effective practices.practices.

If the patient’s family physician has If the patient’s family physician has contracted with the MCO, the patient can contracted with the MCO, the patient can continue to see his or her physician and continue to see his or her physician and enjoy the benefits of MCO membership enjoy the benefits of MCO membership simultaneously.simultaneously.

Physician Contracting Physician Contracting WeaknessesWeaknesses

Can tie the hands of the physician.Can tie the hands of the physician. Could encourage the practice of Could encourage the practice of

“Cookbook medicine” or “Office “Cookbook medicine” or “Office Manager” medicineManager” medicine

Certain reimbursement schemes place Certain reimbursement schemes place the physician at great financial risk and the physician at great financial risk and could impact the quality of care received.could impact the quality of care received.

Physicians may become disgruntled by Physicians may become disgruntled by restrictive contract terms and/or “all-or-restrictive contract terms and/or “all-or-nothing” clauses.nothing” clauses.Source: Doctors Struggle to Balance Professionalism with the Pressures of Everyday Practice.

Retrieved April 25, 2003, from the American College of Physicians web site: http://www.acponline.org/journals/news/apr03/professional.htm

Is this Ethical?Is this Ethical? It may be difficult for physicians to remain It may be difficult for physicians to remain

objective about treatment decisions if a objective about treatment decisions if a monetary reward or penalty is associated with monetary reward or penalty is associated with a particular course of action. a particular course of action.

"Bed side rationing." In situations requiring "Bed side rationing." In situations requiring them to balance the interests of a particular them to balance the interests of a particular patient with those of other patients, physicians patient with those of other patients, physicians are prevented from carrying out their are prevented from carrying out their fundamental obligation of individual patient fundamental obligation of individual patient advocacy.advocacy.

Source: 1997 Report from AMA Council on Ethical and Judicial AffairsSource: 1997 Report from AMA Council on Ethical and Judicial Affairs

Is this Ethical?Is this Ethical?

If the patient thinks that the doctor is If the patient thinks that the doctor is making treatment decisions based on his making treatment decisions based on his or her own financial interest, the or her own financial interest, the relationship of trust between patient and relationship of trust between patient and doctor is eroded. doctor is eroded.

Doctors may become resentful of patients Doctors may become resentful of patients who require the most care and resources. who require the most care and resources.

Source: 1997 Report from AMA Council on Ethical and Judicial AffairsSource: 1997 Report from AMA Council on Ethical and Judicial Affairs

Physician Contracting Physician Contracting WeaknessesWeaknesses

Ethical and QOC ImplicationsEthical and QOC Implications Is it ethical to give physicians bonuses for Is it ethical to give physicians bonuses for

lower utilization rates?lower utilization rates? Is this impacting the quality of care that the Is this impacting the quality of care that the

physician’s patients are receiving?physician’s patients are receiving? Is this damaging to the Physician-Patient Is this damaging to the Physician-Patient

relationship in that it is a conflict of relationship in that it is a conflict of interest?interest?

Does it interfere with the physician’s Does it interfere with the physician’s primary duty of individual patient advocacy?primary duty of individual patient advocacy?

Case Study of McDuffieCase Study of McDuffie Four physicians at McDuffie Medical Associates Four physicians at McDuffie Medical Associates

in Thomson, GA struggled to care for patients in Thomson, GA struggled to care for patients from an HMO that paid less than Medicare and from an HMO that paid less than Medicare and hadn't raised its rates in four years. hadn't raised its rates in four years.

It was an ethical dilemma," said Jacqueline W. It was an ethical dilemma," said Jacqueline W. Fincher, FACP, a general internist with the Fincher, FACP, a general internist with the group. "We were running patients through like group. "We were running patients through like cattle, practicing medicine in a way that did not cattle, practicing medicine in a way that did not feel comfortable." feel comfortable."

After some serious deliberation, the group After some serious deliberation, the group decided to terminate the contract—even though decided to terminate the contract—even though the plan covered almost 20% of its patients. the plan covered almost 20% of its patients. The physicians took a 5% pay cut for two The physicians took a 5% pay cut for two quarters to offset the resulting shortfall. quarters to offset the resulting shortfall.

Opportunities for Physician Opportunities for Physician ContractingContracting

Can create better working relationships Can create better working relationships between MCOs and physiciansbetween MCOs and physicians

Provides a structure for care delivery and Provides a structure for care delivery and allows the MCO to have a defined network allows the MCO to have a defined network available to its members.available to its members.

Have to be careful to make the contracts Have to be careful to make the contracts fair – physicians may become disgruntled fair – physicians may become disgruntled by contracts that place an undue amount by contracts that place an undue amount of risk upon themof risk upon them

Allow practice guidelines to be developed Allow practice guidelines to be developed by physicians and specialists in the fields by physicians and specialists in the fields that are applicable to the guidelines.that are applicable to the guidelines.

Threats to Physician Threats to Physician ContractingContracting

Direct ContractingDirect Contracting Some companies are contracting directly Some companies are contracting directly

with large physician groups and leaving with large physician groups and leaving the MCO out of the loopthe MCO out of the loop

Boeing direct contracting exampleBoeing direct contracting example 1994 - contracted with Medalia in Seattle for 1994 - contracted with Medalia in Seattle for

150,000 potential patients150,000 potential patients ““Instead of being passive recipients of Instead of being passive recipients of

insurance contracts and having to play by the insurance contracts and having to play by the insurers’ rules, we would be in control…This insurers’ rules, we would be in control…This was a very exciting challenge for us” Peter was a very exciting challenge for us” Peter McGough, MD, Medalia’s medical directorMcGough, MD, Medalia’s medical director

Source: Dolan, K. How to make direct contracting work. Medical Economics, October 27, 1994.


Direct ContractingDirect Contracting Direct contracting offer greater control of the Direct contracting offer greater control of the

premium dollar and larger profit margins for premium dollar and larger profit margins for doctors (if done properly)doctors (if done properly)

In the Boeing example, physicians kept 85% of In the Boeing example, physicians kept 85% of charges compared to 65% - 70% of charges that charges compared to 65% - 70% of charges that insurers reimbursed.insurers reimbursed.

However, this requires the physician group to However, this requires the physician group to take on the role of the administrator and manage take on the role of the administrator and manage the risk (could be good or bad)the risk (could be good or bad)

Physicians typically do not have the business Physicians typically do not have the business training to manage the complicated contracts and training to manage the complicated contracts and balance the risks involvedbalance the risks involved

Poor management could lead to financial Poor management could lead to financial insolvency of the medical group thus affecting the insolvency of the medical group thus affecting the group’s ability to continue to provide quality group’s ability to continue to provide quality medical caremedical care


U.S. Medical Liability SystemU.S. Medical Liability System Some physicians are increasing the Some physicians are increasing the

practice of defensive medicine in an effort practice of defensive medicine in an effort to reduce litigation.to reduce litigation.

This “malpractice pressure” has led to This “malpractice pressure” has led to increased use of diagnostic tests and thus increased use of diagnostic tests and thus increased health care costs.increased health care costs.

MCOs have taken notice of this trendMCOs have taken notice of this trend There is the potential to create tension There is the potential to create tension

between the MCO and the provider and between the MCO and the provider and this may cause the provider to seek out this may cause the provider to seek out less restrictive contracts.less restrictive contracts.Source: Feldstein, P.J. Health Policy Issues: An Economic Perspective: Second Edition. Chicago: Health

Administration Press; 1999.

Physician Contracting Physician Contracting with Aetnawith Aetna

April 24, 2000April 24, 2000 Background: Aetna is the nation’s leading Background: Aetna is the nation’s leading

provider with 19M health care, 14M dental, and provider with 19M health care, 14M dental, and 11M group insurance members.11M group insurance members.

Aetna Healthcare settles with Texas for breaking Aetna Healthcare settles with Texas for breaking consumer laws and giving patients misleading consumer laws and giving patients misleading information regarding emergency coverage, information regarding emergency coverage, referrals, and prescription drug coverage.referrals, and prescription drug coverage.

Physicians complained about “all-or-nothing” Physicians complained about “all-or-nothing” clauses that forced capitation agreements.clauses that forced capitation agreements.

Settlement forced Aetna to allow physicians to opt Settlement forced Aetna to allow physicians to opt out of “all-or-nothing” clauses.out of “all-or-nothing” clauses.

Source: AMNews – 4/24/2000 - Aetna consents to physician contracting principles in Texas - http://www.ama-assn.org/amednews/2000/04/24/gvl10424.htm


The settlement also forced Aetna to:The settlement also forced Aetna to: Offer physicians with <100 Aetna members the option Offer physicians with <100 Aetna members the option

of being paid on FFS instead of capitationof being paid on FFS instead of capitation Prohibit penalties for exceeding certain budgets or Prohibit penalties for exceeding certain budgets or

provide bonuses for staying under budget when care provide bonuses for staying under budget when care provided is medically necessaryprovided is medically necessary

Restrict Aetna from unilaterally amending its contract Restrict Aetna from unilaterally amending its contract with individual physicians (except as related to fees)with individual physicians (except as related to fees)

Require that practice guidelines be developed by Require that practice guidelines be developed by physiciansphysicians

Ban economic profiling of physicians and patientsBan economic profiling of physicians and patients Require Aetna to pay for emergency department Require Aetna to pay for emergency department

services without prior authorization from Aetna or its services without prior authorization from Aetna or its physicians.physicians.


December 19, 2000December 19, 2000 Aetna President and CEO John W. Rowe, Aetna President and CEO John W. Rowe,

MD, announced that physicians MD, announced that physicians contracting with Aetna will have greater contracting with Aetna will have greater choice in health plan participation.choice in health plan participation.

““Creating a more flexible contracting Creating a more flexible contracting policy is one example of changes we’re policy is one example of changes we’re making to reduce the ‘hassle factor’…we making to reduce the ‘hassle factor’…we recognize that local needs should be recognize that local needs should be addressed”addressed”Source: Aetna President CEO John W. Rowe, MD, Announces National Implementation of More Flexible

Physician Contracting Strategy – http://www.aetna.com/about/press/dec19_00.html

Recommendations and Recommendations and ConclusionConclusion

Physician contracting in managed care Physician contracting in managed care has advantages and disadvantages for has advantages and disadvantages for both partiesboth parties

Physician contracts should emphasize use Physician contracts should emphasize use of preventive techniques to help keep of preventive techniques to help keep patients health and to keep costs lowpatients health and to keep costs low

Have to be careful to provide an equitable Have to be careful to provide an equitable contract that can be financially sound and contract that can be financially sound and still allow the physician to practice quality still allow the physician to practice quality medicinemedicine

Recommendations and Recommendations and ConclusionConclusion

The contract should allow “the physician The contract should allow “the physician to provide the best possible medical to provide the best possible medical treatment without jeopardizing the treatment without jeopardizing the passion for caring and the compassion passion for caring and the compassion for people that makes people want to for people that makes people want to practice medicine in the first place”practice medicine in the first place”

Quality health care can be cost-effective Quality health care can be cost-effective – contracts should keep this in mind– contracts should keep this in mind

Source: Grazier, Kyle L. Managed Care and Physician Contracting. Journal of Healthcare Management, Jan 1999, v44, i1, pg. 11

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Physician contracting in managed care

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