• Taking Chances2:24

The principle behind any contract is that both sides negotiate and agree to the terms. With managed care contracts, the terms can affect how a physician practices medicine and the relationship between a physician and patient.

For example, there are three types of provisions in many managed care contracts that may limit what a physician can discuss with a patient. The first type prohibits a physician from discussing "proprietary information."

Proprietary information generally is material that, if it were made public, would damage the company's ability to compete effectively. Coca Cola's secret recipe is proprietary information. And managed care organizations consider various elements of their structure to be proprietary. For example, physician salaries, the capitation rate, or physician incentive and penalty programs might be proprietary information.

Because managed care organizations differ, physicians must be sure they understand exactly what is considered proprietary information with each managed care contract. In addition, physicians should keep an eye open for new laws that may supersede individual contracts and require physicians to divulge incentive and penalty information to patients who ask about it. For example, for Medicare and Medicaid patients, the federal government recently issued regulations that require MCOs to tell patients if physician payment is based upon the use or cost of the services provided. The regulations are even stricter if the MCO rules put physicians at substantial financial risk for their treatment of Medicaid and Medicare patients.

A second type of potentially troublesome clause in a physician's contract is one that prohibits the physician from undermining patient confidence in the MCO through "word or deed." Physicians who sign on with a managed care organization to receive the benefits of the patient referrals are expected not to malign that MCO to those patients. Again, physicians should ask what each MCO means by this type of limitation. An assurance from an MCO that zealous patient advocacy is not restricted should make a physician more comfortable signing on with that MCO.

The third type of limitation, and the one that has drawn so much unfavorable attention, prohibits physicians from discussing "unapproved" treatment options with patients. If, for example, the utilization review committee of an MCO decided that "watchful waiting" was the appropriate and only reimbursable course of action for a patient with benign prostatic hypertrophy, then presumably this would be the only option the physician could discuss with the patient. The clauses may be unenforceable, even as written, because they directly conflict with physicians' duty to obtain informed consent, which includes a duty to discuss available treatment options with patients.

Contract restrictions on what physicians can communicate to patients are sometimes known as “gag clauses.” Some are accepted business practice in any competitive industry, and physicians share the benefit of a competitively healthy payor. But other gag clauses in managed care contracts are seen to threaten patient care. This spring, Massachusetts became the first state to outlaw some of these clauses, such as the restriction on telling patients about treatment options not covered by the MCO. Similar legislation is pending in several other states and at the federal level.

There are other areas of MCO contracts that restrict physician actions and need to be reviewed by physicians. For example, doctors who agree to refer patients only to specialists within the MCO's panel should look over the MCO's list to make sure they are comfortable with the specialties and specialists represented.

They should also obtain written referral guidelines and ask about formulary lists and the ability to prescribe off the list if medically necessary. Physicians should understand the MCO utilization review policies and appeal processes and get them in writing. Physicians are responsible for their patients' care and are expected to understand and utilize these appeal processes for the best interests of each patient.


Many MCOs ask contracting physicians to sign indemnity clauses. That is, they want the physicians to pay any legal defense costs and judgments the MCO might incur because of the physician's medical negligence. Say, for example, an MCO and a physician are named in a medical malpractice case in which a patient alleged the physician failed to follow up on the patient's X-ray results. The MCO could seek repayment from the physician for attorney fees, settlement costs, and any judgment costs. These costs could be quite high, and physicians should make sure they have insurance to protect against these types of losses.

CRICO-insured physicians are covered for most elements of managed care liability as part of their medical professional liability policy. This includes coverage of indemnification agreements with an MCO for claims arising out of the physician's medical negligence. Physicians with professional liability insurance from other carriers should find out whether they have managed care liability coverage and what the coverage limit should be.

Finally, in reviewing a managed care contract, a physician or physician group should look at the termination clauses. Many contracts allow either party to end the contract for any reason, or no reason at all, with 90 days notice. This clause essentially makes the whole contract binding for only three months. In some ways, this short term can benefit the physicians. It enables individuals and physician groups to end or renegotiate the terms of an MCO contract, even after they have signed on with !be program. It also enables MCOs to drop physicians on short notice without cause, although this very point is being disputed by a New Hampshire physician, Dr. Paul Harper, who feels that it goes against public policy.

The New Hampshire Supreme Court has agreed that managed care contracts should not be allowed to breach public policy, but no final decision about Dr. Harper’s actual contract has been reached yet. The case serves as a reminder to physicians to attempt to understand an MCO contract before signing it in order to prevent disagreement later.

In conclusion, these contracts are negotiable to varying degrees. Parties to these contracts benefit from adopting terms that both sides can live with. Failure to do so will only result in disagreements and difficult working conditions in the future. Such disagreements could obstruct the goal of providing quality medical care to patients of the MCO, which in the end, must be the ultimate objective of these relationships.

Guidance on Managed  Care Contracts

by Attorney Frank E. Reardon

July 1996

Healthcare Law, Litigation & Public Policy   Medical Licensure & Discipline ♦ Employment Board of Registration

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