Get Out of Bad Contracts

May 1, 2005

More groups are getting control over their revenue by rejecting unfair managed care contracts

Physicians are starting to wake up.

There is only so much you can accomplish by controlling overhead and policing collections. If you aren't getting paid enough, you can't succeed.

More and more small and large groups are getting control over their revenue by rejecting unfair managed care contracts -- we call it decontracting. It's a risky but highly effective way to deal with carriers who refuse to negotiate.

Decontracting helps physician groups overcome below-market reimbursement rates as well as harsh service exclusions and onerous billing rules and requirements.

How it works

Why is decontracting effective? Physicians who refuse to renew contracts are forcing health plans to either pay full list price for noncontracted services or undertake the time-consuming, problematic process of notifying patients that a popular physician is no longer in-network.

In most cases, carriers will find it easier and less costly to return to the negotiating table to work out a more equitable and physician-friendly reimbursement solution.

Physicians can win rate increases up to 20 percent when the carrier finally comes back to the table. These gains can go a long way toward restoring financial stability to practice groups hard-hit in recent years by Medicare reductions and flat or declining commercial payer reimbursements. Plus, groups that succeed in pushing back against an insurance carrier generally can count on a more positive and responsive relationship with the plan going forward.

Steps to decontracting

The first step in determining whether decontracting makes sense is to assess how reimbursement by a particular carrier compares to rates paid to other physician groups in similar specialties, both nationwide and locally. High, low, and median rates typically are available through medical societies or physician trade organizations. Also check out Physicians Practice's own Fee Schedule Survey, available in the Tools section of www.PhysiciansPractice.com.

Of course, avoid any appearance of antitrust. Make unilateral decisions and make it clear that you are not acting collectively with competing physician groups.

If the reimbursement value paid by a specific carrier falls at the median or below, look at the dollar volume provided by that carrier. Generally, it makes sense to focus initially on carriers that provide the smallest percentage of your total payments. That way, you put the least amount at risk.

If you need a rate increase to meet practice revenue objectives, let the healthcare plan know well before the existing contract expires. That gives the plan an opportunity to respond while preserving the option of decontracting if you can't agree on a price.

If a carrier can't or won't meet your price, give termination notice, generally 90 or 120 days out. This notice lets the carrier know that the group will be charging full-list, out-of-network price for patient services after the termination date.

Be sure to tell the carrier that if billed rates are not paid, you will balance-bill patients directly for the services provided. Patients receiving bills for services they thought were covered will quickly spark a customer-relations firestorm that most carriers prefer to avoid.


While the insurance company undoubtedly will attempt to inform patients that the decontracted physician group is no longer a network provider, in practical terms, shifting patients away from their existing or preferred doctor is easier said than done. This is particularly true if the practice is closely affiliated with a hospital, if the hospital has a contractual relationship with the carrier, or if no viable alternatives exist, as is often the case with many specialties.

Consequently, the payer will probably try to bring pressure to bear on your renegade practice through the hospital or hospitals with which you are affiliated.

Communicate with partners

One risk associated with decontracting is that the hospital could potentially revoke privileges for the physician or group and seek another physician group to provide the services in question. This outcome would have an adverse economic impact on the group that could extend well beyond the revenue associated with the carrier targeted with decontracting.

It is critically important to make the case to hospital executives that existing reimbursement rates just won't work, and that the plan's refusal to negotiate left no alternative but decontracting. It may also be worth noting that service to the hospital suffers because the payer reimbursement rate does not adequately reflect the level of service and coverage provided.

In practical terms, it is seldom in the best interests of the hospital to revoke physician privileges, particularly if the existing group represents a key specialty that is vital to the hospital's overall care mission. For that reason, it is likely that the hospital will be sympathetic to the physician's position.

In fact, in many cases where carriers have eventually agreed to meet a physician group halfway on a particular rate increase, hospitals have stepped in to make up the balance through a variety of subsidy or stipend payments.

Physician groups that go the decontracting route can also expect to draw heat from their colleagues, particularly family practitioners who refer to the decontracted practice. Again, a clear and collegial explanation regarding the financial necessity of breaking the agreement is the best response.

Practices that decontract should not expect immediate results. Indeed, health plans are betting that most physicians will not have the fortitude to walk away from a contract. Many will maintain a posture of inflexibility until the last possible moment. Therefore, staying the course and writing off the business is the only prudent way to proceed.

Ultimately, however, it is probable that the plan will seek to reopen negotiations and may indicate that it wants to work to meet the physicians' demands. But be forewarned: Some carriers may attempt to give the appearance of renegotiating in good faith, even as they claim to the hospital that the physician group is not negotiating fairly. In these situations, the group has to hold firm and educate the hospital about the specifics of the negotiations. Once the plan realizes that the renewed effort to bring pressure through the hospital is not working, they'll probably come back to the table and work quickly to reach an agreement.

In the long term

Beyond gaining a more equitable reimbursement arrangement, many groups that have successfully decontracted have found that ongoing negotiations and dealings with the plans typically become less contentious. If a plan understands that a physician group won't back down, it's generally more willing to address concerns in a timely and equitable fashion going forward.

Although decontracting is by no means a sure bet, it is certainly worth considering, particularly if the plan in question doesn't represent too great a piece of the payer mix. Physicians obviously need to weigh the risks associated with decontracting. But they should also think about the costs -- both to the bottom line and to morale -- of continuing to work under a contract that is a money-loser or only marginally profitable.

EM>Jeff Wescott, CPA, is national vice president of Consulting Services, Per-Se Technologies. He is responsible for developing and managing the financial, strategic, business advisory, and practice management services for clients throughout the United States. He can be reached via editor@physicianspractice.com.

This article originally appeared inthe May 2005 issue of Physicians Practice.