Provider contracts must be nimble in changing era

July 1, 2013

Protect yourself through a change in law clause that allows you to terminate a contract

 

In the past decade, the payer-provider reimbursement model has fallen under more comprehensive regulation because of new state transparency laws, increased regulation from state departments of insurance and, even more recently, certain provisions of the Patient Protection and Affordable Care Act (PPACA) affecting an insurer’s administrative processes and, indirectly, its profit model.  As the PPACA’s provisions continue to go into effect, insurers may find themselves needing to re-examine their sometimes too-standard provider contracts to account for an ever-changing health care landscape.  While this may be a manageable inconvenience with respect to new contracts or contracts that are set to expire, it could become a major headache when it comes to existing contracts that are locked in for a period of years - especially those with unfavorable terms for the insurer.

Among its many provisions, PPACA guarantees an increase in access and handcuffs insurers’ ability to deny eligibility in many instances.  Given the insurer’s decreased ability to pick and choose its customers,  PPACA therefore punishes inefficiencies by magnifying administrative costs.  It also puts greater emphasis on promoting and maintaining health and wellness and less emphasis on pay-as-you-go treatment, thus reimagining the ideal focus of the typical provider contract (especially as it pertains to incentives).  Ten years ago - even five years ago - none of these changes were foreseen.

            Likewise, it is difficult to predict what the next 10 years will bring, and an insurer’s ability to anticipate future changes is minimal.  One of the lasting legacies of the PPACA likely may be its proof that the landscape can change in an instant and its demonstration that the wisest insurers are those that maintain flexibility in their provider contracts.

            It may, therefore, be time for insurers to re-examine the escape clauses in their contracts with providers.  Most contracts contain “evergreen” clauses that keep the contract in effect for a certain (often lengthy) term and automatically renew unless one of the parties acts within a certain time before the expiration of the term.  These clauses historically have been to the insurer’s advantage because they lock providers into a reimbursement structure (albeit one often with a contracted escalator) and allow insurers to advertise the composition of their networks over a multiyear period. 

            The evergreen structure, by itself, does not allow an insurer to terminate the contract (or renegotiate its terms) until the end of a term, however.  Faced with regulatory uncertainty, insurers are moving toward the use of clauses that allow termination “without cause” upon reasonable notice. These clauses are now fairly prevalent, that has not always been the norm.  The use of such “without cause” clauses can backfire, however, because they almost always need to be reciprocal as providers demand equal protection.  What this means, of course, is that if a provider gets a better offer elsewhere, it may seek to terminate the relationship in favor of an insurer’s competitor.  As an example of how disputes over contract termination can turn disastrous (and expensive), one need look no further than the recent battles between KentuckyOne Health and managed care organization Coventry Cares in federal court in Kentucky.

            Perhaps a cleaner way that an insurer can protect itself in an uncertain regulatory world is through the use of “change in law” clauses.  These are clauses that allow parties to terminate or, at least, renegotiate their contract when a new law is introduced (or an old one is amended or repealed) and causes a material change in the parties’ expectations.  Although these clauses are common, they all too often are written so vaguely as to be of little use.  Indeed, there will almost always be room for disagreement over the definition of words like “material” and a war over whether the new law really changes anything at all.  PPACA, for instance, has the potential to greatly increase an insurer’s administrative expenses; whether that constitutes a change in law sufficient to allow an insurer to terminate an unfavorable provider agreement depends solely on how well the contract’s “change in law” clause is worded.  Ultimately, the best clause would be broad and specify that an insurer may re-evaluate a contract upon the passage of any law affecting access to health care and allow an insurer to pass any increased costs to its network.

Jeffrey J. Lauderdale is a partner in the Litigation Practice group of Calfee, Halter & Griswold LLP.  He can be reached at 216.622.8545 or at jlauderdale@calfee.com.