AHM 530 Transcript

AHM 530: Network Management and Course Overview
Network Management and Course Overview

Introduction
Health plans integrate the financing and delivery of healthcare within a system that seeks
to ensure health plan members' access to necessary services, provide timely high-quality
care, and improve the cost-effectiveness of care delivery. A health plan's success in
managing accessibility, quality, and cost largely depends on how well the health plan
manages its provider networks. This course explores how health plans develop and
manage provider networks. It begins with a description of the processes for network
development, followed by a discussion of programs for ongoing network management.
This lesson provides an overview of the most critical terms, issues, and considerations
relating to network management.
Following the completion of this lesson, you should be able to:
• Explain the meaning of network management and list some of the activities that are
typically included in this function
• Describe the role of a network management director, a contracting specialist, and a

provider relations representative in network management
• Define profiling and explain its significance in network management
• Describe some training and support approaches that health plans use to improve the
performance of network management staff
• Explain the relationship between network management, medical management, risk

management, member services, and claims administration
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Preview of Course Topics
Here are some of the topics we will be covering in this course.
The Road to Network This lesson explores the various considerations involved in
Adequacy achieving network adequacy, from the initial efforts required
to develop a plan and its accompanying provider network, and
the ongoing management and maintenance. Particular
attention is given to the strategies used by health plans to
determine the structure, size, composition, and goals for its
provider network.
Building the Network Once the health plan’s strategy is in place, it must assemble
the providers who will make up the network and assure they
are properly credentialed. This involves a dual focus on
structure (i.e. provider types and structure) and recruitment
(i.e. identifying, credentialing, and data verification).
Provider Contracting A critical component of building and managing a health plan’s

provider network involves provider contracting. Properly
determining and memorializing the terms of the parties’
respective rights and obligations in the provider contract is
important for numerous reasons.
Retention Whereas other lessons address the value of a health plan’s

provider network and offer practical information about
building the network and assuring network adequacy, this
course focuses on ongoing network management and provider
retention issues (i.e. “now you have built it – here’s how to
maintain it”).
Pharmacy Network Explores the details involved in building and managing the
Management network’s pharmacy component.
Provider Networks for Addresses the issues associated with provider networks for
Workers’ Compensation workers’ compensation, providing critical information for
those involved in this aspect of provider network development
and management.
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Network Management Key Terms and Module Overview

Important Key Terms
Before delving more deeply into a discussion of provider networks and network
management, this module first defines some of the basic terminology related to
networks and network management.
Provider A provider is any healthcare professional (an individual),

facility, or organization that renders medical care to a
health plan's membership
Practitioner The term practitioner is sometimes used to refer to an

individual provider who is trained and licensed or
certified to deliver a specific set of healthcare services.
Provider Network A provider network, also called a provider panel, is the

group of healthcare providers that a specific health plan
or managed care organization (MCO) has contracted
with to deliver medical services to its members in
exchange for negotiated compensation.
Provider Panel Another name for a provider network
The use of a defined network of providers is a distinguishing characteristic of managed

care health plans. The basic premise underlying the use of provider networks is that:
• health plans direct members in need of healthcare services to providers in the

network
• network providers agree to follow the health plan's policies for care delivery and
to accept lower rates of reimbursement
Network Management
Network management includes all activities conducted by a health plan to design,

assemble, monitor, and maintain a network of providers. For most health plan members,
interaction with a health plan means interaction with physicians, hospitals, pharmacies,
and other network providers.
Because most of a member's contacts are with providers, the health plan's development
and management of high-quality provider networks play a critical role in the satisfaction
of members. The health plan's approach to network management also impacts the group
purchasers' impressions of the health plan. Similarly, the satisfaction of participating
providers and their staff is strongly influenced by the degree to which they understand
and can easily implement the health plan's policies and procedures, and the receipt of
accurate payment in a timely manner. Effective network management contributes to the
administrative efficiency of the health plan itself.
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Network Management Key Terms
Here are some additional terms that will prove helpful to understand as you continue your
course studies:
Members Members, also called subscribers,

enrollees, or customers, are the
individuals for whom a health plan
provides healthcare services.
Accessibility Accessibility is a measure of the extent to

which a health plan member can obtain
necessary medical services in a timely
manner. Health plans conduct access to care
surveys to measure members' ability to
obtain satisfactory medical care on a timely
basis.
Quality Quality refers to a health plan's

success in providing healthcare and
other services in such a way that plan
members' needs and expectations are
met. One important activity within
the scope of the network
management function is to ensure
the quality of the health plans
provider networks.
Primary care Primary care is care that is provided directly

to a member without a referral from
another provider. Primary care focuses on
preventive care and the treatment of
routine illnesses and injuries. Primary care
services are most often rendered by general
practitioners, family practitioners, internal
medicine practitioners, pediatricians, and
obstetricians/gynecologists.
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Network Management History and Development
Network management, as a function, has fluctuated in focus and importance depending

on how healthcare has been delivered. Network management began with the
introduction of managed care. Health maintenance organizations (HMOs) required
patients to select a primary care physician who would help coordinate the patient’s
interaction with other providers with the help of a network management team. Basic
network management functions include:
• provider selection and recruitment

• setting, communicating, and monitoring adherence to utilization, referral, and
other healthcare delivery rules1
This changed when preferred provider organizations (PPOs) became dominant. The
network management function evolved to ensure that the health plan offered coverage
that was necessary to be competitive in a given market. Choice became more important
than cost, “any willing provider” was included in the network, and coordination was
significantly reduced.2
Several changes impacting the modern healthcare marketplace have caused shifts in
network management, with increased emphasis on managing healthcare access, cost,
and quality which include:
• New models of care delivery, such as patient-centered medical homes (PCMHs)

and accountable care organizations (ACOs), which are becoming increasingly
common
• Increased focus on value-based reimbursement models, such as episodes of care
or pay for performance
• Demand from plan sponsors for new products and benefit designs
• Enactment of the Patient Protection and Affordable Care Act (ACA) and the
associated advent of health insurance exchanges (which became operational as of
January 1, 2014) with attendant increases in the market of hew health plan
customers3
All these factors have led to an increased emphasis on the network management function.
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Patient-centered Patient-centered medical home (PCMH) is a model of care in

medical home which patients are engaged in a direct relationship with a
chosen provider who coordinates a cooperative team of
healthcare professionals, takes collective responsibility for
the comprehensive integrated care provided to the patient,
and advocates and arranges appropriate care with other
qualified providers and community resources as needed.4
Accountable Care Accountable Care Organizations (ACOs) are groups of

Organization doctors, hospitals, and other health care providers, who
(ACO) come together voluntarily to give coordinated high-quality
care to the Medicare patients they serve. 5
Episode of Care An episode of care (episode) is defined as the set of services

provided to treat a clinical condition or procedure.
Value-based A value-based bundle payment is a single payment for

bundle payment treating a patient with a specific medical condition across a
full cycle of care.6
Pay for The pay for performance reimbursement model provides

Performance financial incentives to hospitals, physicians, and other health
care providers to carry out improvements in the quality,
efficiency and value of healthcare, and achieve optimal
outcomes for patients.7
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The Scope of Network Management
Arranging and maintaining member access to providers who consistently deliver quality
medical services is a complex process. Most health plans offer benefit plans that cover
preventive, routine, urgent, and emergency healthcare. A health plan provider network
typically includes:
• physicians and acute care hospitals

• nonphysician specialists
• facilities that offer a broad spectrum of healthcare services
Network management may be further complicated by considerations for special

populations (i.e. elderly or low-income groups, or members who suffer a work-related
illness or injury). The network management function must ensure that the health plan's
provider networks comply with applicable laws, regulations, and accrediting standards.
The scope of the network management function varies greatly from one plan to another;
however, network management typically includes the following activities:
• Assessing members’ needs for healthcare and planning provider networks that
meet those needs as well as the MCO’s goals for accessibility, quality, and cost-
effectiveness
• Identifying and recruiting potential network providers
• Conducting selection activities, such as gathering and verifying credentialing
information and evaluating providers’ office practice set-ups
• Negotiating contract language and reimbursement
• Executing contracts
• Administering contracts and ensuring compliance with quality and utilization
programs and other contract terms
• Renegotiating and amending contracts
• Developing and maintaining current and accurate provider directories
• Orienting new providers and their staffs to the MCO’s processes
• Providing ongoing education, support, and service for providers and their staffs
• Resolving problems for providers and their staffs
• Monitoring provider practices for quality, utilization, and cost-effectiveness
• Conducting periodic recredentialing activities
• Ensuring that providers receive the reports and performance feedback they need
to manage utilization and quality
• Terminating providers
• Collecting and interpreting utilization, quality, and cost information on a network-
wide basis to improve the coordination of healthcare services across providers
• Evaluating providers’ satisfaction with the MCO
• Overseeing network-related activities that have been delegated to provider
organizations, such as independent practice associations (IPAs), physician-hospital
organizations (PHOs), and other entities
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Credentialing
Physician-Hospital A Physician-Hospital Organization (PHO) is a legal entity

Organization formed by a hospital and a group of physicians to further
(PHO) mutual interests and to achieve market objectives. A PHO
generally combines physicians and a hospital into a single
organization to obtain payer (i.e. health plan) contracts.
Independent An Independent Practice Association (IPA) is an organization

Practice typically established primarily to contract with third-party
Association (IPA) payers. It is a legal vehicle developed to allow physicians who
have no other corporate or legal relationship to constitute
themselves as a group for contracting purposes.
An important activity within the network management function is ensuring the quality of
the health plan’s provider networks. Credentialing is a review process conducted by or for
a health plan to determine the current clinical competence of a provider and to ensure that
the provider meets the health plan's standards. During the credentialing process, the
provider's credentials (the documentation related to licenses, certifications, training, and
other qualifications) are obtained and verified. A health plan committee (made up of the
provider's professional colleagues) reviews the credentials to determine whether the
provider meets the health plan's preestablished criteria for participation in the network.
Recredentialing is a health plan's periodic reexamination and verification of a provider's
qualifications to ensure that the provider still meets the health plan's standards for
network participation.
Relationship Between Network Management and Providers
Another significant aspect of network management is establishing and maintaining

good relationships with providers and their staff. A friendly relationship between
network management and providers may influence providers and their staff to become
familiar with and comply with the health plan's clinical and administrative policies.
Although the two concepts are closely related and may be performed by the same
staff, some health plans distinguish between provider relations and provider service
activities. Provider service is a reactive network management activity that focuses on
problem-solving or responding to specific requests from providers. An example of
provider service is helping a provider expedite a request for procedure authorization.
Other health plans consider provider relations and provider service to be the same
thing and use the two terms interchangeably.
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Organization of the Network Management Function
From an organizational perspective, the network management function is usually a self-

contained entity, either as its department or as a division of another related area. Many
health plans have a sub-unit within network management, or even a separate
department, for credentialing activities. Although some health plans have staff members
who focus exclusively on credentialing activities, in other health plans, the network
management staff members share credentialing activities along with a variety of other
network-related responsibilities.
A health plan with multiple offices in its service area may decentralize some or all network
management activities. Each health plan determines which network activities will be
centralized and which will be decentralized. A large health plan may prefer to handle most
(or all) network management functions through a single network management unit based
at the company's national, regional, or state headquarters. Alternatively, the health plan
may use local staff based in the plan's service area to perform many network activities. In
many cases, the health plan uses a centralized approach for some activities while
decentralizing other functions.
Example A: A health plan that maintains a staff within the plan's service area to recruit
and educate providers may also have a centralized provider-inquiry phone unit that
providers can call to request authorization of referrals or procedures or ask questions
about the plan.
Example B: Local staff collect credentialing or performance information from providers

and then forward the information to a centralized data input unit, rather than maintaining
records at the local level. A centralized data unit can help ensure data integrity, which is
essential for the accuracy of credentialing files, performance reporting, and provider
directories.
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Organizational Structure of Network Management
The organizational structure of the network management function often varies according
to the size and the geographic scope of the health plan.
Example: Smaller plans typically have more integration among activities and less
specialization of roles. The network management directors of small plans are more likely
to be involved in day-to-day network management activities, such as recruiting,
contracting, and providing performance feedback to providers.
In small plans, the chief executive officer or chief operating officer may have direct
involvement in managing networks, although this structure is rare. Larger health plans
may have separate network management staff for different types of providers. For
example, the health plan may have units specifically for developing and managing
pharmacy networks, hospital networks, and ancillary service networks.
If the organization covers a multistate or multiregional service area, there may be staff in
each of several locations to handle the respective territories (with a unit at the corporate
site to cover administrative functions). Large health plans often have a central contracting
unit for tertiary institutions, hospital systems, and medical vendors (i.e. laboratories) whose
services cut across state lines, with local staff for geographic-specific providers.
Network Management Staffing
The numbers and types of personnel who perform network management activities differ
from one health plan to another. The specific duties performed by network management
staff also vary. Although there is no standard approach to staffing the network management
function, many health plans have three basic categories of network management personnel:
• Directors
• Contracting specialists
• Provider relations representatives
Network Management Directors
The nature of network management supervision varies greatly among individual health
plans. In some health plans, especially in less mature health plan markets, the medical
director has the ultimate authority over all network management activities. The medical
director is a physician who oversees the health plan's medical management programs. The
medical director may participate in the day-to-day network operations with providers
(recruiting, contracting, educating, and evaluating). In other cases, the medical director
oversees network activities but is not involved at an operational level. Medical directors for
health plans that have a strong clinical orientation, especially provider-sponsored health
plans, are generally very involved with most network management processes.
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Utilization and Quality Management Programs
Utilization Utilization management (UM) means managing the use of

management (UM) medical services to ensure that a patient receives necessary,
appropriate, and high-quality care in a cost-effective manner.
Quality Quality management (QM), also called quality assurance (QA)

management or quality improvement (QI), is an organization-wide process of
(QM) measuring and improving the quality of the healthcare provided
by a health plan.
In other health plans, the vice president of healthcare services, the vice president of
networks, the director of provider relations, or a similar officer oversees network
management while the medical director focuses on clinical issues, such as utilization
management (UM) and quality management (QM) programs.
Still, other health plans divide the oversight of network management activities between
two or more plan officers.
Example: A health plan's medical director may oversee all networks except the pharmacy
network, which is overseen by the pharmacy director. In other plans, the medical director
oversees some network management activities (i.e. credentialing and performance
management), and a nonclinical officer is responsible for other network-related activities
(i.e. contracting and provider service).
Many providers prefer having a medical director involved in at least some network
activities. This is due to the belief that a medical professional will have a better
understanding of provider needs than a nonclinical network manager. In any case, the
health plan officer in charge of network management needs a thorough knowledge of basic
health plan concepts and the laws, regulations, and accrediting standards affecting
networks.
This officer not only oversees all network management functions but also serves as a
network management liaison to other members of senior management within the health
plan. The network manager communicates with and, as needed, works with other senior
managers to develop policies and address problems that are network related.
Example: The network management director works with managers from the claims
function to develop claims submission and processing policies that meet the needs of both
the plan and its providers.
An executive-level committee at the health plan may oversee and set policies for network
management. Some health plans have executive-level committees dedicated specifically to
networks and or credentialing. At other health plans, the QM committee is the executive-
level committee that oversees network management activities. The director of network
management reports to the applicable executive-level committee and may be a member of
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that committee. The committee overseeing network management typically reports directly
to the health plan’s board of directors.
Organizational Committees
Some health plans, and the provider organizations in their networks, have formed joint
committees to deal with network issues. This can involve changes to credentialing criteria
or changes to programs that manage provider performance. Committees that include
representatives from both the health plan and the provider organization may result in
closer collaboration between the two parties.
Provider organizations such as IPAs and PHOs can have their board of directors and
committees to address health plan activities. When a health plan contracts with one of
these provider organizations, the director of the network management department or
other senior network management staff member can serve as a liaison between the
provider organization and the health plan. The liaison ensures regular communication,
solicits input from the providers, and follows up on the implementation of any provider
organization board or committee decisions. For instance, the network management
director can communicate UM and QM policy changes to the provider organization,
obtain information about satisfaction with the support provided by the health plan's
provider relations representatives, and relay provider suggestions about administrative
processes to the appropriate health plan department.
Contracting Specialists
In many health plans, the network management department includes personnel whose
primary responsibility is to negotiate and execute contracts. Larger health plans further
specialize in this function by having some staff members handle contracts with
individual practitioners and others focus on contracting with provider organizations and
facilities.
The contracting staff members need to understand provider reimbursement and other
aspects of health plan finance to be able to analyze the projected utilization and the
costs associated with a proposed network of providers. The contracting personnel must
coordinate activities with the health plan's claims, information systems, and marketing
departments to ensure that the terms of provider contracts can be efficiently
administered by the company's systems.
Example: Contracting personnel should consider the claims administration department's

capability to process claims before determining a contract's terms on the time for claims
processing. The health plan's legal department should review all contracts for
compliance with applicable laws and regulations.
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Provider Relations Representatives
Provider relations representatives, also known as network management field staff, are
responsible for:
• recruiting and assisting with the selection of new providers
• profiling (in some plans)
• credentialing (in some plans)
• evaluating a provider's medical practice set-up
• conducting initial orientation of the provider and staff
• educating providers about health plan developments
• rendering provider service
• improving provider satisfaction
Profiling: One Tool in Provider Selection
Profiling, also known as provider profiling, is the collection and analysis of information
about the practice patterns of individual providers. Profiling produces information on
parameters such as:
• quality of care
• outcomes
• patient satisfaction
• utilization of resources
• cost-effectiveness
• compliance with the plan's protocols
Some health plans use profiling information to select network providers whose practice
patterns appear to be compatible with the goals and policies of the network. The profiles
for network candidates are often not available unless the provider has previously
participated in one of the health plan's networks. Sources of profiling information about
applicants for the network include:
• health plan's records for claims, QM, and UM

• data gathered by health plan purchasers
• reports from the providers applying for the network
A more common use of profiling is to measure the overall performance of providers

already in the network. During provider evaluations, profiling provides the health plan with
a base of objective measurements and identifies problems to address. Data for provider
profiling of current network providers may come from a variety of sources including
claims, encounter forms, and other periodic reports submitted by the providers. Network
providers need performance feedback on a regular basis to assess their performance
relative to the standards of the health plan, national standards, and the performance of
their peers. Performance feedback also identifies areas of deficiency for the provider.
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Applying Performance Measure

In applying performance measures, a health plan determines the provider's actual
performance on an activity and then compares that performance to the standard or
expected level of performance, specified in the measure. Standards can be developed
internally or externally. External standards are based on outside information that can be
found in the published industry (i.e. wide averages or the best practices of recognized
industry leaders).
Typically, the medical director or another clinical senior manager from the health plan then
discusses the results of the performance analysis with the provider. Provider relations
representatives sometimes collect, organize, and assist with the analysis of profiling
information. Provider relations representatives may help providers with administrative
problems that are hampering performance.
A provider profile focuses on patterns of a provider's care rather than on the provider's
specific clinical decisions and expresses those patterns as a rate or measure of resource use
during a defined period.
Credentialing
Collecting and verifying credentialing information may or may not be among the
responsibilities of provider relations representatives. Some health plans choose to establish
a separate in-house unit for credentialing activities, or credentialing may be managed by the
quality management function. Other health plans delegate credentialing information
collection and verification to provider organizations or credentials verification organizations
(CVOs). One reason to separate credentialing from recruiting and provider relations
activities is to set up a "checks and balances" system for the network. Separate credentialing
help a health plan ensure objectivity when selecting and recredentialing network providers.
Some health plans believe that provider relations representatives are a logical choice to
perform initial credentialing and periodic recredentialing because of the representatives'
knowledge and proximity to area providers. Credentials verification can often be
performed in a variety of ways, including through a portal.8 A health plan staff member
usually makes a site visit to assess the provider's facilities and practice procedures. Since
provider relations representatives already call on providers, the health plan may find it
more efficient to let the network management field staff gather the extensive
documentation required for credentialing and recredentialing.
Example: During its recredentialing of Dr. Harry Callahan, Presidio Health Plan developed
a provider profile that helped the health plan determine how well he met Presidio’s
standards. The report included cumulative performance data for Dr. Callahan and
encompassed all measurable aspects of his performance. This report included such
information as the number of hospital admissions Dr. Callahan had and the number of
referrals he made outside of Presidio’s provider network during a specified period.
Presidio also used process measures, structural measures, and outcome measures to
evaluate Dr. Callahan’s performance.
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Provider Education
Because provider relations representatives are often a provider's main source of

information about the health plan, the representatives must be familiar with other aspects
of the plan's operations as well as with network management. Some of the operational
areas and specific issues that representatives often address in their education of providers
and their staffs are identified in Figure A.
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Figure A: Examples of Operational Areas and Issues that Representatives Address
Membership eligibility: - What is the frequency of - What criteria does the plan use to
payment? measure patient satisfaction?
- How can active and formerly
active members be identified? - What is the basis for any - What are the plan’s policies and
incentive payments? procedures for ensuring the
- How can the provider confidentiality of member
determine which benefit plan - What are the member information?
and copayment levels apply to a copayment amounts, and who
member? collects these? Practice changes:
Benefit coverage: Authorizations and referrals: - When the provider practice

experiences change among its
- Which benefits does the health - Which services require practitioners that may affect
plan cover and which are referrals or authorizations, access to services, how should the
excluded for each type of and what are the associated provider communicate these
managed care product offered? procedures and appeal changes to the MCO?
mechanisms?
Claims: Health plan information /
- Who within the health plan updates:
- What are the procedures for should be contacted about
submitting claims? questions concerning - How will the practice be notified
authorization? about new MCO products or
- Which coding system should
procedure changes?
the provider use? Medical Practice Guidelines:
Due process:
- What are the rules for claims - Which preventive services
adjudication, including any should primary care physicians - What procedures are followed
special requirements for unusual (PCPs) provide? when there is a sanction against a
services? participating provider?
- Which protocols apply to
- How long does the health plan different provider specialties? - What are the MCO’s criteria for
usually take to turn around credentialing and periodic
“clean claims” (claims that are - What other medical policies recredentialing?
complete and accurate when does the plan have in place?
submitted and do not require In-network referrals:
any medical review)? Quality management
programs: - Who are the other participating
- How does the provider physicians, practitioners, ancillary
interpret and follow up on - What is the scope of the service vendors, and institutions
information included in a MCO’s quality management that the practice can use or refer
remittance statement, especially program? patients to?
for any adjusted claims?
- What are the requirements
Reimbursement: for provider participation in
QM?
- How much can the provider
expect to be reimbursed for
services?
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Improving Provider Satisfaction

Given the complexity of the relationship between a health plan and its networks,
provider relations representatives or other health plan personnel should conduct
periodic surveys of their providers and their providers' staffs. Such surveys assess
provider understanding and satisfaction with the following:
• policies and procedures with which providers must comply

• communication and service from the health plan
• the extent to which the organization upholds its obligations for timely and
accurate payment, the quick turnaround time for authorizations, and efficient
methods for determining membership eligibility
The feedback from provider surveys allows the network management department to
revise its service protocols and to facilitate changes in other operational areas as
needed.
Provider satisfaction is discussed more fully later in this course in our look at provider
retention issues.
Organization of the Provider Relations Staff
To distribute updates from the plan and to identify and resolve any problems, the number
of provider relations representatives should allow for regular communication with all
providers. It is usually more efficient to have the field staff based in regional locations that
are close to the offices they cover, rather than in the health plan's corporate headquarters.
Regional locations make it possible for a representative to call on providers in person and
visit many offices in a day. However, many health plans have such large panels that provider
relations representatives cannot make on-site visits to all individual practice sites. Some
health plans limit in-person visits to primary care providers.
When a health plan has provider relations representatives who work outside the
corporate location, the network management department establish standard policies and
procedures to guide them, so they can serve network providers adequately and resolve
problems on a timely basis. By developing standard service and reporting procedures for
all processes, the network management department ensures that its field representatives
can provide consistent service for its providers and identify common issues or problems
that may need to be addressed at the corporate level.
Support and Training for Network Management Staff Overview
Network management functions encompass a variety of activities that require different

skill sets. Staff who recruit providers benefit from having the following:
• sales training and experience

• outgoing personalities
• strong written and oral communication skills
• aptitude for managing details
• knowledge of the health plan's policies and procedures
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Personnel in charge of service or provider education require strong customer service skills.
Senior staff within network management must have the necessary background to interact
with other departments, work with the physician and hospital leaders, understand the
complexities of contracting and reimbursement, and manage the broad range of activities
associated with developing and managing provider networks.
Regardless of their roles within the department, all network management staff share a
common need for detailed knowledge about the health plan's operations and for support
mechanisms to help them work with a variety of provider specialties and services. A health
plan that wants to improve the performance of its network management staff may decide
to provide some of the following types of support and training:
• Education about internal plan operations

• Forums for sharing information within the department and within the health
plan
• Information systems support
• Cross-training in the different network management activities
• Communications support
Education About Internal Plan Operations
To serve participating providers effectively, network management staff should receive a

thorough orientation on internal plan operations including:
• particularly in the areas of provider reimbursement

• data reporting
• claims submission
• authorizations and referrals
• medical management protocols
• benefit coverage for the different products
Because the departments that handle these functions usually have in-depth training for
their employees, it is particularly helpful if network management staff attend the relevant
sessions or modules of those orientation programs.
Forums for Information-Sharing
Network management staff should have periodic staff meetings to discuss problems and
potential solutions. Because many issues affecting the network have implications for other
operational departments, interdepartmental meetings at both senior and operational
levels can improve operations throughout a health plan.
Example: Network management personnel may negotiate contracts that satisfy providers
and improve the health plan's financial position, only to find out later that the terms and
provisions of the contracts are inconsistent with standard administrative procedures. The
special intervention required to administer these nonstandard contracts may reduce the
advantages that the contracts offer. Through interdepartmental meetings, network
management personnel can learn how to construct contracts that help the health plan
achieve its business goals while still conforming to operational standards.
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Technological Support
A health plan's information system typically includes a great deal of information relevant
to network management such as:
• data on each participating provider

• fee schedules and coding rules
• claim status
• utilization data
• authorizations
• referrals
• membership eligibility
• benefit coverage
The network management staff needs access to this information and field representatives
need remote access capability. A provider should also be able to contribute to the health
plan’s system through a portal.9
Because network management activities involve significant telephone use, health plans
usually have sophisticated phone systems to track the following service statistics:
• call volume
• timing of calls
• average time that callers
• spend on hold
• call length
• call abandonment rates
Many health plans include automatic call distributors in their phone systems. An
automatic call distributor (ACD) is an automated system that answers telephone calls with
a recorded message, gives the caller instructions on how to reach a specific department,
and then directs the call to a specific unit based on preset criteria, such as the caller's
area code or another code that the caller enters on the phone's keypad.
Cross-training
Given the dynamic nature of the health plan industry, health plans should be proactive in
cross-training network management staff, both from a functional and a geographical
perspective. Events such as contracts with new purchasers or the enlargement of the health
plan's service area can create the need to expand networks in a relatively short period of
time. As a result, staff members who have previously supported specific functions or specific
territories may suddenly be required to participate in new activities. Staff can better meet
the evolving needs of their health plan when they understand a broad range of related
functional areas such as the following:
• provider appeals and grievance processes
• reimbursement and claims processes
• utilization and quality management programs
• programs for initial and ongoing member education
19
Communications Support
Provider relations representatives must communicate a considerable amount of
information to participating providers. Network management staff should have access to
and make use of a variety of communications tools to ensure that providers receive
timely, complete, and accurate information. These communications tools include:
• quick reference summary sheets

• newsletters
• training seminars
• mass emailing systems
a portal-based information sharing system
The Relationship Between Network Management and Other Health Plan

Functions
Network Management and Other Health Plan Functions
In the course of conducting network development and management activities, the

network management staff has regular interaction with several other health plan
departments including:
• medical management
• risk management
• member services
• claims administration
These other departments regularly exchange information with network management

personnel and may provide specific services related to networks. Cooperation and
communication among the various functions enhance each department's efficiency and
effectiveness.
20
Medical Management
Medical management, also known as care management, encompasses all the activities
that health plans and their providers engage in to maintain or improve quality service
levels, meet budget projections for medical services, and respond to accreditation and
regulatory requirements. Medical management includes:
• the health plan's policies, processes, and activities for utilization management
• quality management
• The resolution of member complaints and grievances
• medical policy development
• medical technology assessment
• formulary management
Medical management attempts to integrate clinical services from various providers in a

way that maximizes the benefit to the plan member while avoiding excessive utilization of
healthcare resources. An important purpose of medical management is to improve the
member's overall health status over time by coordinating care across individual episodes
of care and the different providers who treat the member.10
Many of the activities of network management are closely related to those of medical
management.
Example: Profiling is a means of managing provider performance to ensure high-quality

care. Network management and medical management often work together to develop
programs that meet the needs of both functions. Some health plans have regional
medical directors who provide support to the provider relations staff.
Example: A regional medical director may accompany a provider relations representative

on visits to providers, particularly if a provider has repeatedly failed to comply with
administrative requirements or if the provider has questions or problems that involve
clinical issues. Provider relations representatives support medical management directors
and staff by coordinating special projects (i.e. forums with practitioners to introduce new
QM programs).
Other specific medical management activities that also involve network management are:
• health risk appraisals to identify members at risk for an illness or injury

• outreach programs to encourage the use of preventive health services
• demand management and disease management programs
• clinical practice guideline development and implementation
• outcomes management
• utilization review and authorization systems for referrals and procedures
• credentialing of providers
• case management
A health plan's processes for provider selection, reimbursement arrangements, and

performance management often rely heavily on quality, utilization, and cost information
from the various medical management programs.
21
A formulary is a listing of drugs, classified by therapeutic category or disease class, that are
considered preferred therapy for a given health plan population and that are to be used by a
health plan's providers in prescribing medications.
Risk Management
Risk management includes all activities that a health plan undertakes to protect the plan
against the financial loss associated with the delivery of healthcare services and to protect
its members against harm from medical care. The purpose of risk management is:
• to identify and evaluate exposures (actual or potential) to risk

• to prevent or minimize any financial loss or harm to a member that may result from
such exposure
In some situations, health plans may be held liable for negligent care rendered by plan
providers. To ensure healthcare quality and reduce the risk of negligent care, health plans
often implement some (or all) of the following measures:
• credentialing and recredentialing conducted in accordance with applicable federal

and state regulations, accrediting agency guidelines, and court decisions
• performance management programs that include quality indicators
• compliance with state and federal laws and regulatory requirements for
accessibility, adequate numbers and types of providers, and contract provisions
Another type of legal risk for health plans is the possibility of lawsuits from providers who:
• are not allowed to join a network

• have their privileges restricted by a health plan
• are dismissed from the network
The health plan must be aware of and comply with applicable antitrust and
antidiscrimination laws to avoid this type of exposure to risk. Health plans should also
protect the confidentiality of information discovered during the credentialing process.
Health plans must also manage the risk of financial loss that may result if the actual total
cost of healthcare services exceeds the budgeted cost. One common way to manage this
risk is by transferring some of the financial risk to providers through risk-sharing
reimbursement arrangements. Health plans are careful to comply with applicable laws and
regulations when developing reimbursement arrangements and to avoid creating a
compensation approach that might induce providers to deny needed care to members.
More information about reimbursement arrangements is covered in the course in our

discussion of contractual issues.
22
Member Services
Member services is the department responsible for:
• helping members with any problems

• handling member grievances and complaints
• tracking and reporting patterns of problems encountered
• enhancing the relationship between the members of the plan and the plan itself
Member services also monitor overall member satisfaction with providers and care.
Through its processes for assessing member satisfaction and addressing member complaints
and grievances, member services can identify trends that may indicate problems with
accessibility or provider performance. Some of the complaints and problems tracked by
member services that are of interest to network management personnel are listed in Figure
B.
Figure B: Healthcare Accessibility and Quality Concerns Reported by Member Services
Healthcare Accessibility and Quality Concerns Reported by Member

Services
• Excessive length of time to obtain an appointment with a provider

• Long waiting time in the provider’s office
• Inconvenient or inadequate office hours maintained by the
provider
• Provider unavailable after office hours
• Long travel time or distance to the provider’s practice site.
• Deficiencies in cleanliness, safety, or equipment at provider
facilities
• Perceived lack of courtesy and professionalism from the provider
or staff
• Inadequate explanation of the member’s condition and treatment
options
• Delay in treatment or referral from the member
• Perceived inappropriate treatment or referral of the member
Member services may directly affect access to services by showing members how to
obtain care from the provider network. Member education can explain:
• concept of a provider network

• meaning and scope of covered services
• role of a primary care physician (PCP)
• way in which a member may select a PCP or change to a different PCP
• health plan's system for authorizing referrals, procedures, and hospital care
23
Claims Administration
The network management function relies on the health plan's claims administration
department for much of the information needed to manage provider performance. Claims
administration is the process of receiving, reviewing, adjudicating, and processing claims
for either payment or denial. By examining claims, the health plan can determine the
number and type of healthcare services delivered to plan members. This information
allows the health plan to understand each provider's practice patterns and level of
compliance with the health plan's procedures for the delivery of care. It also monitors the
number and types of services provided by the entire network.
Providers compensated through a capitation reimbursement arrangement do not submit

claims. Instead, capitated providers send encounter forms to supply the health plan with
information about members' healthcare visits, diagnoses, treatment, and plans for follow-
up care. The provider relations staff can facilitate the processing of claims and encounter
form information by helping providers stay up to date on the codes that they use to
indicate diagnoses and procedures performed.
Lesson Summary
After completing this introductory lesson, you should understand the basics of the network
management function, including:
• staffing of this function

• activities that are typically conducted by the network management staff
• how these activities relate to other health plan operations
You will have also gained an understanding of profiling and how it might be employed by
health plans to select providers for their networks. You will understand that a more
common use of profiling measures the overall performance of providers already in the
network.
It is important to recognize the impact of external forces on a health plan's approach to

network management You will explore how legal requirements, quality standards, and
purchaser and consumer expectations all influence how a health plan develops and
manages networks in future lessons.
24
Recommended Additional Reading
Evans, James. “Network management: Why major change is on the way,” Health
Management Technology Online, October 8, 2012, available at
https://www.hcinnovationgroup.com/clinical-it/article/13005184/network-management-
why-major-change-is-on-the-way (accessed August 2019)
Evans, James. “Network Management: Are You Ignoring a Critical Asset?” Health
Management Technology Online. Oct. 8, Oct. 31 and Dec. 20, 2012.
James, Julia, “Health Policy Brief: Pay for Performance,” Health Affairs Online, October 12,
2012.
Madden, Susanne, “Physician Profiling,” Physicians Practice Magazine, October 1, 2010, vo.
20.
“Care Management: Implications for Medical Practice, Health Policy, and Health Services
Research,” Agency for Healthcare Research and Quality, (April 2015), available at
https://www.ahrq.gov/professionals/prevention-
chroniccare/improve/coordination/caremanagement/index.html.
25
Notes:
1
Evans, James. “Network management: Why major change is on the way,” Health Management Technology
Online, October 8, 2012, available at https://www.hcinnovationgroup.com/clinical-
it/article/13005184/network-management-why-major-change-is-on-the-way (accessed August 2019).
2
Id.
3
Evans, James, supra.
4
https://www.pcpcc.org/resource/patient-centered-medical-home-what-patient-centered-medical-home-
pcmh
5
https://innovation.cms.gov/initiatives/aco/
6
https://ww2.mc.vanderbilt.edu/eoc/46938
7
James, Julia, “Health Policy Brief: Pay for Performance,” Health Affairs Online, October 12, 2012.
8
Evans, James. “Network Management: Are You Ignoring a Critical Asset?” Health Management Technology
Online. Oct. 8, Oct. 31 and Dec. 20, 2012. Page 6.
9
Id.
10
“Care Management: Implications for Medical Practice, Health Policy, and Health Services Research,” Agency
for Healthcare Research and Quality, (April 2015), available at
https://www.ahrq.gov/professionals/prevention-
chroniccare/improve/coordination/caremanagement/index.html.
26
AHM 530: The Road to Network Adequacy, Purposes, Processes, and Markets
The Road to Network Adequacy, Purposes, Processes, and

Markets
Introduction
Health plans strive to deliver high-quality, cost-effective healthcare services to members.

This is accomplished through the development and management of a plan’s provider
network, which is the set of doctors, hospitals, and other healthcare practitioners that are
part of the plan. Since the plan’s members interact with the organization primarily through
its providers, the steps the plan takes to design, assemble, monitor, and maintain its
network are critical to the success of the plan.
A key concept for measuring plan success is network adequacy, which refers to a health
plan’s ability to deliver the benefits promised by providing reasonable access to the
appropriate types and number of providers in the appropriate geographic distribution
according to the needs of the plan’s members.
This lesson explores the various considerations and steps involved in achieving network
adequacy, from the initial efforts required to develop a plan and its accompanying provider
network, through the ongoing management and maintenance. What becomes clear is the
importance of focusing on the following items:
• Markets
• Stakeholders
• Goals
• Compliance
• Network construction
After completing this lesson, you should be able to:
• Understand the importance of conducting market analysis and the strategies for
conducting market analysis as a first step to developing and managing a successful
health plan provider network
• Describe how the expectations of key stakeholders can affect the successful
development and management of a plan’s provider network.
• Understand the areas in which a health plan should establish goals before beginning
to develop or modify a provider network
• Explore the legal and regulatory landscape impacting network development and
management
• Consider the principal factors relevant to developing and maintaining provider
networks whose structure, composition, and size are adequate to meet the needs of
plan members and ensure reasonable access to services
1
Phase 1: Market Considerations

Market Analysis
Before establishing a provider network, a health plan must understand the characteristics of
its proposed service area, the needs of its proposed members, and its proposed products
and focus. Plans use market analysis to gather and analyze information on:
• characteristics of the market (i.e. market maturity)
• providers
• competitors
• economic conditions
• employers
• types of industries
• service area
• general population
With continuing advances in technology, health plans are now able to use increasingly
sophisticated data analytics tools to conduct detailed network comparisons and analyses.
Market Maturity
One purpose of analyzing the market is to understand the level of health plan activity in a
market—referred to as market maturity. The level of market maturity often indicates how:
• knowledgeable providers and consumers are about health plans
• receptive providers and consumers are likely to be to health plans
• active competition is among health plans in the service area
Markets at different levels of maturity require different network management approaches
and strategies.
Example: In a market with little health plan activity, consumers and purchasers are likely to
be more receptive to loosely managed plans (i.e. Preferred Provider Organizations (PPOs)
and Point-of-Service (POS) plans) than to tightly managed plans (i.e. Health Maintenance
Organizations (HMOs) or Exclusive Provider Organizations (EPOs)).
2
The Provider Community
A critical component of any market analysis is the assessment of the provider community.
The plan needs to understand key demographic details (i.e. types, numbers, and locations)
of healthcare providers in the proposed service area, utilization patterns, and healthcare
costs. Providers include physicians, hospitals (the services they provide and the number of
beds), and other practitioners (i.e. nurse practitioners, therapists, and clinicians) and
facilities. Analysis of the provider community also includes understanding the locations of
the providers, including distances between provider locations and members’ homes and
workplaces as well as any geographic barriers that may affect access.
It is critical for the health plan to also understand existing referral patterns, established
provider relationships in the service area, and the hospital admitting and procedural
privileges. Many physicians have established relationships with healthcare professionals in
their communities. In some communities, groups of physicians may be affiliated with one
entity (i.e. a hospital, physician group or organization, or physician / hospital-type
organization). Understanding the existing referral patterns and the relationships of the
providers in the proposed service area allows the plan to utilize network approaches and
techniques reflective of these relationships.
Example: If many of the physicians in the service area are affiliated with a single entity, the
plan will most likely need to contract with that entity, while if most physicians are not
affiliated with a single entity, the plan has more contracting options.
Both the level of market maturity and the presence of provider organizations can
significantly affect network development and management strategies.
The Competition
Competitive analysis includes understanding and assessing other health plans in the market.
This assessment should include the following types of information for each competitor plan
in the proposed service area:
• Competitor product types and premiums
• Competitor network characteristics (i.e. provider numbers, types, and locations and
physician-to-member ratios)
• Network overlap (where the same providers participate in multiple networks) and
exclusivity (where certain providers are exclusive to a single health plan network)
• Network volatility (i.e. the number of providers added and dropped from
competitors’ networks and geographies where competitors are strengthening
networks by adding providers focusing efforts on network expansion in new areas, or
contracting networks)
• Cost-containment strategies used by competitors
• Provider satisfaction with competitors
3
Economic Conditions
Network design and management can be influenced by the level of growth or decline in an
economy. A growing economy typically leads to increases in employment, population
growth, and eventually growth in the medical community (i.e. more hospitals, physicians,
and other providers). Conversely, a declining economy likely would have the opposite effect.
Economic growth in a market often indicates an influx of new, younger workers attracted by
employment opportunities. The addition of younger workers lowers the average age of the
population, which influences the healthcare services that will be needed.
In a declining economy, younger workers may leave the area in search of new jobs. The
remaining population may be older and more subject to chronic health problems. This
resulting impact on the nature and cost of health services is needed to meet the
population’s needs.
Employers and Types of Industries
Employer-provided insurance remains a cornerstone of the US health care system, covering

millions of individuals. Analysis of the employers in the area is an important component of
market analysis. Part of this analysis includes understanding the size of employers. While
the Patient Protection and Affordable Care Act of 2010 (also known as the Affordable Care
Act (ACA), Healthcare Reform, or Obamacare) imposed new requirements for employers of
more than fifty (50) full- time equivalent (FTE) employees to offer certain types of coverage
or face penalties. Large employers (more than 1,000 employees) tend to adopt health plans
more quickly and are likely to offer more health plan options than smaller companies.
Smaller companies may have less experience with health plans and lack the financial and
administrative resources necessary to offer multiple health plan options.
The industry mix in the target market also has implications for the provider network.
Manufacturing companies or other organizations with union-represented employees may
emphasize different concerns for their workers than would be typical for higher-wage
professionals, who generally prefer high levels of benefits and less restricted access to
providers. The type of industry in a market may also affect the composition of a network.
Example: Manufacturing and heavy industry jobs tend to have more back injuries, while
carpal tunnel injuries are more common in computer-oriented businesses.
A 2018 survey of employer health benefits made the following observations that underscore
the importance of analyzing employers as part of market analysis:
• Plan enrollment patterns vary by firm size1
• Plan enrollment patterns differ across regions2
• Plan enrollment patterns differ by industry
Figure 1 provides additional information regarding these patterns.
4
Figure 1: Distribution of Health Plan Enrollment for Covered Worker, by Firm Size, Region,
and Industry, 2018
The Service Area
Analysis of the proposed service area includes understanding whether it is primarily rural,
urban, or suburban.
Rural communities have limited numbers and types of providers and facilities (including
fewer hospitals). Making it difficult for health plans to build a comprehensive network that
satisfies member demand for a complete range of healthcare services. In rural areas with
few providers, the health plan may have little or no choice about which facilities to include
in its network. Small cities (those with populations under 500,000) share some of the
characteristics of rural areas.
Employers in a city with two hospitals may be reluctant to purchase a health plan that
includes just one of the hospitals because consumer loyalty may be split. Another concern is
channeling patient volume to one of the hospitals. This could drive the other hospital out of
business and reduce local choices, effectively reducing the negotiating power of health
plans.
5
Urban areas (population greater than 500,000) have larger numbers of physicians and
facilities, offering health plans more flexibility in provider contracting. With more providers,
there may be increased pressure on the plan to offer larger networks. This, in turn, can
complicate the plan’s management of costs, quality, and satisfaction. A popular alternative
is for a plan to offer narrow networks which are smaller, more selective networks,
regardless of the number of physicians and facilities.
Hospital contracting generally is easier in large urban areas. The overcapacity of inpatient
hospital resources is pervasive throughout markets of all sizes. In large urban centers, the
combination of overcapacity and a large number of healthcare facilities allows health plans
to more easily negotiate discounted prices and risk-sharing arrangements with hospitals.
Suburban areas surrounding a city on network development depends on the size of the
urban area. In a smaller urban area (i.e. Kansas City, Missouri)3 healthcare providers in both
the surrounding suburbs and in the city, itself are viewed as one system by consumers and
employers. Suburban-based providers may be able to deliver primary and secondary care,
but tertiary providers in the city may be necessary to round out the network. Larger urban
markets (i.e. Chicago)4 have suburban areas with medical complexes that rival those in the
city for scope and complexity of services.
6
The Population
Population analysis in the proposed market includes understanding key demographic

characteristics, which may influence the mix of providers and facilities included in the
network. Important population characteristics are ages, income levels, ethnicities, and
religions.
Example: Health plan networks that serve the elderly (i.e. Medicare) often need to include
post-acute care facilities (i.e. rehabilitation centers and skilled nursing facilities) in their
networks. Plans that serve populations with large ethnic, racial, or religious groups should
have networks that accommodate diverse language, cultural, and medical needs.
Income levels in the proposed market are of equal importance, as the specific healthcare
needs of consumers will vary with income. Numerous studies have demonstrated that low-
income groups have a higher incidence of chronic illnesses than higher-income populations.
Low-income populations also may be more sensitive to the financial consequences of
receiving healthcare.
Health plans should consider the structure of the local health delivery system for low-
income populations including:
• Are physicians’ offices open on evenings and weekends?

• Are urgent care facilities available on a 24-hour basis?
• Are outreach services available for chronic disease management and prenatal care?
• Do primary care providers (PCPs) routinely check for chronic conditions like asthma
and diabetes?
• Does the provider panel include providers that low-income consumers have selected
in the past?
• What are the barriers that prevent low-income consumers from using other
providers in the area?
As income levels rise, financial concerns may not be eliminated altogether, but other issues
may assume greater prominence. The inclusion of prestigious institutions and specialists in
provider panels become more important as income increases, and the mix of services
offered may change.
Factors including competition in the market, economic conditions, employer characteristics

(i.e. type and size), service area characteristics (i.e. rural v. urban or suburban), consumer
demographics (i.e. number and location of plan members and potential members, income
levels, age and gender mix, ethnicity, race, and religion), are critical considerations in the
development and management of a successful health plan provider network.
7
Phase 2: Stakeholder Considerations

Stakeholders
Stakeholder considerations are highly relevant to the successful development and

management of a plan’s provider network. Two critical groups of stakeholders include plan
purchasers and members. A third important stakeholder group are the providers
themselves.
Purchaser Expectations
Consumers obtain health coverage through purchaser arrangements in which someone

other than the consumer arranges for the coverage. Some of these purchasers are private
employers or business groups that purchase healthcare coverage for their employees or
group members. Other purchasers are government agencies offering healthcare coverage
through public programs (i.e. the Federal Employees Health Benefits Program (FEHBP),
Medicare, Medicaid, and workers' compensation). Since the enactment of the ACA in 2010,
many individuals have taken direct responsibility for purchasing plans. Purchasers play an
active role in establishing requirements and standards for health plans (including provider
networks) because purchasers foot the bill for the majority of healthcare expenditures in
the United States.
Private Employer Purchasers
As of 2017, more than 156 million Americans were receiving health insurance through
employers.5 The business community has had an enormous influence on the growth of
health plans, and the expectations of employers, unions, and business coalitions have
had a direct effect on the way health plans operate. Employers, concerned about the
rising costs of healthcare coverage, increasingly have turned to health plans using
managed care techniques to provide more cost-effective care than is available in
traditional fee-for-service plans.
Figure 2 reveals the changing distribution of health plan enrollment for the covered
worker by plan type, over the past few decades.
8
Figure 2: Distribution of Health Plan Enrollment for Covered Workers, by Plan Type, 1988-
2018.
Employers are also concerned with ensuring that employees receive quality healthcare.
Businesses negotiating for employee health care benefits tend to focus on price
reasonableness as well as the quality of care and service. Employers search for value in
the form of:
• limited premium increases
• formal quality and disease management programs
• customer service standards
• quality measurement reporting
Health plans typically bid for private employer accounts by responding to a request for
proposal (RFP). Under the RFP process, multiple plans bid for an account by completing
detailed questionnaires and undergoing in-depth site visits. Health plans must demonstrate
sufficient network capacity (i.e. enough providers to adequately serve all of the company’s
employees). Companies also may look for the availability of preferred physicians, hospitals,
and other providers with regional, national, or worldwide reputations for specialized care
and treatment. If the purchasers are sufficiently important to the health plan, it may be
necessary to guarantee the recruitment of specified providers who are not already under
contract.
9
Individual Purchasers
Consumers are playing a larger and more direct role in the U.S. healthcare system. As of
2018, over 20 million people gained health insurance coverage through the ACA, 6 with a
significant percentage of these having shopped for and picked their own plan. Even in the
context of employer-provided plans, more responsibility is being shifted onto employees.
With individual consumers increasingly paying a significant portion of the cost of both
medical care and health benefit premiums, they have become more conscious of costs as
needs and value. One of the most important considerations for individual consumer plan
choice is what providers are included in a network.
Government Purchasers
The federal government has long offered health plans as an option to government
employees and additionally offers health plan options to Medicare beneficiaries. Virtually
all states now offer or require health plans as part of their Medicaid programs. Some states
have enacted legislation that allows health plans and managed care in workers'
compensation programs. Even the Department of Defense, through the Military Health
System's TRICARE program, contracts with health plans to assure appropriate coverage for
eligible service members and their dependents. The following sections provide a brief
overview of these government-sponsored programs including:
• Federal Employees Health Benefits Program (FEHBP)

• Medicare
• Medicaid
• Workers’ Compensation
• Military Health System
10
Federal Employees Health Benefits Program (FEHBP)
FEHBP is the largest employer-sponsored health insurance program in the country,

providing more than $40 billion in health care benefits annually to eligible employees and
retirees of the federal government.7 The Office of Personnel Management (OPM)
administers the program. In a typical year, FEHB provides health insurance coverage to
about 8.2 million federal employees, retirees, and their dependents.8 FEHBP enrollees
choose a health plan from among the various health insurance carriers participating in
FEHBP, each of which offers one or more plans.9 Depending on where an enrollee resides,
his or her choice of plans is limited to about 15 different plans.10
Generally, FEHBP health insurance carriers and their plans fall into two broad categories:
fee-for-service (FFS) plans (this category includes PPOs) or health maintenance
organizations (HMOs). FFS plans are generally available nationwide, while HMOs tend to be
locally available.11 Enrollees may base their decision to join an FFS plan or an HMO based
on a variety of factors (i.e. whether they already have a preferred medical provider, where
they live, and whether they require the flexibility associated with FFS plans). FFS plans are
more likely to allow access to out-of-network providers (with increased out-of-pocket costs)
than HMOs.12
Although the enactment of the ACA in 2010 established new requirements for all private
health plans, including FEHBP plans, many ACA provisions had no meaningful effect on
FEHBP. This is because many FEHBP plans already met the requirements established under
the law (i.e. the provision that people with preexisting conditions cannot be denied health
coverage).13
11
Medicare
Medicare is the federal healthcare program for individuals age 65 and older and
individuals of any age who are severely disabled or who have end-stage renal disease.
The Centers for Medicare and Medicaid Services (CMS) regulates Medicare. Generally,
Medicare beneficiaries are eligible to receive Part A (Hospital Insurance) and Part B
(Medical Insurance) benefits. These benefits are available either through Original
Medicare, which is administered by Medicare on a fee-for-service basis or through
capitated health insurance plans offered by private companies known as Medicare Part C
or Medicare Advantage plans. Introduced with the passage of the Balanced Budget Act of
1997,14 and modified by the Medicare Modernization Act of 2003, 15 Medicare Advantage
plans have played an increasingly larger role in the Medicare program over the past decade.
Medicare Part D went into effect on January 1, 2006. Anyone with Part A or B coverage is
eligible for Part D, which covers mostly self-administered prescription drugs. To receive this
benefit, a person with Medicare must enroll in a stand-alone Prescription Drug Plan (PDP)
or a Part C plan with integrated prescription drug coverage (MA-PD).
PDPs are run by private companies approved by Medicare. Medicare Advantage plans (i.e.
HMOs, HMO-POS, PPOs, Special Needs Plans (SNP), and Medicare Medical Savings Account
Plans) must be approved by CMS following a rigorous application process. Health plan
network management departments ensure compliance with Medicare regulations
concerning network access and availability, and regulatory standards for quality assurance,
utilization management, fraud and abuse, and reporting.
Medicaid
The Medicaid program provides health coverage to millions of Americans,16 including

eligible low-income adults, children, pregnant women, elderly adults, and people with
disabilities. It also offers some benefits not typically covered by Medicare, including nursing
home care and personal care services. Although it is funded jointly by states and the
federal government, Medicaid is primarily regulated on the state level. Most states'
Medicaid programs are designed to encourage or require recipients to enroll in approved
health plans.
States have looked to health plans as a way of expanding network availability, ensuring
continuity of care, implementing quality management programs, and controlling healthcare
expenditures. Health plans with Medicaid programs must address various network-related
issues including:
• ensuring acceptable reimbursement to providers

• addressing provider concerns about serving the Medicaid population
• contracting with traditional Medicaid providers
• working with appropriate social service agencies to meet recipients' nonmedical
needs
• overcoming the skepticism toward health plans of many Medicaid consumer and
provider advocacy groups
12
Workers' Compensation
Workers' compensation programs are designed to cover both medical expenses associated
with workplace injuries and associated lost wages. Due to escalating costs, many states have
passed legislation introducing managed care through plans into workers' compensation
programs. There are several important network issues in the development of a successful
workers' compensation program. These issues include the following:
• Recruiting enough physicians and other providers in the appropriate specialties,
especially those who have experience in occupational medicine
• Developing appropriate reimbursement methods
• Educating providers to evaluate a patient's ability to return to work
• Developing medical/disability protocols appropriate to work-related injuries
Military Health System (MHS)
The Department of Defense accommodates the mobile armed forces population's need for
managed healthcare services through its TRICARE program. Operated by the Defense Health
Agency, TRICARE contracts with private health plans that provide administrative services
and additional treatment facilities, thereby combining the resources of military hospitals
and clinics with civilian health care networks.
Active-duty military personnel is automatically enrolled in the HMO option with no

deductibles and reduced copayments (TRICARE Prime). Eligible family members and
dependents generally may enroll in either an HMO option (TRICARE Prime/additional Prime
Options) or the PPO plan (TRICARE Select). Certain premium-based plans also are available
for purchase by qualified beneficiaries, including TRICARE Reserve Select, TRICARE Retired
Reserve, and TRICARE Young Adult.
Reimbursement policies in government programs can significantly impact network

development and management. Such programs routinely use capitated payment
arrangements that do not directly reimburse plans for the cost of rendering medical care
and meeting administrative expenses. Compliance with government program provisions,
particularly in Medicaid and workers’ compensation, often can increase costs. Plans may
find it necessary to limit providers to withdraw from the network, creating disruption in
service to plan members, or may even cause plans themselves to withdraw from
participation in government programs.
13
Member Expectations
Due to the growing need to manage healthcare expenditures combined with the
enactment of the ACA, enrollment in health plans has increased significantly. Purchasers
and members alike are attracted to and have benefited from the many advantages that
health plans provide:
• broad coverage
• lower premiums
• limited copayments
• management of unnecessary medical expenditures
• formal quality improvement initiatives
The growing sophistication of the public toward medical care generally has led consumers
to become more interested and involved in healthcare coverage issues such as:
• access to data related to quality and satisfaction

• better service and convenience
• greater say in healthcare treatment decisions
Plan members favor contract provisions that enhance patient-provider communication

and require external appeal mechanisms for denied services and mandatory turnaround
times for medical review decisions. Consumers increasingly expect their health plans to
cover new technologies or last-resort treatments, even if the services are considered
experimental, marginally effective, or not medically necessary. Regulators must consider
the ramifications of such coverage.
Impact of Purchaser and Member Stakeholder Expectations on Network Design

and Management
In this section, we discuss purchaser and member expectations and their impact on
network design and management including:
• providers included in the network

• open access
• coverage of alternative/non-traditional healthcare approaches
14
Selection of Providers
Consumers often judge a plan by whether it includes providers or not (i.e. physicians and
hospitals) they know and trust. For major employer accounts, health plans may ask
members which providers they would like to have in the network or analyze data to
determine what provider usage patterns already exist. With that information, the plan can
then attempt to target network recruiting efforts toward those providers. In the case of
other types of accounts (particularly in Medicare, Medicaid, and other governmental
programs), health plans try to recruit providers who offer services that are best suited to
meet the healthcare needs of those populations.
Example: If a state's Medicaid enrollee currently receives care from providers who are not
already part of a health plan network, health plans may recruit those traditional Medicaid
providers as a part of their marketing strategy. Similarly, because of the special features or
demographic attributes of some purchaser programs, health plans may need to add new
types of providers to their networks or expand the existing number to accommodate
members' needs.
The health plan must verify the credentials of all network applicants before admitting them
to the panel. Only under special circumstances can a health plan accept a provider that does
not fully meet its credentialing standards.
Open Access
Member expectations, combined with state legislative initiatives and review of efficacy
data, have caused a growing number of health plans to remove many referral requirements.
More health plans allow members to:
• go to nonparticipating and participating specialists

• permit female members to access obstetrician/gynecologists directly without a PCP
referral
• authorize some specialists to serve as PCPs for members with serious or chronic
conditions
15
Alternative Healthcare
To adapt to consumers' increased use of non-traditional therapies,17 health plans

increasingly include alternative healthcare approaches (i.e. chiropractic, naturopathy,
homeopathy, and acupuncture) in their benefit plans.
In some cases, states have mandated that health plans include certain types of providers of
alternative therapies as part of their networks. In other instances, health plans have
recognized the growing popularity of these services and have chosen to provide coverage of
alternative healthcare-usually as a rider-as a way of differentiating themselves from
competitors in the marketplace.
The expectations of key stakeholders, including purchasers (private and governmental) and
members, play an active role in establishing requirements and standards for health plans,
including provider networks.
Phase 3: Provider Network Goals

Provider Network Goals
After identifying opportunities for developing a provider network through market analysis
and evaluation of key stakeholder considerations, a critical next step involves choosing goals
for the health plan’s network. These goals can be defined if the health plan is focused on a
specific healthcare market or can be more general if the development effort is expected to
cover a variety of markets and market conditions. Network goals are usually established in
several key areas including:
• perceived and measurable quality of care delivered by the network

• accessibility of the network to consumers
• cost savings produced by the design of the network
• the health plan’s relationship with network providers
• patient satisfaction with network providers
Perceived and Measurable Quality of Care Delivered by the Network
Among the criteria used by health plans in determining quality expectations are:
• credentialing requirements for practitioners and institutional providers
• types of service capabilities, facilities, and equipment
• standards of care and protocols applicable to network providers
• measurable outcomes the health plan expects the network to produce
• member satisfaction results
16
Accessibility of the Network to Consumers
Key metrics here include the time and distance members must travel for healthcare,
provider hours of operation, and ease of obtaining appointments. Health plans also consider
the proportion of providers who already treat plan members that are included in the
network. Purchasers are certain to have strong views regarding network accessibility.
Cost Savings Produced by the Design of the Network
Cost-savings goals generally involve consideration of:
• The relative cost of healthcare in the area where a network is to be developed. In a

market with below-average healthcare costs, an undersupply of providers, and low
health plan penetration (characteristics of some rural markets), cost-savings goals
should be more modest than for a market with above-average costs, an oversupply
of providers, and some level of health plan competition.
• The strength of the current health plan competitors in the market and the level of
cost savings that these health plans are achieving. There is a wealth of publicly
available information from required financial filings and reports that can give a
health plan some indicators for the competitive environment and economics.
Additional information about utilization and price benchmarks for the health plan
industry is available from trade publications, data analytics, and marketing
companies focused on healthcare. Anecdotal information from local employers and
providers can also be a valuable source of information about utilization levels and
costs under competitors' plans.
• The cost-effectiveness of the health plan's existing networks. Using the results
achieved by its current networks, the health plan can set goals for any networks
that it plans to develop.
Part of the cost savings calculus is reflected in the healthcare industry's ongoing shift from
traditional fee-for-service (FFS) models to value-based care. Industry professionals and
regulators increasingly view the traditional FFS model as inefficient. Providers are paid each
time they provide a service; the incentives are to provide more services. A principal goal of
the ACA and other healthcare reform measures (introduced by Congress, government
agencies, and providers) is to move toward value-based payment approaches, in which
providers are incentivized to provide high quality service and the lowest cost setting. Plans
thus need to be equipped to manage care under revolving models.
Health Plan's Relationship with Network Providers
Goals in this area usually determine whether the health plan chooses to have tight
management control over its network providers or allows them more autonomy. Goals for
relationships with providers also influence the nature of incentive programs included in
provider contracts.
17
Patient satisfaction with Network Providers
Patient satisfaction is a key performance measure of health care quality. Since patient
satisfaction often is not directly observable, patient satisfaction surveys are commonly
used as a measuring device. Such surveys ask plan members how they feel about their
interactions with their providers and attempt to translate subjective results into
meaningful, quantifiable, and actionable data.
Member satisfaction, provider satisfaction, and designing high quality, cost-effective

networks are interrelated goals that are critically important to achieving health plan
success.
Phase 4: Provider Network Compliance

Provider Network Compliance
The healthcare industry is heavily regulated, with a variety of laws, regulations, and
guidance with which health plans and providers must comply. Some of these authorities are
directly applicable to a plan’s provider network, including those that address issues with:
• network adequacy
• patient access to healthcare services
• quality of care
• mandated benefits
• providers’ right to contract
Network adequacy is the extent to which a network offers the appropriate types and
numbers of providers in the appropriate geographic distribution according to the needs of
the plan’s members.
18
Federal Laws and Regulations Addressing Network Adequacy
The HMO Act of 1973 established certain standards for federally qualified HMOs including
requirements to provide:
• geographic accessibility to primary care and most specialty providers with
“reasonable promptness” and “within generally accepted norms for meeting
projected enrollment needs”
• access to medically necessary emergency services 24 hours a day, seven days a week
• a detailed description of service areas and provider locations
Medicare law applies the same “reasonable promptness” standard as the HMO Act of 1973.
CMS requires that all Medicare Advantage organizations (MAOs) offering coordinated care
plans, network-based private fee-for-service (PFFS) plans, and network-based medical
savings account (MSA) plans provide adequate access to covered services to meet the needs
of the population served.18
Example: CMS monitors network compliance by reviewing organizations’ networks on a

triennial basis (i.e. every three years).
Medicaid managed care programs must provide at least the same level of access as the
traditional Medicaid program. In May 2016, CMS issued the Medicaid Managed Care Final
Rule, which includes revised guidance and standards for network adequacy.
Network adequacy standards require states to develop time and distance standards for a
variety of provider types, including primary care (adult and pediatric), OB/GYN, behavioral
health, specialist (adult and pediatric), hospital, pharmacy, pediatric dental, Long-Term
Services and Supports (LTSS) providers, and additional provider types that promote the
objectives of the Medicaid program.
Availability of services requires plans to meet state standards for timely access to care and
services, considering the urgency of the need for services.
Assurances of adequate capacity and services require each plan to submit documentation to
state regulatory authorities to demonstrate that it complies with the following
requirements:
• Offers an appropriate range of services that is adequate for the anticipated number
of beneficiaries for the service area (i.e. county)
• Maintains a network of providers, operating within the scope of practice under State
law, that is sufficient in number, mix, and geographic distribution to meet the needs
of the anticipated number of beneficiaries in the services area (i.e. county).
19
The Federal Employees Health Benefits (FEHB) program requires health plans serving federal
employees and their dependents to provide:
• immediate access to emergency services
• urgent appointments within 24 hours
• routine appointments within one month
• average office waiting times of no more than 30 minutes
20
Affordable Care Act (ACA)
Since 2014, the ACA has required most health plans to cover a comprehensive set of
healthcare services, including preventive and wellness care, prescription drugs, mental
healthcare, emergency care and ambulance services, and others, as stipulated by the
Secretary of Health and Human Services (HHS). The ACA also set a national standard for
network adequacy, requiring “a network that is sufficient in a number of types and
providers,” and that “all services will be accessible without unreasonable delay.” But the
interpretation of “sufficient” and “reasonable” was left to the states.
State Laws and Regulations Addressing Network Adequacy
To guide state adequacy standards, in November 2015 the National Association of Insurance
Commissioners (NAIC) updated its 1996 Managed Care Plan Network Adequacy Model Act
and renamed it the Health Benefit Plan Network Access and Adequacy Model Act.19 The
revised Model Act includes standards for:
• provider-enrollee ratios (including as to primary care providers (PCPs) or by
specialty)
• geographic accessibility of providers
• geographic variation and population dispersion
• appointment waiting times
• hours of operation
• the network’s ability to meet the needs of all covered persons regardless of income,
condition, or English language proficiency)
• other health care service delivery system options (i.e. telemedicine, mobile clinics, or
centers of excellence)
• volume of technological and specialty care services available in the service area
Under the revised Model Act, health plans are required to file, maintain, and follow an
access plan showing how specific standards will be met.
Any Willing Provider (AWP) Laws
States Any Willing Provider (AWP) laws20 require health plans to allow any provider who is
willing to accept the terms and conditions of the plan’s provider contract to participate in
the plan’s network. Such laws can be broad in scope, either identifying the list of providers
covered by the provisions (i.e. physicians, pharmacists, chiropractors, optometrists, etc.) or
asserting that the provisions apply to all providers licensed in the state without specifically
listing any.21 They can also be limited in scope, such as laws applying only to pharmacies or
pharmacists.22
A plan’s ability to include economic criteria (such as average cost per case or per member)
as a term or condition of the contract depends on state laws. In some cases, any willing
provider laws apply to PPOs but not HMOs and similar plans.23
21
Freedom of Choice (FOC) Laws
State freedom of choice (FOC) laws permit a member to obtain reimbursable health care
services from any qualified provider even if the provider has not signed a contract with the
plan. These laws often compel plans to pay the same amount to a non-network provider
chosen by an enrollee as they pay to a network provider. This does not guarantee, however,
that a member will incur the same out-of-pocket costs.24
Mandated Benefit
State mandated benefit laws typically require health plans to:25

• include in the plan’s benefit design specific health care services or treatments that
must be covered (i.e. substance abuse treatment, in vitro fertilization, chiropractic,
hospice, home healthcare, smoking cessation, and hospitalization for maternity care
of a specified length)
• grant direct access without referral by the primary care physician to specified
provider classes (i.e. dermatologists, obstetricians/gynecologists, and pediatricians)
• extend benefits to dependents and other related individuals (i.e. adopted children,
dependent students, grandchildren, and domestic partners)
These mandated benefit laws most often apply to health insurance coverage offered by
employers and private health insurance purchased directly by an individual.
Mandated provider laws are a subset of state mandated benefit laws. Mandated provider
laws typically require group health plans to cover services provided by groups of licensed
providers who are not physicians (i.e. chiropractors, optometrists, physical therapists,
psychologists, registered nurses, acupuncturists, nurse midwives, occupational therapists,
and social workers).26 The ACA federalized these state mandated provider laws, with a
provision that bars group plans from discriminating against “any health care provider who is
acting within the scope of that provider’s license or certification under applicable State
law”.
22
Surprise Billing
Surprise billing laws also have emerged in several states.27 This type of legislation is
designed to protect consumers from surprise bills when services are performed by a non-
participating (out-of-network) doctor at a participating hospital or ambulatory surgical
center in an insurer's network or when a participating doctor refers an insured to a non-
participating provider. These laws typically protect consumers from bills for emergency
services.28
Example: The New York State (NYS) approach to surprise billing takes its inspiration from
baseball salary disputes which rely on arbitration. Each side names a salary figure and
submits it to a neutral arbitrator. The arbitrator decides and this ruling is final. Similarly,
each side in a surprise billing situation names a figure before a neutral arbitrator whose
decision as to the amount due for services is final.
Laws, regulations, and guidelines on access and adequacy help health plans in determining
appropriate strategies for network design and management.
Phase 5: Network Construction

Network Construction
The information obtained through analysis of market considerations and stakeholder

expectations, together with an understanding of network goals and applicable
legal/regulatory requirements, enables health plans to focus on developing and maintaining
networks that are adequate in structure, composition, and size to meet the needs of plan
members and ensure access to services without unreasonable delay.
23
Network Structure
When developing a provider network, a health plan must determine how to balance cost-
savings goals, stakeholder expectations, and requirements for access. Products with
narrower panels and more restrictions on how patients can access providers will achieve
higher cost savings than products with a broader panel and fewer restrictions on access.
The number and type of plan(s) offered will have a direct impact on network structure.
Health plans that offer more than one type of plan may choose to develop separate
networks for each plan type. Another option is to coordinate provider networks through a
system of interrelated networks, sometimes referred to as nested, customized, or sub-
networks. Plans that offer only one type of health plan establish a single network designed
around a unique set of goals and strategies.
A tiered network has different levels of providers that are grouped based on whether they
are higher performing in terms of quality, safety, and efficiency, or lower-performing in
these areas when compared to their peers.
Additional key considerations include:

i. Whether to structure the provider network as a closed panel or an open panel
ii. Whether to require use only of in-network providers or to allow members to see and
be reimbursed for care received from out-of-network providers
In a closed panel plan, providers see only health plan members and generally operate out of
health plan facilities and offices. Providers are either employed directly by the plan (staff
model) or belong to a group of providers that hold contracts with the health plan (group
model). In this type of plan, insureds typically must select a PCP who has control over
referrals to other physicians.
In an open panel plan, independent physicians or providers who meet the health plan’s
standards of care may be eligible to contract with the plan. Providers see both plan
members and nonmembers and typically serve members out of their own facilities and
offices.
Plans that provide in-network care only (typically HMOs and EPOs) provide covered benefits
only through their provider networks and do not pay for care received from out-of-network
providers. Plans that offer access to both in-network and out-of-network care (typically
PPOs and POS plans) may offer lower cost-sharing requirements when members use care
delivered by in-network, preferred providers.
24
Network Composition
Various laws, regulations, and standards provide health plans with useful guidance in
determining an appropriate network design. An important aspect of this process is network
composition (i.e. is determining the right mix of hospitals, primary care providers,
specialists, and other facilities/services to include in the network).
Example: Should the network include freestanding ambulatory surgery centers in addition
to hospitals? Should it include non-traditional healthcare providers and nurse practitioners
in addition to physicians?
The composition of a plan’s network is important to the health plan for many reasons,
including marketing and product differentiation, member satisfaction and retention, and
compliance with laws and standards specific to network adequacy.
25
Network Size
A plan’s network does not necessarily need to include all the health care providers,
hospitals, or other health care facilities in the area to provide meaningful access to
consumers. If a health plan has too few providers or facilities in its network, consumers may
face barriers to care.
Historically, the number of providers included in a provider network has relied on formulas
such as staffing ratios, which compare the number of providers in a plan’s network to the
number of enrollees in the plan. Generally, the initial provider panel for a health plan will be
larger than the size required to serve the membership of the plan in the first several years.
Physician-to-enrollee ratios and formulas are more useful for refining established panels
than for establishing new provider panels.
If a health plan has conducted a thorough analysis of the market and factored in key
stakeholder expectations, it can use the resulting data to identify the competitive
characteristics of the market. Using those characteristics as a guide, the health plan can
then choose an initial panel size for PCPs, specialists, facilities, and ancillary providers.
An increasingly important factor in any discussion of network size is the rise of so-called
narrow network plans. Narrow network plans exist when insurers and employers that
provide healthcare coverage to workers offer plans that provide members with a limited
choice of healthcare providers in exchange for lower premiums.
Insurers that offer these plans typically work with a smaller pool of doctors, hospitals, and
treatment centers (who agree to a lower price for services with the expectation that they
will get greater patient volume). This can keep down the premiums paid by consumers.
Narrow network plans must comply with state and federal laws and regulatory
requirements, including network adequacy standards. Ensuring member satisfaction despite
a smaller network requires various measures, including active cooperation and collaboration
between the health plan and participating providers, and a focus on quality measures as a
key part of the criteria used for provider selection and inclusion in a plan’s network.
26
Additional Reading:
Office of Management and Budget (OMB)-approved information collection, “Triennial

Network Adequacy Review for Medicare Advantage Organizations and 1876 Cost Plans”
(OMB 0938-1346, CMS-10636).
National Conference of State Legislatures (NCSL), State Insurance Mandates and the ACA
Essential Benefits Provisions, available at http://www.ncsl.org/research/health/state-ins-
mandates-and-aca-essential-benefits.aspx#Understanding (accessed April 2019)
Anderman, Tracy, What to Know About Narrow Network Health Insurance Plans, Consumer
Reports, Nov. 23, 2018, available at https://www.consumerreports.org/health-
insurance/what-to-know-about-narrow-network-health-insurance-plans/ (accessed April
2019)
Narrow Provider Networks in New Health Plans: Balancing Affordability with Access to
Quality Care, Georgetown University Center on Health Insurance Reforms and Urban
Institute, June 2014
Eggbeer, Bill, Narrow, Tailored, Tiered and High Performance Networks: An Emerging Trend,
available at http://www.bdcadvisors.com/wp-
content/uploads/2015/08/bdc_jan_2013_narrowtailoredtieredandhighperformancenetwor
ks.pdf (accessed July 2018) (accessed July 2018)
Giovannelli, Justin and Ashley Williams, Regulation of Narrow Networks: With Federal
Protections in Jeopardy, State Approaches Take on Added Significance, Feb. 2, 2017,
available at https://www.commonwealthfund.org/blog/2017/regulation-narrow-networks-
federal-protections-jeopardy-state-approaches-take-added (accessed July 2018)
O’Connor, James T. and Juliet M. Spector, High-Value Provider Networks, July 2, 2014,
available at https://www.ahip.org/milliman-report-high-value-healthcare-provider-
networks/ (accessed July 2018)
27
Notes:
1 Covered workers in small firms are more likely than covered workers in large firms to enroll in POS plans
(11% vs. 3%). See https://www.kff.org/report-section/2018-employer-health-benefits-survey-section-5-
market-shares-of-health-plans/
2
HMO enrollment is significantly higher in the West (33%), and significantly lower in the South (10%) and
Midwest (5%). Covered workers in the South (55%) are more likely to be enrolled in PPOs than workers in
other regions. Covered workers in the Midwest (39%) are more likely to be enrolled in HDHP/SOs than
workers in other regions, while covered workers in the West (19%) are less likely to be enrolled in
HDHP/SOs. See id.
3
In 2013, the estimated population of Kansas City, Missouri was 466,600, up slightly from the 2010 census
population of 459,787. See http://worldpopulationreview.com/us-cities/kansas-city-population/
4
In 2016, the estimated population of Chicago, Illinois, was around 2.7 million. See
http://worldpopulationreview.com/us-cities/chicago-population/
5
https://www.kff.org/other/state-indicator/total-
population/?dataView=1&currentTimeframe=0&selectedDistributions=employer&selectedRows=%7B%22
wrapups%22:%7B%22united-
states%22:%7B%7D%7D%7D&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D
6
Bloomberg, Since Obamacare became Law, 20 Million More Americans Have Gained Health Insurance,
November 16, 2018; Source: http://fortune.com/2018/11/15/obamacare-americans-with-health-
insurance-uninsured/
7
Blom, Kirstin B. and Cornell, Ada S, Federal Employees Health Benefits (FEHB) Program: An Overview, Feb. 3,
2016, p. 5.
8
Id.
9
The types of plans with which OMP may contract as part of the FEHB are specified by statute. See 5 U.S.C.
§ 8903.
10
Blom, Kirstin B. and Cornell, Ada S, Federal Employees Health Benefits (FEHB) Program: An Overview, Feb. 3,
2016, p. 8.
11
Id.
12
Id. p. 9.
13
Id. p. 20.
14
Balanced Budget Act of 1997, Pub.L. 105–33, 111 Stat. 251, enacted August 5, 1997.
15
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub.L. 108-173, 117 Stat. 2066,
enacted December 8, 2003.
16
According to a December 2018 Enrollment Report, Medicaid covers 65.9 million people. Source:
Medicaid.Gov, https://www.medicaid.gov/medicaid/index.html.
17
In the United States, approximately 38 percent of adults (about 4 in 10) and approximately 12 percent of
children (about 1 in 9) are using some form of Complimentary and Alternative Medicine (CAM). Source:
https://nccih.nih.gov/research/statistics/2007/camsurvey_fs1.htm#use
18
42 CFR 417.414, 42 CFR 417.416, 42 CFR 422.112(a)(1)(i), and 42 CFR 422.114(a)(3)(ii).
19
https://www.naic.org/store/free/MDL-74.pdf (accessed April 2019).
20
For more information about Any Willing Provider (AWP) laws, see Ashley Noble, Health Insurers and Access
to Health Care Providers: Any Willing Providers, National Conference of State Legislatures (Nov. 5, 2014),
available at http://www.ncsl.org/research/health/any-willing-or-authorized-providers.aspx.
21
Georgia’s AWP statute is an example of the broad type of law, as it applies to “[e]very doctor of medicine,
every doctor of dental surgery, every podiatrist, and every health care provider within a class approved by
the health care corporation….” GA. CODE ANN., § 33-20-16 (2010).
22
Connecticut and Delaware, among others, have on the books limited AWP laws that apply only to
pharmacies. See CONN. GEN. STAT. ANN. § 38a-471; 18 DEL. CODE ANN. § 7303.
23
H. Carter Sanders, Kenton J. Coppage & Dorothy H. Cornwell, Any Willing Provider Law Applies to Provider
Network, But Not to HMO, ERISA and Life Insurance News (Aug. 21, 2012), available at
http://www.smithmoorelaw.com/Any-Willing-Provider-Law-Applies-to-Provider-Network-But-Not-to-
HMO-08-21-2012.
28
24
Hellinger, F., Any-Willing-Provider and Freedom-Of-Choice Laws: An Economic Assessment, Health Affairs,
Winter 1995; 14 (4):1, available at https://www.healthaffairs.org/doi/10.1377/hlthaff.14.4.297.
25
For more information about state mandated benefit laws, see Laugesen MJ, Paul RR, Luft HS, Aubry W,
Ganiats TG. A Comparative Analysis of Mandated Benefit Laws, 1949–2002. J. Health Serv. Res., 2006 Jun;
41(3 Pt 2): 1081–1103, available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1713218/.
26
National Conference of State Legislatures, Insurance Carriers and Access to Healthcare Providers – Network
Adequacy (Feb. 1, 2017), available at http://www.ncsl.org/research/health/insurance-carriers-and-access-
to-healthcare-providers-network-adequacy.aspx.
27
Christina Cousart, Answering the Thousand-Dollar Debt Question: An Update on State Legislative Activity to
Address Surprise Balance Billing, National Academy for State Health Policy (Apr. 11, 2016), available at
https://nashp.org/answering-the-thousand-dollar-debt-question-an-update-on-state-legislative-activity-
to-address-surprise-balance-billing/.
28
California’s surprise billing law, passed in 2016, applies annual out-of-pocket caps on covered benefits
inclusive of out-of-network emergency care received up to the point of patient stabilization. See CAL.
HEALTH & SAFETY CODE §§ 1367.006, 1367.007; CAL. INS. CODE §§ 10112.28, 10112.29. Connecticut’s surprise
billing law, also passed in 2016, requires carriers to establish a process to ensure that beneficiaries receive
benefits at in-network levels in circumstances when there is no available provider to provide covered
benefits or when covered benefits cannot be provided without unreasonable travel or delay. CONN. GEN.
STAT. ANN. § 38a-591(b).
29
AHM 530: Building the Network Structure and Recruitment
Building the Network: Structure and Recruitment

Introduction
A health plan’s most valuable resource is its provider network. A primary network includes:
• primary care and specialty physicians
• institutional providers (i.e. hospitals and nursing homes)
• pharmacies
• ancillary providers (i.e. home health agencies and rehabilitation centers)
Once the health plan’s strategy is in place, it must assemble the providers who will make up
the network and ensure they are properly credentialed. This involves a dual focus on:
• structure (provider types and structure)
• recruitment (identifying, credentialing, and data verification)
It is important to understand the critical role of credentialing and data verification in the
process of building a health plan’s network and the important role that delegation can play
as part of this process. We will also examine factors that must be considered in developing a
network for Medicare.
As with all aspects of the network management process, the concept of network adequacy
remains a key area of focus. Significant challenges can arise during a plan’s effort to build
and maintain provider relationships as part of its overall network development and
management activities.
After completing this module, you should be able to:
• Understand the types of providers included in most health plan networks
• Discuss the factors that a health plan considers when identifying potential network
hospitals and practitioners
• Identify the methods that health plans may use to recruit candidates for their
provider networks
• Explain the data collection and verification processes used in credentialing
• Understand the liability issues involved with credentialing decisions
• Describe how and why a health plan might decide to delegate activities
• Identify and describe the steps in the delegation process
• Understand the factors that should be considered in building a network to serve the
Medicare population
1
Phase I: Network Structure Considerations

Network Structure Considerations
A key component of a health plan’s success is ensuring that members have convenient
access to healthcare services. To provide good access, health plans must see that their
network includes:
• the appropriate types of providers
• the appropriate number of providers
• providers in the appropriate locations
Regulations and standards require networks to be “adequate".1 Guidelines have been

established to develop and maintain networks that are adequate in structure, composition,
and size, to meet the needs of plan members and ensure access to services without
unreasonable delay. The composition of a plan’s network is important to the health plan for
many reasons, including marketing and product differentiation, member satisfaction and
retention, and compliance with laws and standards specific to network adequacy.
2
Types of Providers
A health plan’s provider network typically includes a mix of the following types of providers:
• Primary care providers (PCPs)
In most cases, primary care providers are general practitioners, family practitioners,
internists, or pediatricians. Some plans classify obstetricians/gynecologists
(OB/GYNs) as primary care providers, while others consider them specialists. Some
plans also include nurse practitioners (NPs) and physician assistants (PAs) in their
primary care panels, but NPs and PAs typically work under the supervision of a
physician, and their ability to provide services independently may be limited by state
law.
• Specialists
A specialist is a healthcare professional whose practice is limited to a certain branch

of medicine, based on specific services or procedures (i.e. anesthesia), specific body
systems (i.e. neurology), certain types of diseases (i.e. oncology), or an age group
(i.e. pediatrics or gerontology). Ideally, all specialty categories will be represented in
a provider network.
• Hospitalists
A hospitalist is a physician who exclusively manages inpatient hospital care.

Hospitalists may be employed by a hospital or be in a medical group. Hospitalists
allow other physicians to focus on the outpatient care of their patients.
• Healthcare facilities
Health plans contract with a variety of facilities including hospitals, ambulatory

surgery facilities, ambulatory diagnostic and treatment centers, retail health clinics,
sub-acute care facilities, and skilled nursing facilities.
• Ancillary service providers
“Ancillary services” is an umbrella term for a variety of healthcare services that are
an adjunct to primary, specialty, and facility-based care. Ancillary services include
diagnostic services (i.e. laboratories and radiology), therapeutic services (including
home healthcare), physical and occupational therapists, pharmacists, and durable
medical equipment and supply companies.
• Pharmacies
Pharmacists in managed care organizations, including health plans, are responsible

for the delivery of prescription drug benefits to millions of plan members. Many
types of pharmacies provide a broad range of access to prescription drug benefits.
Federal and state rules in certain circumstances may require health plans to provide
a range of pharmacy options, including access through mail-order pharmacies and
retail pharmacies. 2
3
Number and Locations of Providers
The health plan must maintain a network that contains a sufficient number and appropriate
type of providers. Health plans must also ensure that their networks contain providers who
are accessible to participants without unreasonable travel or delay.
Health plan characteristics, provider access, population characteristics, purchaser and

consumer preferences, and health plan goals are factors that influence network design.
These factors specifically influence the number and locations of healthcare practitioners,
hospitals, and facilities needed by the health plan.
• Plan characteristics
o Level of managed care
In general, more highly managed plans (plans that practice more managed
care techniques and concepts) need fewer providers than more loosely
managed plans. For instance, an HMO, which is highly managed, requires
fewer providers than does a PPO or POS product with the same number of
members.
o Size of plan
Large plans typically need fewer providers per 1,000 members than do small
plans because large plans can benefit from economies of scale and other
efficiencies. However, if the membership in a large plan is geographically
widespread, the plan may need a broader panel to provide adequate access
to care and services.
4
• Provider access
o A provider-to-member ratio is a ratio of the number of providers available to

plan members to the number of members (usually the number of providers
per 1,000 members). Ratios can be used for both PCPs and specialists.
o Geographic distribution is based on the number of providers within a certain

number of miles or a certain number of minutes of driving time
Software is used to measure the accessibility of healthcare networks and

evaluate geographic distribution for specific provider types.
Example: To maximize access a plan may require that its network have at
least two PCPs within a three-mile radius of each ZIP code in the service area.
Or a network might include at least two PCPs within a given radius of
members’ homes (such as an eight-mile radius for urban areas or a 20-mile
radius for rural areas).
o Drive time refers to how long members must drive to reach a provider
Drive time is typically set at 15 minutes for urban areas and up to 30 minutes
for rural areas. In some states, health plan licensure bodies (such as the
Department of Insurance) have established requirements for access based on
time or distance.
o Other considerations
Provider capacity to accept patients and the clinical skills of various providers
are other factors that can also impact staffing needs.
• Population characteristics
Demographic characteristics of plan membership (i.e. age, sex, income, ethnicity,

and education level) influence both the numbers and types of providers in the
network.
Example: Networks of plans with large numbers of women and children typically
include large numbers of OB/GYNs and pediatricians. Plan networks serving
Medicare beneficiaries typically have larger numbers of providers and a broader mix
of specialists than networks serving similarly sized younger populations.
5
• Purchaser and consumer preferences
Primary factors that influence customers’ selections among health plans are
perceptions of quality, access to care, and costs.
o Perceived quality
If perceived quality is the dominant consideration, then the actual

composition of the network and provider selection criteria are key elements
of the network development.
o Access
If access is the major issue for customers, a large, very inclusive network is
desirable.
 PCPs
For purchasers and members, the primary care panel is typically the
largest and most important component of the provider network.
Larger PCP panels tend to result in higher market share and high
levels of member acceptance and satisfaction, but they can result in
higher plan costs. Limiting the size of the PCP panel can reduce costs
for administration and network management, but these reductions
historically have been outweighed by customer preferences for larger
PCP panels.
 Specialists
The size of the specialist panel is typically less important to customers

than the size of the PCP panel. Therefore, health plans can often limit
specialist panels to include only providers who offer the highest-
quality, most cost-effective care in the service area.
6
Number and Locations of Hospitals and Other Facilities
The goal of a health plan is to include enough facilities in its network to effectively serve the
plan’s membership. The network needs to have the appropriate number and types of
hospitals and facilities in the appropriate locations.
• Plan characteristics
o Level of managed care
In general, more highly managed plans (plans that practice more managed
care techniques and concepts) need fewer providers than more loosely
managed plans. For instance, an HMO, which is highly managed, requires
fewer providers than does a PPO or POS product with the same number of
members.
o Size of plan
Large plans typically need fewer providers per 1,000 members than do small
plans because large plans can benefit from economies of scale and other
efficiencies. However, if the membership in a large plan is geographically
widespread, the plan may need a broader panel to provide adequate access
to care and services.
7
• Provider access
o A provider-to-member ratio is a ratio of the number of providers available to

plan members to the number of members (usually the number of providers
per 1,000 members). Ratios can be used for both PCPs and specialists.
o Geographic distribution is based on the number of providers within a certain

number of miles and/or a certain number of minutes of driving time.
Software is used to measure the accessibility of healthcare networks and
evaluate geographic distribution for specific provider types. For example, to
maximize access a plan may require that its network have at least two PCPs
within a three-mile radius of each ZIP code in the service area. Or a network
might include at least two PCPs within a given radius of members’ homes
(such as an eight-mile radius for urban areas or a 20-mile radius for rural
areas).
Drive time refers to how long members must drive to reach a provider. Drive
time is typically set at 15 minutes for urban areas and up to 30 minutes for
rural areas. In some states, health plan licensure bodies (such as the
Department of Insurance) have established requirements for access based on
time or distance.
o Other considerations
Provider capacity to accept patients and the clinical skills of various providers
are other factors that can also impact staffing needs.
• Population characteristics
o Demographic characteristics of plan membership such as age, sex, income,

ethnicity, and education level influence both the numbers and types of
providers in the network. For example, networks of plans with large
numbers of women and children typically include large numbers of OB/GYNs
and pediatricians. Plan networks serving Medicare beneficiaries typically
have larger numbers of providers and a broader mix of specialists than
networks serving similarly sized younger populations.
8
• Purchaser and consumer preferences
o Primary factors that influence customers’ selections among health plans are
perceptions of quality, access to care, and costs.
o Perceived quality
If perceived quality is the dominant consideration, then the actual

composition of the network and provider selection criteria are key elements
of the network development.
o Access. If access is the major issue for customers, a large, very inclusive
network is desirable.
 PCPs
For purchasers and members, the primary care panel is typically the
largest and most important component of the provider network.
Larger PCP panels tend to result in higher market share and high
levels of member acceptance and satisfaction, but they can result in
higher plan costs. Limiting the size of the PCP panel can reduce costs
for administration and network management, but these reductions
historically have been outweighed by customer preferences for larger
PCP panels.
 Specialists
The size of the specialist panel is typically less important to customers

than the size of the PCP panel. Therefore, health plans can often limit
specialist panels to include only providers who offer the highest-
quality, most cost-effective care in the service area.
9
Considerations for Number and Locations of Hospitals and Other Facilities
Many of the factors that affect the number of practitioners needed in a network also affect
the number and locations of hospitals and other facilities. Considerations for the number
and location for hospitals and other facilities include:
• access by plan members
• service capacity
• types and quality of services offered
• accreditation status
• reputation within the service area
• cost and use of resources
• level of participation in health plans
• willingness to agree to contract terms acceptable to the health plan
10
Pharmacies
The number of pharmacies needed in a health plan network depends on how the health
plan intends to use pharmacists. For routine filing of prescriptions, a health plan seeks to
contract with all pharmacies that are willing to provide competitive rates for ingredient cost
and dispensing fees. If a health plan wishes to expand the role of pharmacists, by
encouraging a partnership between physicians and pharmacists for planning and
implementing drug therapies, the health plan may choose to depend on a smaller network
of pharmacies featuring pharmacists who are trained to collaborate with physicians on
prescribing.
Inappropriate use of prescription drugs is a significant issue in today’s healthcare

environment. The impacts of the opioid crisis include:
• 351,000 lives lost due to opioid overdose (1999-2016)
• $55 billion annually in health and related societal costs in the U.S. (estimated)
• $20 billion annually in emergency and inpatient costs in the U.S. (estimated)
Health plans can decrease the incidence of inappropriate drug use by encouraging a
partnership between physicians and pharmacists for planning and implementing drug
therapies.
11
Special Structural Consideration

Narrow Networks
An ongoing trend in the health insurance industry is the emergence of narrow network
health plans. These health plans offer a smaller number of providers and in-network
facilities than traditional provider networks-often resulting in lower premiums. These types
of plans go by many names including:
• custom networks
• high-performance
• tailored networks
• select networks
• high-value networks
• narrow networks
Generally, the networks available for such plans are smaller because they are limited to a
set of doctors and hospitals that meet additional performance standards.
Narrow network plans first appeared in the 1990s as an effort to control premium costs by
restricting patient access to a select group of low-cost providers. These plans subsequently
fell out of favor for allegedly sacrificing quality for cost, with benefits managers instead
opting for full-service HMOs and open access PPO alternatives.
With employers and patients seeking greater value for their health care dollars, businesses
are increasingly showing more willingness to offer narrow network products that encourage
members to use more efficient health care alternatives, either by restricting networks to the
most efficient providers or by having different copays and coinsurance for providers in
different tiers of the network.
Narrow network plans must comply with state and federal laws and regulatory
requirements including network adequacy standards. 3 Ensuring member satisfaction despite
a smaller network requires various measures, including active cooperation and collaboration
between the health plan and participating providers, and a focus on quality measures as a
key part of the criteria used for provider selection and inclusion in a plan’s network.
12
Example: “Novellus Health Plan” focuses on quality measures in provider selection for its
narrow network. Some proven quality measures include:
• Structural
Does a hospital have a hand hygiene protocol in place? Does a physician’s office use
computerized order entry for prescriptions?
• Process
Are nurse practitioners routinely examining diabetes patients’ feet to check for
wounds? Are physicians prescribing appropriate drugs to diabetic patients?
• Outcome
What percentage of cancer patients entered remission? What was the amputation
rate for patients with diabetes?
• Patient experience
How long did patients have to wait before being seen? Did the provider’s office
follow up regarding lab results?
Some reports suggest that consumers are picking narrow network plans over broader
options with increasing frequency and are generally satisfied with their choices. There is
some evidence suggesting that such plans perform as well as plans that offer access to a
broader range of providers. Concerns sometimes arise about the ability of such plans to
provide timely access to care, including services from specialists and high-performing
hospitals. This can potentially lead to litigation and increased oversight from federal and
state legislators and regulators. 4
13
Telemedicine
The World Health Organization defines telemedicine as “the delivery of health care
services, where distance is a critical factor, by all health care professionals using
information and communication technologies for the exchange of valid information for
diagnosis, treatment and prevention of disease and injuries, research and evaluation, and
for the continuing education of healthcare providers, all in the interests of advancing the
health of individuals and their communities.” 5 In both rural and urban settings,
telemedicine is emerging as a potential way to improve access to medical care and
provide a more affordable way to deliver it.
Telemedicine has been used successfully to improve patient access to medical care while
reducing healthcare costs. In 2016, an estimated 61% of US healthcare institutions and
40-50% of US hospitals used telemedicine. From 2012 to 2013, the telemedicine market
grew by 60%. 6
Types of Telemedicine Program
There are two general types of telemedicine programs. 7Synchronous programs take place
in real time and are live, two-way interactions between a patient and healthcare provider
(i.e. virtual appointments conducted using the patient’s smartphone, tablet, or camera-
enabled computer). Asynchronous programs, also known as “store and forward”
applications, do not involve live interaction. They involve the transfer of images, videos, and
other clinical information that a healthcare provider views and responds to later. To
facilitate these programs, patients wear medical devices that monitor and track health
information (i.e. blood pressure) which is then forwarded to their healthcare provider.
The rules and regulations addressing health care provider participation in telemedicine vary
from state to state. The current lack of interstate licensure laws (and other factors) limit the
ability of many providers to offer telemedicine services. Demand for such services is
continuing to rise, and primary care providers and plans will need to be familiar with the
practical and legal considerations in establishing this kind of service. Areas of future growth
include chronic disease management and “hospital at home” care. 8
14
Phase II: Provider Recruitment and Selection Considerations

Provider Recruitment and Selection Considerations
Once a health plan has defined the types and numbers of providers needed for a network,
ensured compliance with network adequacy goals and standards, plan members’ needs and
expectations, and plan structure considerations a health plan can focus on identifying and
recruiting the most appropriate providers for the network.
Recruitment focuses on attracting current health professionals and students to open

positions or future positions, in order to ensure an adequate network that meets plan
member needs.
Retention focuses on keeping healthcare professionals employed in their healthcare

facilities and communities.
Recruitment
During a health plan’s analysis of the market, the plan gathers, analyzes, and understands
important information about the provider community in the service area- including the
number and locations of providers. The following sources provide additional information
about providers and may be used in the recruitment process:
• Purchasers, plan members, plan personnel, and other providers (i.e. “word of
mouth”). Recommendations from purchasers and enrollees are very valuable to the
plan.
• Inclusion of providers recommended by purchasers and enrollees can give the health
plan a competitive advantage when negotiating with purchasers and can also help
sell the plan to potential members.
• Local, state, and national medical societies or other professional associations
• Directories and lists9
• Provider directories from competing plans
• Contact with practitioners in training programs (to the extent permitted)
15
Recruitment of Practitioners in Training
The recruitment of final-year residents is a frequently employed strategy. Since final-year

residents are typically in high demand, employing constructive recruiting strategies is
extremely important. Some considerations that may play into a successful recruiting
strategy include: 10
• residents’ post-training geographic preferences
• emphasis on the availability of free time and lifestyle considerations
• ability to retire educational debt
• income
According to the American Hospital Association, partnering with national and state job
boards, public health departments, professional societies, universities, colleges, academies,
and high schools is a good way to develop comprehensive pipelines for healthcare
recruiting. Some strategies for developing effective partnerships include: 11
• meeting with local colleges and universities to discuss future needs
• inviting partners to attend periodic information sessions
• facilitating volunteer opportunities and internships to help students and recent

graduates gain firsthand experience working in healthcare
One strategy for recruiting healthcare providers in rural communities involves placing
providers-in-training in rural practice after graduation.12
Sometimes, providers take the initiative and apply directly to a health plan for inclusion in
the network. More typically, health plans actively recruit candidates for their networks.
During the recruitment phase of the network development process, a health plan typically
sends a mass communication to the providers in the service area. This communication
introduces the health plan and gives information about it. It usually describes the plan’s
credentialing process and may include a copy of the plan’s fee schedule and a provider
contract.
Mass communications may be issued via direct mail, email, or other internet-based
communications. Another way to reach potential providers is through postings on job
websites or other websites dedicated to facilitating healthcare provider recruitment.
Professional recruiting agencies assist in this process. While such agencies can be useful in
performing various labor-intensive tasks (such as making the initial contact with providers
and screening out undesirable candidates), these agencies also charge substantial fees.
Health plans should examine an agency’s track record of successful provider placements and
their related provider retention information before deciding whether it makes sense to
employ an agency as part of the provider recruitment process.
16
Explanation of Credentialing
Before a provider can bill a health plan, the provider must first be credentialed by the plan.
Credentialing is the process by which a health plan formally assesses a provider’s
qualifications and competency based on a variety of criteria which can include:
• formal education
• residency
• licenses
• additional training
• hospital affiliations
• work history
• malpractice claims history
• peer references
While this can be a time-consuming process, many health plans use a centralized database
to streamline the process.
17
Special Recruiting Considerations Relating to Increased Provider Demand
The Affordable Care Act (ACA) increased the number of people with health insurance,
leading to greater demand on providers for health care services, particularly those
qualifying for Medicaid. This phenomenon (among others) has affected the availability of
various types of providers, including primary care physicians and specialty providers, with
resulting impacts on provider recruitment and network development. According to a recent
study:
• the Association of Medical Colleges has projected doctor shortages of up to 121,300

over the next decade or so, a figure that appears to be increasing year over year 13
• a significant number of physicians surveyed (nearly one in five) have indicated their
plan to reduce practice hours within the next 12 months or to leave medicine
altogether within 24 months14
Health plans have identified additional challenges in recruiting and retaining primary care
physicians and specialists including: 15
• low payment rates
• frustration with claims turnaround delays
• high no-show rates
• patient non-adherence to treatment plans
• preference for private patients
• general scarcity of providers
• Scarcity of providers in rural regions
• frustration with referral and pre-authorization processes
• concerns with payment accuracy
• risk of members being retroactively disenrolled by the state in government-

sponsored plans, leading to denied payments for previously authorized services
• high turnover rate of Medicaid enrollees
• greater reporting needs for Medicaid patients than for commercial patients
18
Overcoming Recruiting Challenges
Evidence suggests that certain specialties are more challenging to recruit and retain.
Example: Pediatric specialties of all kinds generally are considered among the most
challenging providers to find. Other difficult specialties to fill include dermatology,
psychiatry, orthopedics, and plastic surgery.16
Health plans must strive to implement best practices in the areas of provider recruitment
and retention. Key factors in implementing best practices in provider recruitment and
retention are:
• regular and meaningful communication
• increased use of technology applications as a tool in facilitating process

improvement 17
Plans have started to employ creative strategies (i.e. approaches for managing tuition debt
relief and reaching out to medical students) to encourage providers to consider working in
underserved areas.18
Rural communities often face challenges in maintaining an adequate health workforce-

making it difficult to provide needed patient care or to meet facility staffing requirements.
Assistance is available through the National Rural Recruitment and Retention Network
93RNet which is one of the largest and most comprehensive recruitment and retention
resources. Funded by the Federal Office of Rural Health Policy and member dues, 3RNet
offers a variety of resources including:
1. a website where members maintain their state and regional pages, job seekers
can browse and search jobs; facilities and employers can also post jobs
2. a database with over 60,000 profiles of healthcare professionals, including

medical students, interested in rural healthcare services
19
Provider Selection
To be selected by a health plan for its network, a provider must demonstrate to the plan
that he or she can meet the needs of the plan and its members. Major components of the
provider selection process are:
• application
• credentialing
• recredentialing
Application
The selection process begins with the submission of an application by the provider.
Although application forms vary, most include questions on the following:
• basic demographic information
• office information (location, phone numbers, limitations)
• education and training
• work history
• professional licenses
• certifications (specialty, U.S. Drug Enforcement Administration (DEA))
• specialty care certification or eligibility
• hospital affiliations
• malpractice insurance information
• malpractice claims history
• references
Example: Physicians are required to prescribe medication to treat pain and illness. When
these drugs are used improperly, they can be addictive and cause injury, impairment, or
death. Some examples include morphine, codeine, and diazepam. These drugs and
medications are considered controlled substances and are regulated by the DEA. Physicians
must complete a DEA registration to be licensed to prescribe controlled substances.
Credentialing
Once a health plan receives the provider application, it begins the credentialing process.
This includes reviewing and verifying the information submitted on the application form,
determining the provider’s current clinical competence, and verifying that the provider
meets the health plan’s preestablished criteria for participation in the network. 19
20
The Importance of Credentialing
A health plans’ principal goal is to offer members a delivery network that includes high-
quality providers. Credentialing addresses the following objectives:
• evaluating providers and determining which are the most qualified
• minimizing the liability and other legal risks associated with medical practice by
eliminating providers whose histories and practice patterns indicate that they might
pose a legal risk for the plan
• meeting the requirements of accrediting bodies and regulators for accreditation or

licensure
Credentialing is an important part of the selection process- necessitating a detailed

examination of the process (including who typically performs credentialing), how the
credentialing process works, and the standards used in the credentialing process.
Credentialing—Who Does It?
The responsibility for credentialing varies from plan to plan. In some plans, credentialing is
handled by a committee or department, while in others it is performed by an individual. In
other plans, credentialing is contracted to external entities called credentialing verification
organizations (CVOs). Practitioners are usually included in the credentialing committee or
serve on the review body; they provide technical knowledge and peer perspectives in the
credentialing process.
The Credentialing Process
The credentialing process begins with the provider submitting a completed application (and
required supporting documentation) to the health plan. The next steps in the process are
completed by the health plan and include:
• application review
• documentation and information verification
• determination of the need for additional documentation or follow-up
• request for any information required to verify credentials
The health plan may also perform site inspections of the provider’s offices and may inspect
and evaluate medical records on site. The credentialing process is typically completed
before the health plan contracts with the provider.
21
Standards Used in Credentialing—Guidelines, Policies, Procedures, and Criteria
Health plans establish and utilize plan-specific guidelines for credentialing, with each plan’s
guidelines reflecting the unique characteristics of the plan. Written policies define the
requirements for network participation and identify the specific documentation that will be
used to verify requirements. Procedures describe how the process is performed. Criteria are
used to assess a practitioner’s ability to deliver necessary care to health plan members and
typically include:
• completed education
• licensure
• relevant training and experience
• any certifications issued in the practitioner’s area of specialty
• disclosure of any issues that may affect care delivered (i.e. health issues)
Verification
During credentialing, the plan verifies the information submitted by the provider on the
application form and validates that the provider meets the health plan’s preestablished
criteria for participation in its network. To ensure that credentialing decisions are based on
accurate and current information, health plans are required to obtain documents directly
from educational institutions and agencies (primary sources). Health plans typically delegate
primary source verification activities to third-party CVOs.
Primary source verification is a process through which an organization validates

credentialing information by contacting the organization that originally conferred or issued
the credentialing element to the practitioner.
Example: The state department that issues a license to a practitioner is the primary source
for verification of the validity of that license.
Many of the standards and criteria used by health plans in credentialing verification are
based on existing standards established by accrediting agencies (i.e. the National Committee
for Quality Assurance (NCQA) and the Utilization Review Accreditation Commission (URAC)).
A health plan is required to obtain information relating to malpractice, licensure, actions
taken related to professional reviews, actions taken by the Drug Enforcement Agency (DEA),
and Medicare or Medicaid exclusions. The Data Bank, consisting of the National Practitioner
Data Bank (NPDB) and the Healthcare Integrity and Protection Data Bank (HIPDP), 20 is a
repository for information relating to malpractice, licensure, and actions taken related to
professional reviews.
During the credentialing process, health plans are required to evaluate the quality of
organizations (i.e. hospitals, nursing homes, and home health agencies). Health plans must
verify that these organizations are in good standing with regulatory bodies and accredited
by the appropriate accrediting body.
22
The Selection Decision
The health plan’s decision to either select or not select a provider for its network is based on
the needs of the health plan and the provider’s qualifications. Selection decisions cannot be
based solely on the provider’s membership in another organization (i.e. a hospital or
medical group). Health plans must apply standards consistently and fairly. Applying
consistent and fair standards while adhering to the plan’s written policies and procedures
reduces issues that can result in legal actions by providers.
Recredentialing
The credentialing process begins before the provider receives a final contract. Once a plan
contracts with a provider, it begins an ongoing process of periodically reviewing the
qualifications of the provider and verifying that the provider still meets the standards for
participation in the network. This process is known as recredentialing and is typically
performed every two to three years.
During recredentialing, the health plan verifies the information in the provider’s
credentialing data file that is subject to change over time. Examples include licensure,
sanctions, certifications, competence, or health status that might affect the provider’s
ability to perform services defined in the health plan contract. Many plans also consider
results from their quality management and utilization management programs and member
satisfaction surveys or member complaints.
Phase III: Delegation Considerations

Delegation Considerations
Health plans can delegate certain activities related to their networks to providers or other
organizations. In the context of building a plan’s network, the delegation of activities related
to credentialing, recredentialing, and provider performance management are most relevant
to consider. Other types of functions that may be delegated by a health plan include:
• utilization management
• member services
• medical records review
• quality management
• claims administration
Delegation is a formal process through which a health plan transfers to another entity the
authority to conduct certain functions on behalf of the plan. The entity that contracts with
the health plan to perform the specified function is the delegate, and the health plan that
transfers the authority is the delegator.
23
Regulation of Delegated Activities
The use of delegation by health plans is governed by various accrediting agencies,

regulatory agencies, and state laws.21 These accrediting standards, regulations, and laws
help determine which activities a health plan decides to delegate. Regardless of the
agreement for delegation, accrediting agencies hold the health plan accountable for the
delegated activities. A high level of review and monitoring is required for delegation.
Authority and Accountability
The National Committee for Quality Assurance (NCQA), the Utilization Review
Accreditation Commission (URAC), and The Joint Commission (TJC) (formerly known as the
Joint Commission on Accreditation of Healthcare Organizations or JCAHO) all consider a
health plan's management of delegated activities when evaluating a health plan for
accreditation. These three agencies have established specific standards for the oversight of
delegated activities. Health plans typically design programs to comply with the delegation
guidelines of one of these accrediting organizations because delegation moves key
functions away from the health plan. As a result, the health plan has less direct control
over the delegated activities.
“Big Three” Healthcare Accreditation
URAC accredits many types of health care organizations. Some accreditations are for the
entire organization, and some focus on functional areas of the organization.
NCQA accredits organizations and individuals ranging from health plans, including Health
Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) to
physician networks, medical groups, and individual physicians.
TJC accreditation can be earned by many types of health care organizations, including
hospitals, doctor’s offices, nursing homes, office-based surgery centers, behavioral health
treatment facilities, and providers of home care services.
24
NCQA Guidelines Case Study
In building its provider network, “Novellus Health Plan” has delegated certain activities
related to provider credentialing to a credentialing verification organization (CVO).
Novellus follows the standards for the oversight of delegated activities set forth by NCQA,
and its program related to these activities is designed to comply with NCQA’s delegation
standards. The standards require Novellus to conduct specific oversight activities of the
delegate, and, as part of its accreditation review, NCQA will review the Plan’s
documentation to confirm that these oversight activities are performed following the
standards/guidelines.
The credentialing activities that Novellus has delegated include:
• Credentials verification
An entity other than the Plan verifies provider credentials and decides whom to
include/exclude from the Plan’s provider network.
• Assessment tools
An entity other than the Plan creates the provider assessment tools without the
Plan’s involvement to assess provider performance.
• Assessment results
An entity other than the Plan makes decisions about the provider assessment
results.
Per NCQA standards, these are all activities that may be delegated. Responsibilities that
Novellus retains, per NCQA standards and guidelines include:
• assuring clear delineation of its responsibilities and the responsibilities of its

delegate regarding the performance of specific NCQA-required activities through
preparation of a mutually agreed upon delegation document
• evaluating the delegate’s capacity to perform the specific activities required by

NCQA before entering into a delegation agreement (usually involving a site visit and
written review of the delegate’s understanding of the standards/delegated tasks)
• receiving reports from delegates at least semi-annually
• conducting an annual review evaluation of all delegates
Using findings from the pre-delegation evaluation, annual evaluations, file audits and
reports to identify areas of improvement and act when findings warrant.
25
Accountability
Whether the applicable accrediting agency is URAC, NCQA, or TJC, the issue of
accountability is a primary focus for a health plan's delegation oversight program.
Accountability is the process by which one party is required to justify its actions and
policies to another party.
When a health plan delegates authority for a function, it transfers the power to conduct
the function on a day-to-day basis, but not the ultimate accountability for the function.
Although the delegate assumes the right to plan and carry out the function within
specified parameters, the health plan retains the responsibility for making sure that the
delegate performs the function in accordance with the health plan's standards and those
of TJC, NCQA, or URAC.
Accreditation Organization Guidelines
Each of the major healthcare accreditation organizations features its own standards
and/or guidelines for accreditation, with which health plans and other organizations
seeking accreditation are expected to comply (including in the area of delegation).
TJC’s standards focus on important patient, individual, or resident care and organization
functions that are essential to providing safe, high-quality care. New standards are added
only if they relate to patient safety or quality of care, have a positive impact on health
outcomes, meet or surpass law and regulation, and can be accurately and readily
measured. Each accredited and certified organization receives one complimentary manual
delivered via E-dition® (the electronic manual); otherwise, TJC’s standards may be
purchased through the TJC website.
NCQA’s Standards and Guidelines for accreditation of Health Plans generally undergo an
annual update.
URAC’s Health Plan Accreditation Guide also undergoes periodic revision. The Guide and an
overview of applicable standards are available by login and/or purchase on the URAC
website.
26
Delegated Credentialing
If the delegate's performance fails to meet these standards, the health plan is
responsible for developing a plan of corrective action to remedy the deficiencies. The
health plan is also accountable for ensuring coordination and continuity between the
delegated functions and the functions that are conducted by the health plan.
Delegated credentialing is the process by which a health plan (or any other entity
responsible for credentialing) agrees to turn over a portion of their credentialing review
process to a qualified entity and must provide oversight over the delegate for ongoing
adherence to program requirements. Delegated credentialing involves these three key
components.
• The delegated credentialing agreement, which outlines the responsibilities of both

the plan and the delegated entity
• The assessment and evaluation of the credentialing program, which provides the
plan all information required to determine whether the proposed entity meets plan
standards
• Ongoing oversight, which ensures that the delegated entity continues to operate in a
compliant manner
URAC and NCQA have standards for the written agreement between the health plan and
the delegated entity. All three accrediting agencies require documentation proving that the
health plan is conducting appropriate oversight of the delegated function. Such oversight
typically includes regular reports from the delegate to the health plan, and formal site visits
and audits by the health plan on an annual or more frequent basis. If the delegate is an
NCQA-accredited health plan, CVO, or managed behavioral healthcare organization
(MBHO), and the delegator health plan adheres to NCQA standards, the oversight
requirements for delegated functions are less stringent. While NCQA still requires an
appropriate written agreement between the health plan and the delegate, the health plan
is not obliged to make a formal, annual oversight review of any elements already certified
for that delegate by NCQA.
If a health plan accredited by URAC delegates activities to a URAC-certified CVO, URAC does
not require the health plan to perform annual oversight reviews of elements already
certified for that delegate.
The primary resource for NCQA guidelines is the most current version of Standards and
Guidelines for the Accreditation of Health Plans, available on the NCQA website.
27
State Laws and Delegating Functions
State laws also may play a role in a health plan's approach to delegating functions. The
National Association of Insurance Commissioners (NAIC) Health Benefit Plan Network
Access and Adequacy Model Act (Model Act) notes that states may consider
accreditation by a nationally recognized private accrediting entity with established and
maintained standards that are, at a minimum, substantially similar to (or exceed) those
required under the Act, as evidence of meeting some or all the Act’s requirements. Such
accreditation may not be used as a substitute for state regulatory oversight. 22
Delegation oversight is also important to the health plan from a liability point of view.
Because the health plan retains the ultimate accountability for the performance of any
delegated function, the health plan may be held liable if delegated functions are not
conducted properly. If provider malpractice occurs, the delegate that performed provider
credentialing activities and the health plan may both be liable if the credentialing process
for the provider was not conducted according to legal and regulatory standards.
Why Delegate?
Decisions on function delegation, and which aspects of a function to delegate, depend on

the health plan's resources, the proposed delegate's ability to perform the function
according to the health plan's standards, and the health plan's philosophy about
delegation. The health plan might choose to delegate because it does not wish to
dedicate internal resources to perform the activity within the health plan or because the
plan's staff seeks external expertise for the activity. The health plan may also realize that
its current information system cannot handle the demands of a function.
If another organization already has the necessary systems and personnel in place to
perform an activity, the health plan may find it more efficient in terms of time and
money to delegate to that entity.
Example: When a health plan is in the process of establishing its systems for a new
benefit plan, contracting with provider organizations for medical records review services
may be much faster than building the capability for the medical records review function
within the health plan.
Delegation often occurs because the network's providers request the responsibility for
certain activities. Hospitals and provider organizations that accept financial risk for the
delivery of healthcare services may even require the delegation of functions (such as
credentialing) as a condition for contracting with the health plan.
The delegation of functions to providers can also occur without the transfer of financial
risk, and the transfer of financial risk does not equal delegation. If the provider already
has satisfactory systems for an activity in place and the health plan does not, the health
plan may simply find it more practical for the provider organization to assume
responsibility for the function, at least on a temporary basis. The health plan may choose
to develop its own mechanisms overtime to conduct functions that have been previously
delegated.
28
The Delegation Oversight Program: An Introduction
To comply with accrediting, regulatory, and legal requirements, and to decrease the health
plan's legal risk associated with delegation, health plans usually establish a formal program
for oversight of delegated functions. This program outlines the health plan's processes for
evaluating proposed delegation arrangements, reviewing the performance of delegates,
and providing delegates with corrective action plans as needed. By instituting a formal
program for delegation oversight, the health plan can avoid several of the following
problems:
• confusion about which functions have been delegated
• inadequate criteria and processes for selecting delegates
• inadequate continuing oversight of delegates
• failure to formalize the delegation arrangement
The goal of the delegation oversight program is to ensure that delegated functions are
performed at or above the standards of the health plan and the applicable accrediting and
regulatory agencies. Another objective for the delegation oversight program is to ensure
equal and consistent treatment of plan members across the health plan’s entire network. 23
Organizational Structure for Delegation Oversight
The organization of the delegation program varies from one health plan to another. In
some health plans, the existing committee responsible for a specific function directs the
delegation oversight program. For instance, delegation oversight of primary source
verification may be assigned to the credentialing committee or to another committee
(such as quality management or QM), if there is no dedicated committee for
credentialing.
Other health plans have a standing multidisciplinary committee that is dedicated to

supervising all delegation processes. This delegation oversight committee typically
reports to the health plan's QM committee. The composition of a multidisciplinary
delegation oversight committee varies according to the type of activities that the health
plan delegates. The delegation oversight committee may also include a representative
from the delegated entity, although such representation is not standard practice. The
inclusion of the delegate's representative enhances communication and the feeling of
the partnership between the health plan and the delegate.
29
Delegation Oversight Committee Case Study
Novellus Health Plan has established a Delegation Oversight Committee for its Health
Plan that works as follows:
• The Novellus Delegation Oversight Committee assesses and oversees all delegated
activities performed by contracted delegates, which interfaces with the Plan’s
Quality Improvement Committee.
• The Novellus Delegation Oversight Committee monitors delegates’ compliance with

Novellus’ policies and procedures, accreditation standards, and applicable laws,
rules, regulations, and stipulations, thereby ensuring that all members receive
equitable access to care and services.
• Additional responsibilities of the Novellus Delegation Oversight Committee include

but are not limited to:
o Responding to and addressing the concerns of the Novellus operational

departments in a process-oriented manner as it relates to the
performance/non-performance of delegated entities.
o Using objective criteria or metrics to evaluate the measures and processes of

performance of the delegated entities against Novellus’ and the health care
industry’s standards and benchmarks to identify areas of success and areas in
need of improvement.
o Reviewing all applicable pre-delegation materials and annual audit materials

against established protocols.
o Making recommendations to the Quality Improvement Committee regarding

delegation activities including, but not limited to, a potential delegate being
approved as a delegate, adding functions and/or lines of business to an
established delegate, rescinding the delegate status of delegate to that of a
vendor, rescinding the contract of a delegate and/or pursuing
recommendations that impact the delegate.
o Establishing time frames and protocols for auditing and reporting the
functionality of delegated entities to the Delegation Oversight Committee.
o Recommending decisions regarding the delegates to the Quality

Improvement Committee in a manner that allows the Quality Improvement
Committee to act within timely and appropriate time frames.
o Communicating with all affected and concerned customers in a confidential

manner.
o Overseeing statements of deficiencies and improvement action plans to

ensure completion of recognized deficiencies and compliance with state and
federal regulatory and accreditation bodies.
30
Overseeing the Delegation Process
The committee that oversees the delegation process is generally responsible for
establishing the criteria for selecting delegates. Selection criteria vary among plans, but
there are typical minimum requirements for delegates:
• One year of experience performing the delegated activity
• Demonstrated compliance with regulatory requirements
• Systems and processes capable of meeting the health plan's standards and
applicable accreditation standards
• A corporate structure that can support the performance of the delegated activity
• No current Medicare or Medicaid sanctions against the entity or any of its officers
• Agreement with the health plan's requirements for periodic reporting
• Policies and procedures for the delegated function that are acceptable to the
department in the health plan that would otherwise perform the function
• A designated coordinator for the function to be delegated
• Adequate liability insurance for the delegated activity
Based on evaluations of the candidates' capabilities, the committee in charge of

delegation oversight is responsible for approving or denying proposed delegations. This
committee also reviews and approves the processes for measuring delegates'
performance.
Depending on the extent to which the health plan delegates functions, a health plan
may have one or more staff members whose sole job is to administer delegated
activities. In health plans where delegation plays only a small role, personnel from the
department that would otherwise perform the delegated function typically carry out
the routine tasks of the delegation process.
Health plans that delegate functions typically use a structured oversight process to
ensure a logical, consistent approach to the selection and monitoring of delegates. The
delegation oversight process generally includes the following steps:
• proposal for delegation
• evaluation of a candidate for delegation
• decision by the committee responsible for delegation oversight
• a written document describing the delegated activity
• continuing oversight of the delegated activity, with corrective actions and follow up
evaluations when indicated
31
The Delegation Oversight Process
In some cases, the health plan initiates the delegation process by inviting potential
delegates to submit written proposals describing their services and how those services can
meet the needs of the health plan. The health plan then evaluates the proposals and
selects the candidate most qualified to perform the function.
More often, the candidate for delegation approaches the health plan to express interest in
contracting for delegated activities. CVOs and other outside organizations typically have
marketing programs that emphasize their capabilities. Provider groups desiring delegation
frequently introduce the subject of delegated activities during contract negotiations with
the health plan.
After both parties have indicated their interest in delegation, the health plan then
forwards a written proposal for delegation to the candidate. The written proposal
generally consists of a letter of intent, an application, and a draft of the delegation
agreement. Ideally, all these preliminary documents contain precise language describing
the activities to be delegated and the period for which the delegation agreement will be
effective. Terminology must be clearly explained so that both organizations understand
the exact nature of the proposed delegation arrangement. Clarity is especially critical
when delegating functions to network providers who may be less aware of the health
plan's expectations than a CVO or another organization specifically dedicated to
performing delegated functions.24
Proposal for Delegation
The letter of intent outlines the delegation oversight process. It also establishes a mutual
agreement about the confidentiality of patient information and the policies and procedures
of the health plan and the potential delegate. However, a letter of intent is not a contract
and does not create a legally binding relationship.
The length and complexity of the application for delegation vary from one health plan to
another. Some health plans use this form to record only very basic information about the
delegate, such as the name, address, telephone number, contact person for the
organization, and the activities that are being requested. Other applications are more
extensive and require information about the candidate's policies, procedures, and
qualifications. If the potential delegate is a provider organization, the application may
request information about the types and numbers of providers included in the organization.
When the health plan receives the completed application and the requested supporting
documentation, the health plan can begin to evaluate the candidate.
32
Evaluation of the Candidate
The main purpose of evaluating a candidate is to determine if they can perform a

delegated function as well or better than the health plan at an appropriate cost level. To
determine this ability, the health plan compares the application and supporting
documents, to the health plan's own policies and procedures and the standards of the
applicable regulatory and accrediting agencies. Thus, the health plan becomes familiar
with the candidate's basic systems and processes for the delegated function and
identifies areas of special concern for the site visit.
During the site visit, the health plan seeks to validate the previously submitted
documentation and to gain additional information about the quality of the candidate's
performance. The delegation evaluator from the health plan generally examines the
potential delegate's structure, resources, procedures, and outcomes for the function
under consideration
The candidate's organizational chart and bylaws are sources of information about the
candidate's reporting structure for the delegated function. The delegation evaluator
examines these documents for indications that the potential delegate's highest level of
authority is appropriately involved in the governance of the delegated function.
The candidate's human, technological, and financial resources are other indicators of its
ability to meet the health plan's requirements. By observing the delegated function on
site, the evaluator can determine if the personnel responsible for the function are
competent and well-trained and if the support systems for the function are adequate.
The evaluator also audits reports and records to make sure that the candidate's current
processes allow it to perform the delegated function effectively and in accordance with
applicable laws and regulations. The outcomes described in these reports and records
are a reflection of the candidate's level of expertise with the delegated function. The
evaluator determines if the candidate plans to subdelegate any of the delegated
activities and if so, how the candidate plans to manage the subdelegation. 25
33
Decision by the Delegation Oversight Committee
The manager of delegated services, or other personnel in charge of candidate evaluation,

presents a written summary of the evaluation results and recommendations for action to
the health plan committee overseeing the delegation. The committee reviews this
information and either approves, denies, or pends the delegation.
If the candidate meets the health plan's standards for the delegated function, the health
plan sends its findings and a written document that describes the delegation
arrangement to the candidate for approval. If the candidate's capabilities are
inadequate to perform the specified function, the health plan sends a denial of the
delegation along with an explanation of the candidate's deficiencies. The rejected
candidate may reapply for delegated activities after a specified period- usually within six
months. At this time, the candidate provides documentation that past deficiencies have
been remedied.
In cases where the candidate does not fully meet the health plan's standards but does
not have significant deficiencies, the health plan may send the candidate a letter
outlining recommended changes, expected completion dates for the changes, and a
date for a repeat site visit. The candidate's request for delegation will be approved or
denied based on the second evaluation.
Some health plans may agree to a shared delegation arrangement with a delegate who
meets some, but not all, of the health plan's requirements for a function. In a shared
delegation situation, the health plan contracts with the delegate for selected activities and
retains responsibility for the activities that the delegate cannot perform.26
The Delegation Agreement
A delegation agreement is a contractual document that describes the delegated

functions and responsibilities of the health plan and the delegate. The delegation
agreement may be in the form of a contract (the form generally preferred by health
plans), a letter, or some other written instrument. For a delegation arrangement with a
provider organization, the delegation agreement may be included in the contract for the
delivery of healthcare services or it may be a separate document. Some health plans
prefer to keep the delegation agreement separate to allow for termination or
modification of the delegation arrangement without affecting the contract for
healthcare services.
34
Delegation Agreement Case Study
Novellus Health Plan delegates credentialing activities and has established a procedure
for monitoring the credentialing process the various entities with which the Plan
currently has a Delegation of Credentialing Agreement. This is done to ensure all
practitioners and organizational providers are credentialed or re-credentialed according
to the Plan’s Delegation of Credentialing Agreement with them, and that delegated
credentialing services are meeting Plan criteria.
35
Guidelines are summarized from the Plan’s Delegation of Credentialing Agreement:
• Is mutually agreed upon
• Describes delegated activities and responsibilities of both parties
• Delegated Entity must pass a pre-assessment review prior to the Delegation of

Credentialing
• Agreement going into effect which could include:
o Site Visit
o Telephone consultation
o Documentation review (policies and procedures and file review)
o Virtual Review
• Delegated Entity has written policies and procedures that correspond to NCQA
Standards regarding credentialing
• Delegated Entity performs verification of credentialing elements specified in

Delegation of Credentialing Agreement
• Organization retains the right to approve, suspend and terminate individual

practitioners, organizational providers and sites, even if the organization delegates
decision making
• Delegated Entity provides evidence that re-credentialing of practitioners is

completed within the three-year time frame and follows the guidelines specified in
the Delegation of Credentialing Agreement
• The allowed uses of Protected Health Information (PHI)
o Annually audits credentialing and re-credentialing files against NCQA

Standards for each year that delegation has been in effect
o The greater of a minimum of eight initial and eight re-credentialing files, or

5% of total files shall be reviewed
o A Corrective Action Plan (CAP) shall be required from the delegated entity if
the audit score is less than 80%
o Annually evaluated delegate performance against current NCQA Standards

for delegated activities
o Semi-Annually evaluates regular reports as specified in NCQA Standards
PHI stands for Protected Health Information. The HIPAA Privacy Rule provides federal
protections for personal health information held by covered entities and gives patients an
array of rights with respect to that information.
36
Assignment of Responsibilities
Like the letter of intent and the application for delegation, the delegation agreement
should be as specific as possible. An agreement that lists the individual services to be
delegated and then defines the components of these services reduces the chance for
misinterpretation. When a health plan contracts with more than one delegate for a
function, a clear and detailed agreement can help assure that all delegates perform
the function in the same consistent manner.
Example: Novellus Health Partners has delegated its provider credentialing function to
two separate credentialing organizations. One organization focuses on primary care
physicians, and the second focuses on specialists.
The health plan can further lessen the chance for confusion by describing in detail the
responsibilities retained by the health plan and the responsibilities transferred to the
delegate. Listing the responsibilities of both parties in the agreement establishes a
tone of collaboration.
Although the delegate is responsible for performing the function according to

established standards, the health plan is ultimately accountable for any deficiencies. The
health plan must oversee the quality of the delegate's work and propose corrective
action if the need arises. For the delegate to meet the health plan's requirements, the
standards for conducting the activity and the methods of measuring performance
should be clearly stated in the delegation agreement.
Delegation agreements usually specify contingencies for potential problems associated

with the delegated function. One type of contingency clause allows the health plan or
the delegate to terminate the agreement under certain circumstances, that is, with
cause.
Example: If a delegate with poor performance fails to implement corrective action as

directed by the health plan, the health plan may end the arrangement with appropriate
written notice. In other agreements, either party may end the delegation arrangement
without cause after giving adequate written notice to the other party.
Diligent oversight of a delegation arrangement is just as important to ensuring quality

care as the initial selection process. Unless the delegate is accredited or certified by the
same accrediting agency as the delegating health plan, the health plan must regularly
audit the delegate to ensure that the delegate is following the health plan's guidelines for
the function.
In order to ensure satisfactory performance of the delegated function, some health plans
perform periodic audits even if the delegate is accredited or certified by the health plan's
accrediting agency. During an audit, a representative from the health plan annually (at
least) revisits the delegate to observe operations, check documentation, and attend
committee meetings related to the delegated function. The purpose of the audit is to
assess the delegate's continued capability to perform the delegated function in a way
that meets the standards of the health plan and the applicable accrediting and regulatory
bodies.
37
The health plan' s delegation oversight committee reviews the findings from the repeat
visits along with the delegate's formal reports on operations. After the oversight
committee compares the delegate's results and processes to the goals and standards
established in the delegation agreement, the health plan sends its comments and any
indicated corrective action plans back to the delegate. If the health plan has a
delegation oversight manager, this person often acts as a liaison between the oversight
committee and the delegate during the oversight process to facilitate communication
and help correct any performance deficiencies.
Subdelegation
As part of the delegation process, the health plan also monitors any use of
subdelegation. Subdelegation is the process that occurs when the health plan's delegate
contracts with a third entity to perform activities that were originally delegated by the
health plan. Either the health plan or the delegate may conduct the oversight of the
subdelegate. Once again, however, the health plan is ultimately accountable for the
performance of the subdelegate.
The delegation agreement between the health plan and the delegate should clearly
define any limitations that the health plan places on subdelegation.
Example: The agreement may forbid the delegate to subdelegate activities without
informing the health plan and obtaining the health plan's express written approval prior
to subdelegation, or it may specify certain activities that may not be subdelegated. 27
Subdelegation Case Study
“Novellus Health Plan” has contracted with “ProviderLink” to conduct provider

credentialing activities in connection with the development of the Plan’s provider
network. “ProviderLink” is handling several aspects of the process, including in terms of
provider educational/work history, hospital affiliations, and licensure; but ProviderLink is
interested in “sub-delegating” to another entity the task of tracking medical malpractice
claims against particular providers. This would only be permitted in accordance with the
terms of the delegation agreement.
38
Subdelegation Agreement Clause Example
“Novellus Health Plan” retains the right to approve arrangements for any credentialing
activities sub-delegated by “ProviderLink” or any of its delegates. “ProviderLink” shall obtain
“Novellus Health Plan’s” approval before sub-delegation of any credentialing activities
initiated during the term of this Agreement and shall report any change in approved sub-
delegation arrangements to “Novellus Health Plan” at least thirty (30) days in advance of
such change. Sub-delegates shall be subject to all applicable federal and [state] regulations
and requirements.
The process for subdelegation follows the same steps as the original delegation:
• an evaluation of the subdelegate's structures, processes, and outcomes to ensure

that they meet health plan standards
• a delegation agreement that describes the arrangement in detail
• an ongoing program of regular reports on activities, results, and problems
Many health plans inquire about the delegate's plans for subdelegation on the original
application.
Since subdelegation removes the delegated activity even further from the health
plan's control, health plans are generally cautious about subdelegation. As a result,
the health plan may prefer to conduct its own initial and continuing oversight of the
subdelegation rather than leaving this responsibility solely to the delegate.
39
Delegation of Credentialing and Recredentialing
The delegation of provider credentialing and recredentialing activities is a common

practice for health plans. Health plans use credentialing and recredentialing to help
them build and maintain networks of experienced, licensed, and well-trained
providers who can deliver the required healthcare services. Efficient credentialing
help a health plan establish a network, offer a new product, or enter a new market as
quickly as possible.
Many health plans have found that credentialing can be done faster and less costly by
delegating some or all the information-gathering and verification activities. A local
CVO or provider organization may know the local provider market better or have a
more efficient system for gathering information than does the health plan.
Some health plans delegate the entire credentialing process (i.e. information collection,
data verification, and selection decisions) to their providers.
Example: “Novellus Health Plan” has decided to engage in “delegated credentialing” by

delegating the Primary Source Verification process to a provider organization in exchange
for changing the provider enrollment process from a paper-based process to a roster-
based process.
Payers generally will only enter a delegated credentialing contract with provider groups
that have a significant number of providers in their group (i.e. more than 150).
40
The steps involved in entering and successfully running a delegated credentialing contract
program include:
• Negotiating and entering a delegated contract between the Plan and the provider
organization). Each contract will need to be individually negotiated and will include
the service level agreements and requirements that the provider group and payer(s)
need to follow. Fee schedules (if a higher rate is negotiated) will also be included.
• For the program to succeed, the provider organization must maintain (or contract
with) a Credentials Verification Organization (CVO) operation within the organization
that conducts the Primary Source Verification (PSV) services required by your
Delegated Credentialing Contract.
o Some provider groups have their medical staff services department run their
PSV services, but the trend is for out-sourcing or conducting the PSV services
within the provider enrollment department.
o The policies and procedures of the CVO will have to be approved in

conjunction with the Plan.
• The provider organization must choose the right credentialing software to manage
its data and delegated contracts, build its delegated rosters and submit them to the
Plan.
• Periodic audits will be performed by the Plan and will directly affect the CVO –
policies and procedures will be tested to ensure the upkeep of the work is being
completed.28
Benefits of Delegated Credentialing
The benefits of delegated credentialing include:
• time savings
The primary benefit can be the reduction in the time that it takes for a payer to grant
the Provider Identification Numbers (PINs) and Effective Dates for membership into
the payer’s panels.
• roster vs. single enrollment
Other benefits include roster-based enrollment (meaning all providers can be added
to a single roster and submitted to the payer instead of sending individual
applications for each provider), as well as easier tracking and reconciliation
processes.
• improved efficiency
While entering a delegated credentialing contract program is a significant

undertaking, the benefits can significantly improve your organization’s efficiency,
patient satisfaction scores, and profitability.
41
Credentials Verification Organizations
Most health plans, especially those using credentials verification organizations (CVOs),
delegate certain information-gathering aspects of credentialing but retain the authority to
accept or reject individual providers. Applications, primary source verification, and site
visits are some of the components that a health plan may delegate while reserving the
right to make the final selection. The delegation of primary source verification and site
visits may reduce or even eliminate duplication of effort in regions where most providers
contract with multiple health plans. Medical associations in some geographic areas
encourage health plans to use a central source for primary source verification. In addition
to reducing the administrative burden on providers, the centralization of primary source
verification may reduce the time required for a health plan to complete its credentialing
process.
When a health plan delegates credentialing or recredentialing activities to a CVO,

hospital, physician-hospital organization, or other provider organization, the health plan is
still responsible for ensuring that its quality standards for providers are consistently
maintained. If the health plan delegates recredentialing, the health plan must assure that
the recredentialing process includes appropriate information about the quality of
practitioner performance.
Although TJC does not specifically address the delegation of credentialing, both NCQA and
URAC have guidelines for credentialing delegation. In many respects, the credentialing
delegation standards of URAC and NCQA are similar. Both sets of standards require the
delegator to demonstrate appropriate oversight of the delegated activity through a
thorough evaluation of the candidate for delegation, a written delegation agreement that
specifically describes the responsibilities of the delegator and the delegate, and an
ongoing program for performance monitoring and correction of any deficiencies.
Both agencies specify that the health plan retains the right to make the final decision to
accept or reject a proposed provider. When establishing a program to oversee delegated
credentialing activities, health plans generally follow NCQA or URAC guidelines.
Because the health plan may be liable for any adverse events that result from
credentialing errors committed by the delegate, many health plans include one or more
provisions in the delegation agreement to protect the health plan against losses related to
credentialing mistakes. Under one type of provision, the delegate must reimburse the
health plan for any losses that the health plan incurs as a result of negligence in the
credentialing process. Another type of liability protection provision stipulates that
delegates carry adequate liability insurance for credentialing activities. The liability
insurance provision may require the policy to include the health plan as an additional
insured party.
42
Delegation of Provider Performance Management
While health plans sometimes delegate provider performance management to provider

organizations, health plans rarely delegate this function to other parties. None of the
accrediting agencies specifically address the delegation of provider performance
management activities in their standards. Health plans that are accredited by TJC can
apply that agency's general standards for delegation to provider performance
management.
The TJC standards require health plans to:
• evaluate the delegation candidate according to clear criteria prior to delegation
• conduct ongoing monitoring of the delegated function according to established

expectations
• periodically collaborates with the delegate to coordinate activities
• retain the right to make key decisions
• ensure that the delegate complies with applicable TJC standards for the function 29
The delegation of provider performance management falls under URAC's standards that
deal with the delegation of medical management. These standards require the health
plan to assume accountability for delegated activities through proper oversight of the
delegate's performance and compliance with URAC standards for the activity. The
delegator plan is also responsible for ensuring that the delegate adheres to URAC's
standards for the confidentiality of member health information.30
Health plans that seek NCQA accreditation typically follow that agency's standards for
the delegation of quality improvement (QI) activities when delegating provider
performance management. The main requirements for appropriate oversight of QI
delegation are like those for credentialing delegation: evaluation of the candidate prior
to the delegation, a written delegation agreement describing the exact nature of the
delegation, and continued monitoring of the delegate's performance.31
Special Considerations for Medicare and Medicaid Networks
Many aspects of the provider recruitment, retention, and payment processes discussed here
and elsewhere in this course apply equally in the commercial health plan and Medicare and
Medicaid managed care plan contexts. Fee-for-service arrangements exist in all these
markets. There are some special considerations regarding network construction and
management for Medicare-based coverage (including Medicare Advantage plans) and
Medicaid managed care plans.
43
Provider Recruitment, Retention, and Payment for Medicare – Special

Considerations
Medicare Basics
The federal government offers Medicare coverage to individuals who are 65 years or older,
have certain disabilities, and suffer from end-stage renal disease or ALS.32 The Medicare
program is primarily funded through payroll taxes and Social Security income deductions.
Beneficiaries are also responsible for a portion of Medicare coverage costs through
deductibles for hospital services and monthly premiums for other healthcare services. 33
The Center for Medicare and Medicaid Services (CMS) separates Medicare coverage into
four parts, each with its own claims reimbursement structure:
• Medicare Part A
• Medicare Part B
• Medicare Part C
• Medicare Part D
Medicare Parts A and B are considered traditional or “original Medicare” and cover
inpatient and outpatient services. The bulk of Medicare’s benefit spending (about two-
thirds) is attributable to services performed by providers in traditional Medicare. 34
Medicare Part C includes Medicare Advantage plans, and Part D covers prescription drugs. 35
Focusing on Part C, Medicare Advantage Plans are a type of Medicare health plan offered by
a private company that contracts with Medicare to provide all Part A and Part B benefits for
plan beneficiaries. Most Medicare Advantage Plans also offer prescription drug coverage.36
Approximately one third of Medicare beneficiaries have enrolled in Medicare Advantage,

whose plans offer additional coverage. 37
Example: Some Medicare Advantage plans offer vision, and dental coverage that is not
available under basic Medicare policies.
Another key difference is that, unlike original Medicare, the federal government requires
Medicare Advantage plans to cap out-of-pocket spending. While original Medicare
beneficiaries must pay a portion of the healthcare costs for each service, Medicare
Advantage plans include an out-of-pocket spending maximum. Once beneficiaries hit the
limit, all services are covered.38
44
Provider Payment Model – Medicare Advantage Plans
Medicare pays Medicare Advantage plans a capitated (per enrollee) amount to provide all
Part A and B benefits. Additionally, Medicare makes a separate payment to plans for
providing prescription drug benefits under Medicare Part D. Payments to plans are adjusted
to account for enrollees’ health status and other factors. 39
Medicare has adjusted the payment methodology for Medicare Advantage plans over the
years in order to achieve different policy goals, such as expanding plan reach in different
geographic areas and delivering cost savings and or improved benefits.
Example: To attract plans in rural areas, the Balanced Budget Act (BBA) of 1997 established
a payment floor, applicable almost exclusively to rural counties. The Benefits Improvement
and Protection Act (BIPA) of 2000 created payment floors for urban areas and increased the
floor for rural areas. The Medicare Prescription Drug Improvement and Modernization Act
(MMA) of 2003 increased payments across all areas, while the Affordable Care Act (ACA) of
2010 reduced payments to plans.40 Medicare currently pays plans based on a “bidding”
process, which works as follows:
Plans submit bids based on estimated costs per enrollee for services covered under
Medicare Parts A and B. Significantly, all bids that meet the necessary requirements are
accepted. The bids are compared to benchmark amounts that are set by a statutory
formula, which varies by county (or region in the case of regional PPOs). The benchmarks
range from 95% of traditional Medicare costs in the top quartile of counties with relatively
high per capita Medicare costs to 115% of traditional Medicare costs in the bottom quartile
of counties with relatively low Medicare costs. 41
If a plan’s bid is higher than the benchmark, enrollees pay the difference between the
benchmark and the bid in the form of a monthly premium (in addition to the Medicare Part
B premium). If the bid is below the benchmark, the plan and Medicare split the difference
between the bid and the benchmark. The plan’s share in this instance is characterized as a
“rebate,” which is designed for use in providing supplemental benefits to enrollees.
Payments to plans are then adjusted based on enrollees’ risk profiles. 42
The Affordable Care Act (ACA) established a new system of bonuses to compensate for
plans with high quality ratings. Since 2012, Medicare Advantage plans with 4 or more stars
(out of 5) and new plans without ratings have been receiving bonus payments based on
quality ratings. The ACA also reduced rebates for all plans but allowed plans with higher
quality ratings to keep a larger share of the rebate than plans with lower quality ratings. 43
With the capitated payments, Medicare Advantage plans reimburse providers through
individual contracts. Each contract contains its own payment structure, ranging from fee-
for-service to risk-based, alternative payment models. Data shows that most Medicare
Advantage enrollment in 2016 (64%) fell under a health maintenance organization (HMO)
structure, followed by a local provider preference organization (PPO) (23% of enrollees) and
a regional PPO (7% of enrollees). Fee-for-service structures represented only about 1
percent of Medicare Advantage enrollment in 2016. 44
45
Provider Recruitment and Retention for Medicare Advantage Plans
CMS requires Medicare Advantage plans to include a specified number of physicians for
each of 26 specialties, along with hospitals and other providers, within a particular driving
time and distance of enrollees. 45 As between traditional Medicare and Medicare Advantage
plans, the latter generally are regarded as having a more limited network of physicians and
other providers, also known as a “narrow network.” 46
The size and composition of a plan’s network can have important implications for Medicare
Advantage enrollees and, by extension, for enrollee acquisition and retention under such
plans. MA enrollees may have concerns about seeing physicians (as in an HMO-style plan) or
about the costs of out-of-network care (as in the case of PPO enrollees). Given the age of
the Medicare population, emphasis should also be placed on various specialties that cater to
this population (i.e. cardiologists, rheumatologists, etc.).
Various factors may impact the size of a Medicare Advantage plan network, both at the
recruiting and retention stages. Insurers may choose to contract with some available
providers, for various reasons.
Example: Plans may desire greater control over the cost or quality of care provided by a
provider, or they may prefer to limit the number of physicians in the network to improve
coordination and efficiency of care for enrollees.
Network participation is not solely under the insurer’s control, either. Providers may not
want to be part of a Medicare Advantage network for reasons of their own. Among other
things, providers may eschew the extra paperwork requirements associated with accepting
another insurer; they may not want additional patients; or they may have concerns with a
Medicare Advantage plan’s payment rates or other terms, including preauthorization. The
overall shortage in physicians generally, as well as acute shortages among certain specialties
or in certain areas of the country, can significantly impact provider recruitment and
retention for Medicare Advantage Plans. According to the Association of American Medical
Colleges (AAMC), the nation faces a shortage of between 46,900 and 121,900 physicians by
2032. The projected shortfalls range between 21,100 and 55,200 for primary care, and
between 24,800 and 65,800 for non-primary care specialties. 47 AAMC’s research also
indicates that 20% of Americans live in a place that doesn’t have enough primary care
doctors (let alone specialists). 48
Against this backdrop, a recent trend has emerged that may impact provider recruitment
and retention for Medicare Advantage plans. Increasing competition in the Medicare
Advantage marketplace has encouraged payers to partner with providers in offering more
innovative plan options to beneficiaries, with attendant benefits for all stakeholders.
Example: In 2018 Humana and the University of Chicago Medicine entered into an
agreement that provides additional benefits to Medicare Advantage members at no charge,
with enrollees able to utilize services at the University’s outpatient facilities, clinics, and
group practices, and both parties providing enrollees with access to personalized care,
proactive health screenings, and enhanced chronic disease management. 49 Also, in 2018,
Anthem BlueCross BlueShield of Indiana added a community hospital to its MA network to
help increase provider options for beneficiaries.50
46
Provider Payment Models for Medicare Advantage Plans
Innovative provider payment models may also be useful in driving network expansion and
retention for Medicare Advantage plans.
Example: Humana and Heritage Provider Network recently partnered to expand in-network
Medicare Advantage coverage in California. The value-based agreement will reimburse
physicians based on patient outcomes.51
A payment model known as “full-risk” or “global risk” is increasingly being used by Medicare
Advantage plans to shift financial exposure for the treatment of patients to physician-
management companies. Under this arrangement, the health plans give the physician
companies the bulk of their Medicare funding when they assume the mantle of being
financially responsible for all patient care. For the doctor’s groups, the arrangement means
getting paid a large amount of money upfront for patient care without having to worry
about billing or preapproval requirements in many instances. 52
Provider Recruitment, Retention, and Payment for Managed Medicaid –

Special Considerations
Medicaid Basics
Medicaid, which is the largest public health coverage program in the United States, is a joint
federal and state-sponsored program that assists low-income individuals with paying for
healthcare costs. Many Medicaid beneficiaries receive their care through privately held
managed care companies. While each state defines who is eligible for coverage within its
program, Medicaid generally covers eligible low-income adults, children, pregnant women,
elderly adults, and people with disabilities. Medicaid is administered by states in accordance
with federal requirements. The program is funded jointly by states and the federal
government.53
Medicaid beneficiaries may pay premiums, deductibles, copayments, or coinsurances to

receive coverage, depending on the state. The federal government also funds on average 57
percent of the operating costs for each state’s program based on the state’s Medicaid
expenses.54
ACA’s Impact on Medicaid
The ACA made several changes to Medicaid, including the expansion of eligibility to adults
with incomes up to 138 percent of the federal poverty level (FPL). Originally a requirement,
the June 2012 Supreme Court ruling in National Federation of Independent Business v.
Sebelius effectively made Medicaid expansion an option. As of May 2019, 37 states
(including DC) have adopted the Medicaid expansion and 14 states have not adopted the
expansion.
47
Provider Payment Models
Under Medicaid managed care, states sign contracts with "managed care organizations" or
MCOs that provide medical services through their own networks of doctors and hospitals. In
this model, states pay a monthly stipend for coordinating the care of Medicaid patients. The
fee-for-service (FFS) model, in which the state pays doctors and hospitals directly for each
service provided, also is employed in many state Medicaid programs – either on a
standalone basis or as a means of provider reimbursement under Medicaid managed care. 55
Medicaid fee-for-service reimbursement models pay providers by the volume of services

they provide to beneficiaries. Each state establishes its own Medicaid reimbursement rate
under fee-for-service models in accordance with federal methodologies, including the cost
of healthcare associated with providing services, review of commercial payer rates, and
percentage of what Medicare reimburses for equivalent services.
Most Medicaid fee-for-service models set rates by the lesser of the actual charge for
services or the maximum allowable price.56 In contrast to a fee schedule, states pay
providers based either on a percentage of Medicare payment, a market assessment
(determined by the state), or a relative value scale. Medicaid fee-for-service rates generally
are significantly lower than Medicare reimbursement for similar services. 57
While fee-for-service remains a significant component of Medicaid spending, managed care

has become an increasingly important part of the Medicaid program. In 2016, more than 65
million Medicaid beneficiaries were enrolled in managed care. 58 Additional reporting
reflects that as of 2018, more than two-thirds (69%) of Medicaid beneficiaries across the
country were receiving care through MCOs. 59
Medicaid managed care plans generally employ one of three models, each of which features
a distinct method of plan and provider reimbursement. First, many states use a
comprehensive risk-based managed care model, in which plans receive a capitated rate for
Medicaid-covered services. 60 The fixed amount received per member, per month is
designed to cover a specific set of services for each beneficiary. If care exceeds the capitated
amount, however, the plans assume the financial risk. Under the comprehensive risk-based
managed care model, providers can be paid via fee-for-service or share in the model’s
financial risk arrangements (or both).
A second type of Medicaid managed care plan is known as the limited benefits plan. States
that use this managed care approach partner with limited benefits plans to provide services
for specific patient populations or to manage certain kinds of benefits.
Example: A limited benefits plan may focus on specific services (i.e. inpatient mental health,
non-emergency medical transportation, chronic disease management, pharmacy, and long-
term services and supports (LTSS)). 61
Limited benefit plans are generally paid on a capitated basis and may be risk-based, with
providers being paid on a fee-for-service basis or sharing in the plan’s risk. They may be
used to provide a certain set of services to either fee-for-service enrollees, managed care
enrollees, or both.62
48
Long-term services and supports (LTSS) refers to the services and supports used by persons
of all ages with functional limitations and/or chronic illnesses who need assistance to
perform routine daily activities, including bathing, dressing, preparing meals, and
administering medications.
Third, Medicaid beneficiaries may fall under a primary care case management model. In this
model, Medicaid enrollees are required to choose a primary care provider (PCP), who is
responsible for coordinating the enrollee’s care and is paid a monthly fee for doing so. The
PCP is paid on a fee-for-service basis for providing medical services. Under this model, the
plan absorbs the financial risk. 63
49
Provider Recruitment and Retention for Managed Medicaid
Health plans that serve Medicaid enrollees, including managed health care plans, typically
are focused on serving the low-income population. This population may feature
characteristics including:
• geography
• types of employment (i.e. manufacturing or service v. office or white collar)
• language(s) spoken
• adequacy of housing and food and water supply
Plans seeking to build and maintain a provider network that is adequate to meet the needs
of Medicaid enrollees will need to account for these factors and meet federal and state
requirements for network adequacy applicable to Medicaid.
To ensure that beneficiaries have appropriate access to healthcare services, the Centers for
Medicare and Medicaid Services (CMS) issued updated regulations for Medicaid managed
care in 2016. Several key elements of the updated regulations became effective for plan
years beginning in July 2018. As with previous federal rules dating back to 2002, the
regulations issued in 2016 continue to require states to ensure that managed care plans
maintain “sufficient” provider networks to provide adequate access to covered services for
all enrollees.64 But the 2016 rules also require states to develop provider network standards
based on reasonable travel time and distance from enrollee homes to provider sites, to
strengthen requirements for states to monitor enrollees’ access to care, and to address the
needs of people with disabilities or other special needs who increasingly are enrolled in
managed care plans. These various standards may impact the health plan’s strategies for
provider recruitment (i.e. building the network) and retention (i.e. network maintenance).
An important first step for plans is to assess the needs of the beneficiary population.
Different groups of enrollees may require different types of specialty practitioners.
Example: Older populations may require greater access to heart specialists, oncologists, and
rheumatologists. While younger populations may require more obstetrician, gynecologists,
and pediatric provider options.
A significant presence of recent immigrants or others for whom English is a second language
may require providers who speak different languages to meet governing network access
standards.
Two principal factors that can impact a Medicaid managed care plan’s ability to recruit and
retain an adequate provider network are:
• an overall shortage in healthcare providers
• Medicaid payment and administrative structures impact on provider willingness to

accept Medicaid patients
50
The former issue can affect provider recruitment and retention across commercial,
Medicare, and Medicaid plans and has been well-documented. 65 Managed Medicaid plans
have reported high rates of recruitment difficulty for some specialties and identified
provider supply as a leading challenge.66
The unwillingness of a significant number of providers to accept Medicaid patients can also
impact a Medicaid managed care plan’s ability to recruit and retain the right providers in the
right numbers. Medicaid generally has lower reimbursement rates. Depending on the
procedure, the rate may only cover a portion of the actual cost. Medicaid often has
extensive prior authorization requirements and other administrative burdens, including the
need to become certified to provide care to beneficiaries.
There are several strategies for improving provider recruitment and retention for Medicaid
managed care (and improving network adequacy in general) at the plan level. These include:
• incorporating a loan forgiveness provision for doctors who agree to practice in rural
or underserved areas for a period, which may increase network participation
• taking steps to reduce the administrative burden on physicians, including by

implementing more streamlined processes for submitting/paying claims and
obtaining preauthorization
• updating or improving technology and plan-provider communication interfaces
• improving payment options by incorporating value-based structures
• exploring increased use of telemedicine/telehealth alternatives to increase the

number of providers available to enrollee’s areas
51
Additional Recommended Reading
A Closer Look at Provider Networks, available at

https://www.fastercures.org/assets/Uploads/PDF/A-Closer-Look-at-Provider-Networks.pdf
(accessed July 2018).
Affordable Care Act – Standards for Health Insurance Provider Networks: Examples from the
States, Families USA, Issue Brief (November 2014), available at
https://familiesusa.org/sites/default/files/product_documents/ACT_Network%20Adequacy
%20Brief_final_web.pdf.
AHIP Foundation, A Consumer Guide to Understanding Health Plan Networks, available at

https://speier.house.gov/sites/speier.house.gov/files/ahip-interactive-consumer-guide-
compressed.pdf (accessed July 2018).
Mahar, Jamal H., Rosencrance, Gregory J., and Rasmussen, Peter A., Telemedicine; Past,
present, and future, Cleveland Clinic Journal of Medicine, Vol. 85, No. 12, December 2018.
McCarty, Sally & Farris, Max, ACA Implications for State Network Adequacy Standards, Issue
Brief, Georgetown University Health Policy Institute (August 2013), available at
https://www.shvs.org/wp-content/uploads/2014/02/State-Network-Georgetown-ACA-
Implications-for-State-Network-Adequacy-Standards.pdf.
Telemedicine, Medicaid.gov, available at

https://www.medicaid.gov/medicaid/benefits/telemed/index.html (accessed May 2019)
Zimolzak, Joanne L., Insurance to the Rescue-Will Insurance Policies Pay Claims for the Ever-
Growing Public Health and Welfare Disasters?, published at the American Bar Association
Tort Trial and Insurance Practice Spring Section Conference, May 2019
52
Suggested Additional Reading: Medicare and Medicaid
Lipson, Debra J., Jenna Libersky, Katharine Bradley, Corinne Lewis, Allison Wishon
Siegwarth, and Rebecca Lester (2017). Promoting Access in Medicaid and CHIP Managed
Care: A Toolkit for Ensuring Provider Network Adequacy and Service Availability. Baltimore,
MD: Division of Managed Care Plans, Center for Medicaid and CHIP Services, CMS, U.S.
Department of Health and Human Services. Available at
https://www.medicaid.gov/medicaid/managed-care/downloads/guidance/adequacy-and-
access-toolkit.pdf
Rachel Garfield, Elizabeth Hinton, Elizabeth Cornachione, and Cornelia Hall, Medicaid
Managed Care Plans and Access to Care: Results from the Kaiser Family Foundation 2017
Survey of Medicaid Managed Care Plans, March 5, 2018, available at
https://www.kff.org/medicaid/report/medicaid-managed-care-plans-and-access-to-care-
results-from-the-kaiser-family-foundation-2017-survey-of-medicaid-managed-care-plans/
Sara Rosenbaum, Sara Schmucker, and J. Zoe Beckerman, Provider Networks and Access in
Medicaid Managed Care: A Look at Federal and State Standards, To the Point (blog),
Commonwealth Fund, October 10, 2018; available at
https://www.commonwealthfund.org/blog/2018/provider-networks-and-access-medicaid-
managed-care-look-federal-and-state-standards
Juliette Cubanski, Christina Swoope, Cristina Bocccuti, Gretchen Jacobson, Giselle Casillas,
Shannon Griffin, and Tricia Neuman, A Primer on Medicare: Key Facts About the Medicare
Program and the People it Covers, March 20, 2015; available at https://www.kff.org/report-
section/a-primer-on-medicare-how-does-medicare-pay-providers-in-traditional-medicare/
Gretchen Jacobson, et al., Medicare Advantage: How Robust Are Plans’ Physician Networks?
October 5, 2017, Kaiser Family Foundation; available at https://www.kff.org/report-
section/medicare-advantage-how-robust-are-plans-physician-networks-report/
53
Notes:
1
https://www.ecfr.gov/cgi-
bin/retrieveECFR?gp=&SID=73a8285683b5773c2400db3f89a3a38a&mc=true&n=pt45.1.156&r=PART&ty=HTM
L#se45.1.156_1230
2
NAIC Model Act, https://www.naic.org/store/free/MDL-74.pdf; 45 CFR § 156.122(e) (prescription drug
benefits); available at https://www.ecfr.gov/cgi-
L#se45.1.156_1122
3
A number of states impose qualitative standards to assess the adequacy of provider networks for plans that
participate in the Affordable Care Act’s health insurance marketplaces. For example, Maryland requires
carriers to maintain a panel of in-network providers that is “sufficient in numbers and types of available
providers to meet the health care needs of enrollees.” Md. Code Regs. 31.10.34.04, available at
http://mdrules.elaws.us/comar/31.10.34.04. Federal standards for network adequacy are prescribed at 45 CFR
§ 156.230, available at https://www.ecfr.gov/cgi-
L#se45.1.156_1230
4
Narrow Provider Networks in New Health Plans: Balancing Affordability with Access to Quality Care,
Georgetown University Center on Health Insurance Reforms and Urban Institute, June 2014; Eggbeer, Bill,
Narrow, Tailored, Tiered and High Performance Networks: An Emerging Trend,
http://www.bdcadvisors.com/wp-
content/uploads/2015/08/bdc_jan_2013_narrowtailoredtieredandhighperformancenetworks.pdf (accessed
July 2018); Giovannelli, Justin and Ashley Williams, Regulation of Narrow Networks: With Federal Protections in
Jeopardy, State Approaches Take on Added Significance, Feb. 2, 2017,
https://www.commonwealthfund.org/blog/2017/regulation-narrow-networks-federal-protections-jeopardy-
state-approaches-take-added (accessed July 2018); O’Connor, James T. and Juliet M. Spector, High-Value
Provider Networks, July 2, 2014, https://www.ahip.org/milliman-report-high-value-healthcare-provider-
networks/
5
Mahar, Jamal H., Rosencrance, Gregory J., and Rasmussen, Peter A., Telemedicine; Past, present, and future,
Cleveland Clinic Journal of Medicine, Vol. 85, No. 12, December 2018, p. 938.
6
Mahar, Jamal H., Rosencrance, Gregory J., and Rasmussen, Peter A., Telemedicine; Past, present, and future,
Cleveland Clinic Journal of Medicine, Vol. 85, No. 12, December 2018, p. 938.
7
Id. p. 939.
8
Id. p. 938.
9
Such directories and lists may be available online. One such directory focused on regional telemedicine
offerings may be found here. See https://telemedicine.arizona.edu/servicedirectory WebMD offers a “find a
provider near me” function that is widely available. See https://doctor.webmd.com/
10
2017 Survey: Final-Year Medical Residents – A Survey Examining the Career Preferences, Plans and
Expectations of Physicians Completing Their Residency Training, available at
https://www.merritthawkins.com/uploadedfiles/mha_2017_resident_survey.pdf
11
Developing an Effective Health Care Workforce Planning Model, American Hospital Association White Paper
(2013), available at: https://www.aha.org/system/files/2018-05/13wpmwhitepaperfinal.pdf
12
MacQueen, Ian T., et al., Recruiting Rural Healthcare Providers Today: a Systematic Review of Training
Program Success and Determinants of Geographic Choices, published online: 27 November 2017, available at:
https://www.researchgate.net/publication/321329828_Recruiting_Rural_Healthcare_Providers_Today_a_Syst
ematic_Review_of_Training_Program_Success_and_Determinants_of_Geographic_Choices/fulltext/5a1d6c00
458515373189936d/321329828_Recruiting_Rural_Healthcare_Providers_Today_a_Systematic_Review_of_Tra
ining_Program_Success_and_Determinants_of_Geographic_Choices.pdf?origin=publication_detail
13
U.S. Health Policy Gateway, ACA and Physician Shortage, accessible at
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=2ahUKEwjJ4PqCxa_iAhWvuVkK
HYzcAp8QFjABegQIBBAB&url=http%3A%2F%2Fushealthpolicygateway.com%2Fvii-key-policy-issues-
regulation-and-reform%2Fpatient-protection-and-affordable-care-act-ppaca%2Fppaca-research-and-
analysis%2Fppaca-impact-on-access%2Fimpact-on-access-to-care%2Fphysician-
shortage%2F&usg=AOvVaw3phNkhHu9krT0bhvjBfZ_K (accessed May 2019).
14
Id.
54
15
Brodsky, Karen L., “Best Practices in Specialty Provider Recruitment and Retention: Challenges and
Solutions,” August 2005, p. 2.
16
id.
17
id.
18
Commins, John, L.A. Care Awards $3.6M for Physician Recruitment, Jan. 30, 2019, available at
https://www.google.com/search?q=LA+care+awards+3.6M+for+physician+recruitment&rls=com.microsoft:en-
US:IE-Address&ie=UTF-8&oe=UTF-8&sourceid=ie7&rlz=1I7GUEA_enUS629&gws_rd=ssl (accessed May 2019).
19
One form of checklist designed to manage the submission of required background information during the
credentialing process may be accessed here: http://stdtac.org/wp-content/uploads/2016/05/Provider-
Credientialing_STDTAC-1.pdf
20
See National Practitioner Data Bank, http://npdb-hipdb.com/ (accessed July 2018).
21
For example, Section Ins 9.40 (3)(b), Wis. Adm. Code, requires that insurers offering a preferred provider
plan (PPP) develop, e.g., a written plan for the oversight of any functions delegated to other contracted
entities. See https://docs.legis.wisconsin.gov/code/admin_code/ins/9/III/40
22
NAIC Model Act, https://www.naic.org/store/free/MDL-74.pdf
22
Three Things Delegated Entities Need to Know and Get Right, December 2015, available at
https://www.credsimple.com/credentialing-how-tos/delegated-entities-how-to/ (accessed May 2019).
23
HP Standards and Guidelines, Appendix 5, “Delegation,” for use in surveys after July 1, 2014; National
Association of Medical Staff Services (NAMSS), Overview of Delegation in Managed Care, accessible online
(accessed May 2019)
24
Id.
25
Id.
26
Id.
27
Id.
28
Id.
29
https://www.jointcommission.org/accreditation/accreditation_main.aspx (accessed May 2019)
30
https://www.urac.org/accreditation-process (accessed May 2019)
31
https://www.ncqa.org/programs/health-plans/health-plan-accreditation-hpa/ (accessed May 2019)
32
https://www.medicare.gov/
33
id.
34
Juliette Cubanski, Christina Swoope, Cristina Bocccuti, Gretchen Jacobson, Giselle Casillas, Shannon Griffin,
and Tricia Neuman, A Primer on Medicare: Key Facts About the Medicare Program and the People it Covers,
March 20, 2015; available at https://www.kff.org/report-section/a-primer-on-medicare-how-does-medicare-
pay-providers-in-traditional-medicare/
35
id.
36
https://www.medicare.gov/sign-up-change-plans/types-of-medicare-health-plans/medicare-advantage-
plans
37
Gretchen Jacobson, Anthony Damico, Tricia Neuman, and Marsha Gold, Medicare Advantage 2017 Spotlight:
Enrollment Market Update, June 6, 2017, available at https://www.kff.org/medicare/issue-brief/medicare-
advantage-2017-spotlight-enrollment-market-update/?utm_campaign=KFF-2017-June-Medicare-Advantage-
Enrollment-Market&utm_source=hs_email&utm_medium=email&utm_content=52791934&_hsenc=p2ANqtz-
9iAWZqKeKiaFfH2M7XS
38
Cubanski, et al., A Primer on Medicare: Key Facts About the Medicare Program and the People it Covers,
supra.
39
Kaiser Family Foundation, Medicare Advantage, June 6, 2019; available at
https://www.kff.org/medicare/fact-sheet/medicare-advantage/
40
id.
41
id.
42
id.
43
id.
44
id.
45
Gretchen Jacobson, et al., Medicare Advantage: How Robust Are Plans’ Physician Networks?, October 5,
2017, Kaiser Family Foundation; available at https://www.kff.org/report-section/medicare-advantage-how-
robust-are-plans-physician-networks-report/
55
46
Yevgeniy Feyman, et al, Primary Care Physician Networks in Medicare Advantage, Health Affairs 38. No. 4
(April 2019): 537-44. https://doi.org/10.26099/an95-e925 Recent data suggests that this may no longer be the
case, with narrow networks actually accounting for a declining proportion of Medicare Advantage primary care
product offerings. See id.
47
American Association of Medical Colleges (AAMC), New Findings Confirm Predictions on Physician Shortages,
April 23, 2019, available at https://www.aamc.org/news-insights/press-releases/new-findings-confirm-
predictions-physician-shortage
48
id.
49
https://www.busineswire.com/news/home/20180823005531/en/
50
Thomas Beaton, Payers, Providers Create New Medicare Advantage Partnerships, HealthPayerIntelligence,
August 24, 2018; available at https://healthpayerintelligence.com/news/payers-providers-create-new-
medicare-advantage-partnerships
51
Susan Morse,Humana and Heritage Provider Network expand in-network Medicare Advantage coverage,
Healthcare Finance News, October 2018; available at
https://www.healthcarefinancenews.com/news/humana-and-heritage-provider-network-partnership-
expands-network-medicare-advantage-coverage
52
Phil Galewitz, Medicare Advantage plans shift their financial risk to doctors, Kaiser Health News, October 8,
2018; available at https://khn.org/news/medicare-advantage-plans-shift-their-financial-risk-to-doctors/
53
https://www.medicaid.gov/medicaid/index.html
54
The Difference Between Medicare and Medicaid Reimbursement, available at
https://revcycleintelligence.com/features/the-difference-between-medicare-and-medicaid-reimbursement
55
Christine Vestal, Managed Care Explained: Why a Medicaid Innovation is Spreading, Stateline, May 31, 2011,
available at https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2011/05/31/managed-care-
explained-why-a-medicaid-innovation-is-spreading
56
A 2017 report issued by the Medicaid and CHIP Payment and Access Commission (MACPAC) found that 38
out of the 51 US Medicaid programs use this method. See https://www.macpac.gov/publication/states-
medicaid-fee-for-service-physician-payment-policies/
57
kff.org, Medicaid-to-Medicare Fee Index, available at https://www.kff.org/medicaid/state-
indicator/medicaid-to-medicare-fee-
index/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D
58
Sara Rosenbaum, Sara Schmucker, and J. Zoe Beckerman, Provider Networks and Access in Medicaid
Managed Care: A Look at Federal and State Standards, To the Point (blog), Commonwealth Fund, October 10,
2018; available at https://www.commonwealthfund.org/blog/2018/provider-networks-and-access-medicaid-
managed-care-look-federal-and-state-standards
59
Elizabeth Hinton, Robin Rudowitz, Maria Diaz, and Natalie Springer, 10 Things to Know about Medicaid
Managed Care, Kaiser Family Foundation Issue Brief, September 6, 2019, available at
https://www.kff.org/medicaid/issue-brief/10-things-to-know-about-medicaid-managed-care/
60
As of July 2018, 38 states and the District of Columbia contract with comprehensive, risk-based managed
care plans to provide care to at least some of their Medicaid beneficiaries. See id.
61
The Difference Between Medicare and Medicaid Reimbursement, supra; Hinton, et al., 10 Things to Know
about Medicaid Managed Care, supra.
62
https://www.macpac.gov/subtopic/managed-care/
63
id.
64
42 CFR §438.68, §438.206, §457.1218, and §457.1230.
65
American Association of Medical Colleges (AAMC), New Findings Confirm Predictions on Physician Shortages,
April 23, 2019, available at https://www.aamc.org/news-insights/press-releases/new-findings-confirm-
predictions-physician-shortage
66
Rachel Garfield, Elizabeth Hinton, Elizabeth Cornachione, and Cornelia Hall, Medicaid Managed Care Plans
and Access to Care: Results from the Kaiser Family Foundation 2017 Survey of Medicaid Managed Care Plans,
March 5, 2018, available at https://www.kff.org/medicaid/report/medicaid-managed-care-plans-and-access-
to-care-results-from-the-kaiser-family-foundation-2017-survey-of-medicaid-managed-care-plans/
56
AHM 530: Provider Contracting - Part 1: Overview of Provider Contracting Process
Provider Contracting - Part 1: Overview of Provider

Contracting Process
Introduction
A critical component of building and managing a health plan’s provider network involves
provider contracting. Memorializing the terms of the parties’ respective rights and obligations is
important for numerous reasons. Contractual provisions can affect payment, provider practices
and procedures, handling of confidential records, and clinical decision-making. A strong
provider contract offers both parties protection against regulatory violations and future
disputes. Managed care contracts can lead to greater member satisfaction and engagement
due to better, more coordinated care among provider networks.
After completing this module, you will be able to:
• Explain why health plans enter into legal contracts with providers
• Describe the essential elements of a contractual relationship
• Identify the similarities and differences between types of provider contracts
• Describe the major elements in a comprehensive contract
• Discuss the goals that a health plan may try to reach through its contractual strategies
Provider Contracting Considerations
Before the 1980s, most health insurers did not have contracts with providers. The use of
contracts increased with the development of preferred provider organizations (PPOs) when
health plans sought price discounts from providers in return for encouraging patients to go to
contracted (or preferred) providers. Health plans learned that contracts that define business
relationships with providers have multiple advantages over less formal business
relationships.
Today, all types of payers, including PPOs, health maintenance organizations (HMOs), and
point-of-service (POS) options, use contracts to define a complex array of payment, risk-
sharing, utilization management (UM), and quality management (QM) specifications. The
provider contracting considerations to be explored in this section are:
• Players
• Each party’s goals in entering provider contracts
• Typical styles and components of contracts
• Brief overview of each party's responsibilities under the contract
• Business strategies and objectives that can be pursued
1
The “Provider” in Provider Contracting
Although a health plan can frequently enter into contracts with a single provider (i.e.
physician, pharmacy, hospital), contracts can also be made between a health plan and an
organized group of providers such as:
• Multi-specialty physician group

• Medical Group
• Integrated Delivery System (IDS)
• Physician-Hospital Organization (PHO)
• Independent Practice Association (IPA)
• Management Service Organization (MSO)
• Accountable Care Organization (ACO)
In the context of “provider contracting,” the term provider may refer to an individual
practitioner or institution or an organized group of healthcare professionals or institutions.
A Medical Group is a collection of physicians who have come together contractually or in

partnership to manage a practice and share the care of patients. Once they have established
themselves as a legal entity, the Medical Group can also contract with third-party payers.
An Integrated Delivery System (IDS), also known as an Integrated Delivery Network (IDN), is
an organization or group of affiliated organizations in which hospitals and physicians combine
all their activities to deliver comprehensive health care services.
IDS examples include Mayo Clinic, Kaiser Permanente, and Geisinger Health System. PHOs, IPAs,
MSOs, and ACOs.
A Physician-Hospital Organization (PHO) is a legal entity formed by a hospital and a group of

physicians to further mutual interests and to achieve market objectives. A PHO generally
combines physicians and a hospital into a single organization to obtain payer contracts.
An Independent Practice Association (IPA) is an organization typically established primarily to

contract with third-party payers. For contracting purposes, it is a legal vehicle developed to
allow physicians who have no other corporate or legal relationship to constitute themselves as
a group.
Management Services Organizations (MSOs) are entities designed to help with the
administrative, or non-medical, work involved in running a medical practice. These
organizations may be owned by non-healthcare provider investors, hospitals, groups of
physicians, or even health plans, or may be a joint venture between a hospital and physicians.
Accountable Care Organizations (ACOs) are groups of doctors, hospitals, and other health care
providers, who come together voluntarily to give coordinated high-quality care to their
2
Medicare patients. ACOs seek to improve care while controlling costs by aligning incentives for
continued quality improvement and care coordination. In an ACO, the participating entities are
jointly responsible for the financial performance and clinical outcomes and health status of the
covered Medicare population served. A portion of any savings achieved more than a specified
benchmark would be shared among the provider participants.1
Affordable Care Act and Accountable Care Organizations
Enacted in 2010, one of the primary goals of the Patient Protection and Affordable Care Act (ACA) is
to reduce health care costs. The law encourages the formation of ACOs in the Medicare
program, one of several demonstration programs to be administered by the Centers for
Medicare and Medicaid Services (CMS) together with bundled payment and other key care
delivery approaches. ACOs are also being developed in the private sector by IDSs, hospital
systems, clinics, commercial carriers, and physician groups. As of 2015, about 6 million
Medicare beneficiaries were in an ACO, and, combined with the private sector, at least 744
organizations had become ACOs since 2011.2
Integrated Delivery System and Accountable Care Organizations
Many entities fall within the general definition of an IDS, which is an organization that vertically
integrates hospitals, primary care physicians, specialists, and even health plans to provide
medical services. This structure generally is conducive to forming an ACO, in that an IDS
typically has in place both the accountability framework for costs and quality and the
leadership/clinical arrangements necessary for an ACO. The formally organized network of
health care providers that make up an IDS are clinically, financially, and administratively
integrated to provide coordinated services to a defined patient population or community.
These multiple providers may share identified processes such as UM, performance
improvement, and care management.
3
Purpose of Contracting
The primary purpose of a provider contract is to describe and document the intended business
relationship between the health plan and a provider. Important elements of this business
relationship include the responsibilities of both parties and the method of payment for services
rendered. The contract either spells out the processes to be used in conducting business or
includes them by a reference to manuals or exhibits that describe the rules and processes of
the business relationship in greater detail. Contracts sometimes include, by reference, policy
and procedure manuals for UM and QM programs and exhibits that contain the details of the
payment arrangement.
The contract also allows the parties to specify the tone and objectives of the relationship. The
working relationship between a health plan and its providers can be arms-length or
collaborative, detailed and formal, or open-ended and informal. The parties can either have the
substantial independent authority or there can be multiple checks and balances built into the
contract.
Before drafting a contract with its providers, a health plan should consider—either alone or in
conjunction with its provider partners—the quality, accessibility, and cost goals it wants to
accomplish, the strategies it expects to use, and the type of relationship it wishes to establish
with its providers.
Elements of a Contractual Relationship
Among the major elements that define the relationship between a health plan and its
providers, there are five (5) essential elements that should be clearly stated and explained in
the provider contract:
• Contracting parties
• Services provided
• Compensation
• Responsibilities
• Business processes
4
Contracting parties
Who is bound by the contract’s terms? Often, more than one party exists on the payer side
of the equation. Some health plans provide services to self-insured employers or groups
that have fiduciary responsibilities under provider contracts. For example, a self-insured
employer may be the party ultimately responsible for payment, not the health plan. The
health plan may wish to rent the provider network governed by this agreement to other
health plans, making these other plans party to the agreement. On the other hand, the
provider that is party to a contract may be an association of independently practicing
providers (IPA). In such a case, not only the provider organization itself, but each of its
affiliated providers may be parties to the contract.
Services provided
The contract should memorialize the provider’s agreement to deliver specific services to
health plan members and to obtain/maintain all the legal and regulatory authority or
certifications required for delivering the services. For provider organizations that cover
multiple independent providers, the contract should clearly state that the individual
providers are bound to this agreement as well.
Compensation
The contract should specify prices to be paid to providers for their services, and it wants
providers to commit to accept these amounts as payment in full (except for copayments and
deductibles). Payment terms frequently describe incentive programs and financial risk-
sharing, such as capitation and fee withholds. Finally, contracts need to address how
payment will be made when a member has coverage from more than one health plan.
Responsibilities
The health plan wants commitments from providers to follow the plan’s rules and procedures,
particularly regarding billing for services, credentialing, utilization review, and quality-assurance
activities. Providers want assurances from the health plan concerning service expectations,
such as the timeliness of payment and the availability of accurate information on the eligibility
of members and the benefits for which they are eligible. One or both sides also may want to
know that the other party carries adequate liability insurance.
5
Business processes
While a health plan often places detailed information about business processes in a provider
manual rather than in the contract itself, many contracts at least outline the processes. The
processes that are likely to be described in the contract include the following:
• Procedures for claims submission, processing, and payment

• Reimbursement processes
• Procedures for authorization of services and referrals
• Procedures for verification of membership and determination of applicable benefits
• Agreements to exchange information and to the right to access and audit plan
members' medical records
• Grievance processes and an agreement to indemnify the health plan from claims due
to the negligence of providers and vice versa
• The term of the contract (i.e. how long it remains effective) and the amendment and
termination processes (i.e. how to change or cancel the contract)
Tone of Relationship
In each of these areas, the contract can set the tone of the health plan-provider relationship.
Example: The health plan may specify that the provider must comply with the utilization review
procedures of the plan, or the plan and the provider may agree to work together to establish
practice guidelines.
The tone will also be affected by the extent to which covenants are reciprocal.
Example: If a health plan requires malpractice insurance; the plan may commit to maintaining
liability insurance itself. The plan retains the right to cancel the contract immediately if the
provider loses a license or certification, the provider may also be given the right to cancel if the
plan loses any required accreditations or licenses.
Types of Contracts
There are many detailed issues that can be addressed within the body of the contract itself or in
a provider manual or exhibit that is made a part of the contract by reference. Most provider
contracts can be categorized into two different types:
• Comprehensive contracts
• Brief contracts
The primary difference between these two contract types is the amount of information
included in the contract document itself.
6
Elements of a Comprehensive Contract
In the contract document itself, a comprehensive contract includes significant detail about the
business relationship between the health plan and the provider. When navigating the intricate
details of contract issuance, this high level of detail enables involved parties to reference a
single document. However, even comprehensive contracts frequently include payment
information in exhibits attached to the contract, and additional payment and administrative
details are included in the provider manual- which becomes a part of the contract by reference.
Parts of a Contract
Parts of a Contract
A contract typically starts with an introductory section that identifies the parties to the
contract and the scope and purpose of the agreement. Next, the contract usually defines key
terms. The contract may include a representations and warranties section in which the parties
affirm that they meet the legal and regulatory requirements to perform the duties of the
contract. The responsibilities of each party are then discussed in detail. While actual payment
rates are usually contained in exhibits so that they can be updated or changed easily,
comprehensive contracts include detailed information about how the provider is to bill for
services, who the provider can collect payment from, and how multiple sources of payment
will be coordinated.
Comprehensive contracts include additional information regarding the contract term, record-
keeping, confidentiality, audit rights, insurance coverage, termination provisions, and many
other legal and business issues.
Introductory Paragraph
The contract’s introductory paragraph typically notes the date of the agreement and
identifies the primary parties to the contract and any acronyms or short names that will
be used to identify the parties in the body of the contract.
Example: This Agreement (“Agreement”), with an effective date of August 5, 2019, is made
between ABC Health Plan, including its direct and indirect licensed subsidiaries and affiliates
(collectively, “Plan”) and the undersigned physician-hospital organization (“PHO”).
7
Recitals
The contract may then include recitals that identify the agreement’s purpose. For example,
this section may state that the health plan wishes to secure the services of the provider,
and the provider wishes to make those services available. The recitals may identify the
products to be covered by the agreement (i.e. a single product line, such as a Medicare
HMO product, or multiple product lines). Typically, the recitals further define the parties to
the agreement in legal terms.
Example: Acadia HMO is a health maintenance organization duly licensed in the state of
Maine. If the primary parties represent other parties, as in the case of a PHO or an IPA, the
connection between the primary and secondary parties may be identified.
Definitions
Provider contracts also contain definitions of key terms to be used in the contract. These
terms have very specific meanings within the contract that may vary from common or
everyday definitions. These defined terms may also vary widely from contract to contract,
but most contracts define certain common key terms. As a general matter, a term should be
defined if it is:
• Being used in a highly specific or unusual way in the contract

• Term that is not widely understood by the general public
• Critical in defining the business relationship among the parties
8
Key Defined Terms
Some key defined terms typically include the following:
Agreement or Contract: Since most contracts include references to exhibits and

manuals, the definition should include the exhibits and manuals as parts of the
contract.
Customer or Member: It is important to define who is a customer, often referred to as a

member or enrollee of a plan or as a covered person or covered group. Since health plans
frequently work with an array of group purchasers, members of groups, and individual
purchasers of healthcare coverage, it is important to define these types of customers.
Self-insured groups may need to be separately defined as:
1. Fiduciary for the employee benefit plan and is ultimately responsible for
payment to the provider
2. Risk-sharing and incentive arrangements with providers may not be the same for
self-insured groups as they are for fully insured groups
If the health plan is contracting on behalf of multiple payer organizations, such as other health plans, or
is renting the provider network to other organizations, these intermediary purchasers also should be
defined.
Key Defined Terms: Covered Services
Covered services are services included in contracts with customers. Often the
relevant plan documents themselves are defined in the contract, specifying the types
of programs (i.e. HMO, PPO, Medicare, Medicaid) covered by the contract.
Key Defined Terms: Allowed amount
The allowed amount on a payer contract is the maximum amount that a payer will reimburse
a provider for a covered healthcare service. Some contracts will also refer to the allowed
amount as an eligible expense, payment allowance, or negotiated rate.3 This rate may not
fully cover provider charges, and plan members may be responsible for covering the balance
between the allowed amount and the provider charges.
Medicare sets its allowed amounts for specific services in prospective payment
systems by care setting and through the Physician Fee Schedule. Private payers may
use Medicare’s rates as a foundation for building their own allowed amounts.
9
Key Defined Terms: Medical Necessity
Because decisions related to medical necessity can create conflict between providers and
health plans, contracts should attempt to define medically necessary services as clearly as
possible. Determinations regarding medical necessity should be based on accepted medical
standards and UM guidelines developed by nationally recognized organizations. Contracts
should note that the criteria used to make utilization decisions are available to providers
upon request.
The definition of medical necessity or medically necessary services is critical because health
plans are contractually obligated to pay only for services they determine to be medically
necessary. The concept of medical necessity is the foundation of UM and QM activities. CMS
defines “medically necessary” to mean “[h]ealth care services or supplies needed to diagnose
or treat an illness, injury, condition, disease or its symptoms and that meet accepted standards
of medicine.” State regulatory authorities also may define “medical necessity” in various
sections of the state’s laws and/or regulations, which can be incorporated by reference into a
provider contract.
Example: The state of Washington defines medical necessity for inpatient care as “a
requested service which is reasonably calculated to: Diagnose, correct, cure, or alleviate a
mental disorder or substance use disorder; or (b) prevent the progression of a substance use
disorder that endangers life or causes suffering and pain, or results in illness or infirmity or
threatens to cause or aggravate a handicap, or causes physical deformity or malfunction, and
there is no adequate less restrictive alternative available.” 4
Example: California’s Welfare and Institutions Code (“WIC”) contains a similar definition:
“[f]or individuals 21 years of age or older, a service is ‘medically necessary’ or a ‘medical
necessity’ when it is reasonable and necessary to protect life, to prevent significant illness or
significant disability, or to alleviate severe pain.” 5
Services Not Considered Medically Necessary
The contractual definition may also include information about services that are not considered
medically necessary. A typical provider contract might define “medically necessary” as follows:
Unless otherwise stated in the applicable Health Benefit Program, services are medically
necessary if, under generally accepted principles of good medical practice and professionally
recognized standards, they are required for and consistent with the diagnosis, care, and
treatment of a disease, ailment, or injury that is covered [eligible for payment] under a Health
Benefit Program. A service is not medically necessary if it is provided solely for the convenience
either of the member or any health care provider. Services that may otherwise be Medically
Necessary may not be Covered Services if they are excluded or limited in their coverage by the
applicable Health Benefit Program, or if the utilization management requirements of the
applicable Health Benefit Program are not complied with.6
10
Clean Claim
A clean claim is one that payers can process without needing additional information. 7
Contracts should define what a payer needs to ensure timely reimbursement of claims.
Incomplete clinical documentation and coding, incorrect patient information, missing
physician approvals, and other claim errors may result in reimbursement delays and claim
denials. Often these definitions are taken directly from state insurance laws and
regulations.
Prudent Layperson Standard
Through the ACA, the federal government and most states have enacted legislation supporting
a patient’s right to seek care in the hospital’s emergency department without seeking prior
authorization, based on what is known as the prudent layperson standard.
The National Association of Insurance Commissioners (NAIC) has adopted broad standards for
health plan coverage of emergency services based on the prudent layperson standard, which
most states have adopted and/or further broadened. Thus, as set forth in the NAIC’s 2015
Health Benefit Plan Network Access and Adequacy Model Act, an emergency medical condition
is defined as “a physical, mental or behavioral health condition that manifests itself by acute
symptoms of sufficient severity, including severe pain that would lead a prudent layperson,
possessing an average knowledge of medicine and health, to reasonably expect, in the absence
of immediate medical attention, to result in [e.g.] (1) placing the individual’s physical, mental
or behavior health or, with respect to a pregnant woman, the woman’s or her unborn child’s
health in serious jeopardy; (2) serious impairment to a bodily function; (3) serious impairment
of any bodily organ or part ….”8
11
Utilization Management, Quality Management, and Risk Management
Provider contracts typically define utilization management and quality management, list the
activities included in these programs, and describe the responsibilities of the provider and the
health plan with respect to UM and QM.
Utilization Management is a set of requirements established by Managed Care Plans to

promote quality of care, the efficient, effective, and reasonable utilization of health care
resources, and the improvement of health care outcomes. Such programs can include:
• Preadmission review
• Preauthorization/precertification
• Concurrent review
• Retrospective review
• Case management
• Discharge planning
Some plans also define risk management and the parties' roles in controlling risk. Health
plans often reference policy manuals or exhibits for detailed descriptions of UM, QM, and
risk management activities. If a health plan plans to rent its network to other payers or
delegate utilization or quality functions, the plan should make it clear to providers whether
other organizations are involved in UM or QM.
Representations and Warranties
Following the definitions, many comprehensive provider contracts include a representations

and warranties section. A warranty is a statement guaranteed to be true in all respects, and if
the statement is untrue in any respect, the contract of which the statement is a part can be
declared void. Unlike a warranty, a representation is a statement of facts that need not be
true in all respects, but only as material to the provider contract.
In this section, both the health plan and the provider attest that they have the necessary
licenses, permits, and approvals to legally conduct the business described by the contract.
The provider may be asked to warrant that the information in the provider application for
membership in the network is correct. When a provider organization (i.e. PHO, IPA, IDS) is the
primary contracting entity, this section often assures the health plan that the provider
organization has the authority to act on behalf of the individual providers in the organization.
12
Responsibilities and Obligations Outlined in Contracts
Responsibilities and Obligations
The bulk of a provider contract is dedicated to describing the responsibilities of each party
to the contract. At a high level, these responsibilities generally include:
Provider Responsibilities
• Agreement to provide services

• Provider licensing and insurance
• Network participation
• Responsibility for medical care and patient medical records
• Responsibility to meet health plan credentialing/recredentialing requirements
• Participation in UM, QM, and risk management programs
• Patient grievance and complaint resolution
• Compliance with health plan administrative and operating procedures
• Reporting requirements for UM, QM, and risk management programs
• Compliance with regulatory and accrediting bodies
Health Plan Responsibilities
• Verification of the plan's eligibility to do business (i.e. licenses and accreditation)

• Minimum guarantees on the volume of patients directed to the provider
• Service commitments to providers
• Dispute resolution
• Credit checks on self-insured employer groups or guarantee of payment for services
rendered to these groups
• Reporting requirements to help providers manage utilization, quality, and costs
• Marketing provisions
• Other administrative obligations/provisions
Mutual Obligations
There are certain responsibilities or obligations required of both parties, including:
• Billing and payment arrangements

• Claim filing procedures
• Access to and confidentiality of members' medical records, and audit rights
• Insurance coverage, liability, and, when appropriate, indemnification
• Contract term and termination
• Compliance with applicable federal and state laws
• Notice of material changes in status
13
Contract Clauses
The preceding sections cover the principal aspects of the business relationship between a
health plan and its providers. However, many other provisions are used to describe the
expected performance of the parties under the contract and to protect the legal integrity
of the contract. Some additional common contract clauses, with a brief description of their
purpose, are identified in the below chart.
Contract Clause Reason(s) For Including Clause

State contracting/filing Some states require health plans to include specific
requirements language as drafted by the health and/or insurance
regulatory department(s) responsible for
regulating health plan provider networks.9 The
administrative agencies may amend this language
from time to time.
Post-termination What happens when the contract ends? i.e.
obligations paperwork requirements, joint notice to members,
future cooperation/access to records as needed.
Network requirements Details the networks in which provider
organizations can participate as well as the
credentialing requirements providers must meet to
join a network.
Amendment How and under what circumstances can the
contract be changed? Can the contract be
amended unilaterally (i.e. by one party), or would
both parties need to sign off on any amendment?
Confidentiality Governs who may have access to contract
information and in what circumstances;
consequences of unauthorized disclosure.
Notice Provision(s) establishing requirements for
providing notice under the agreement, including a
breach, change in circumstances of either party,
etc.
Assignment An assignment of contract occurs when one party to an
existing contract (the "assignor") hands off the
contract's obligations and benefits to another party
(the "assignee"). Ideally, the assignor wants the
assignee to step into his shoes and assume all his
contractual obligations and rights. The provider
contract should specify whether this is permissible and,
if so, under what circumstances.
14
Governing law and Specifies which state’s law applies to the contract
venue and that any dispute regarding the contract must
be resolved in courts or by arbitration within the
jurisdiction.
Entire agreement Confirms that the contract represents the entire
agreement between the parties for issues within its
scope, and there are no collateral or outside
agreements.
Construction Confirms that both parties were involved in
drafting the agreement and that it should not be
construed more favorably toward one party over
the other.
Authorization Confirms that the parties executing the agreement
have the requisite authority to do so.
Brief Contracts Supplemented by Comprehensive Provider Manual
The comprehensive contract is the most common form of provider contracting vehicle. Some
health plans prefer a brief contract that includes, by reference, a provider manual that
contains much of the information in the comprehensive contract, as well as additional
detailed operational information. Because the provider manual is part of the contract, health
plans using brief contracts must ensure that their provider manual is comprehensive and up
to date.
Many sections in the comprehensive contract can be moved to the provider manual, including
sections on:
• responsibilities and obligations

• definitions
• payment
• information exchange
• record keeping
• Confidentiality
• auditing
• insurance and liability
• marketing provisions
• term and termination
• dispute resolution
15
Advantages of Comprehensive Provider Manuals
One advantage of using a brief contract supplemented by a provider manual is the ease
with which the health plan can make changes affecting all providers or a certain subset of
providers. Rather than having to amend each provider contract to reflect a modification,
the health plan can issue a revision to the provider manual (or a new manual if the changes
are substantial) to those providers affected by the change.
A key factor in determining whether a section can be moved to the provider manual will be
whether the health plan is willing to negotiate contract terms with an entire class of
providers. If the terms of the agreement vary from provider to provider within a class of
providers, then less of the contract can be moved to the manual. In general, the health plan
may prefer having more in the manual and less in the contract because, if advance notice is
given, the manual can usually be unilaterally amended by the health plan. On the other hand,
providers are less likely to be comfortable giving the health plan this increased power.
Areas in Body of Contract
Areas that likely should remain in the body of a brief contract include the following:
• parties to the contract, including a definition of subcontractors or other parties that

can benefit from the contract (i.e. organizations that rent the provider network)
• warranties and representations of the legal status of all parties to perform the
obligations of the contract
• responsibilities of provider networks, such as PHOs, IPAs, and IDSs
• specific payment rates
• relationship of the parties
• governing law
• amendment process
These elements need to be in the body of the contract either because they are likely to vary
from one contract to another or because they relate to specific legal issues rather than
operational or business issues.
16
Strategies for Contracting
The contract should clearly and specifically state the parties' rights and responsibilities. As
managed care tools such as utilization review and case management reach their full
potential, health plans will find it increasingly necessary to develop long-term, collaborative
relationships to implement the next generation of care management tools. For example,
cooperative and stable provider relationships are necessary for the successful
implementation of disease and outcome management programs and value-based care
arrangements.
It is important to remember that long-term relationships are not established by merely

offering a three-year contract instead of a one-year contract. Long-term relationships are
established through the development of collaborative processes and through reciprocal
obligations.
Example: If a health plan requires providers to maintain their credentials in good standing,
the health plan should similarly maintain its licenses and accreditation. If the health plan
wants providers to accept risk on self-insured accounts, the plan should inform providers of
the credit-checking policies it uses for self-insured groups. If the health plan cannot
guarantee the accuracy of its eligibility information, it should share the risk of bad debts
with providers. If the providers incur financial penalties for late billing, the health plan
should incur financial penalties for late payments.
Plans should work with providers to develop practice patterns and protocols for care,
disease management programs, and outcome measurement processes. Grievance
processes should include providers who are not employees or paid consultants of the plan.
Providers can be consulted on the design of products, benefits, and incentive programs.
The plan can provide data comparing the costs, quality, and patient satisfaction scores of
similar providers, adjusted for differences in the severity and mix of patient illnesses. The
plan can signal its intent to collaborate in these ways by referencing them in the contract or
provider manual.
If the health plan maintains several networks intended for use in different plan designs, the
provider agreement should indicate the specific networks in which the provider agrees to
participate. For different products and product- specific sections of the provider manual, multiple
products can be accommodated in a single contract using separate payment exhibits. If common
payment approaches are used across products, this simplified contracting approach is enhanced.
Utilization review, disease management, and data reporting can also be standardized.
17
Summary
Prior to the 1980s, most health plans did not have contracts with providers. The use of
contracts increased with the development of preferred provider organizations when health
plans sought price discounts from providers in return for encouraging enrollees to use these
providers. There are five elements that should be clearly stated and explained in a contract
between a health plan and its providers:
• Contracting parties
• Services provided
• Compensation
• Responsibilities
• Business processes
Business processes likely to be described in a contract include:
• procedures for claims submission, processing, and payment

• reimbursement processes
• procedures for authorization of services and referrals
Most contracts between health plans and providers can be categorized into two types:
• Comprehensive contracts
• Brief contracts
A comprehensive contract includes a considerable amount of detail about the business

relationship between the health plan and the provider. The purpose of including details in a
contract is to furnish all parties with a single document that can be referred to when dealing
with contractual issues. Comprehensive contracts begin with introductory language that
identifies the parties to the contract and the scope of the agreement. Next, the contract
usually defines key terms. The contract may include a representations and warranties section
in which the parties affirm that they meet the legal and regulatory requirements to perform
the duties of the contract. The responsibilities of each party are then discussed in detail. While
actual payment rates are usually contained in exhibits so that they can be updated or changed
easily, comprehensive contracts include detailed information about how the provider is to bill
for services, who the provider can collect payment from, and how multiple sources of
payment will be coordinated.
Comprehensive contracts include additional information regarding record-keeping,

confidentiality, audit rights, insurance coverage, the contract term, termination provisions,
and many other legal and business issues.
Some plans prefer to use brief contracts that include for reference, a provider manual that
contains much of the information that would be included in a comprehensive contract. An
18
advantage of using a brief contract supplemented by a provider manual is the ease with
which the health plan can make changes affecting all providers or a subset of providers. A key
factor in determining whether something should be moved to the provider manual is
whether a health plan is willing to negotiate terms with an entire class of providers. If
contractual terms vary from provider to provider within a class of providers, then less of the
contract should be moved to the manual.
Health plans may have various goals regarding business relationships with their providers.
The tone and structure of a contract can represent an opportunity to further these goals.
These goals may include establishing long-term relationships with providers. Such long-term
relationships can be further through the development of collaborative processes and through
reciprocal obligations contained in the contract between the health plan and its providers.
19
Notes:
1
American Academy of Pediatrics, https://www.aap.org/en-us/professional-resources/practice-
transformation/getting-paid/Pages/Accountable-Care-Organizations-part-2.aspx (accessed August 2019).
2
Jenny Gold, Accountable Care Organizations, Explained, Kaiser Health News, September 14, 2015, available at
https://khn.org/news/aco-accountable-care-organization-faq/ (accessed August 2019).
3
https://www.healthcare.gov/glossary/allowed-amount/ (accessed August 2019).
4
RCW 71.34.020 (12).
5
CA WIC § 14059.5.
6
Participating Provider Agreement, Intermountain HealthCare,
https://intermountainphysician.org/selecthealth/providermanual/Pages/Participating-Provider-Agreement.aspx
(accessed August 2019).
7
http://www.hfma.org/forms/glossary/search.aspx/.
8
NAIC Health Benefit Plan Network Access and Adequacy Model Act (2015), available at
https://www.naic.org/store/free/MDL-74.pdf
9
New York’s requirements found at N.Y. Comp. Codes R. & Regs. tit. 10, §98-1.13, available at
https://www.health.ny.gov/health_care/managed_care/pdf/subpart98-1and2.pdf (accessed August 2019)
20
AHM 530 Provider Contracting: Part 2 - Contract Negotiation
Provider Contracting: Part 2 - Contract Negotiation

Introduction
With the healthcare industry focused on population health and the need to stabilize rising
healthcare costs, negotiating managed care contracts has become increasingly critical for
both providers and payers. A health plan depends on providers to deliver the healthcare
services described in its benefits plan, and providers rely on health plans for access to
patients. Because the contracting goals of providers and health plans differ in many respects,
the parties must often negotiate a variety of issues before they reach mutually agreeable
terms. As a result, negotiation skills have become an important asset for both health plans
and providers.
• List and describe functions that are often represented on a health plan or provider
negotiating team
• List circumstances that may result in the renegotiation of a provider contract
• Identify information that the health plan typically seeks about a provider when
preparing for provider contract negotiations
• Describe how to set negotiation objectives and how to plan for provider contract
negotiations
The Role of Negotiation in Health Plan Contracting
Provider contract negotiation is a communication process that utilizes information

exchanges between a health plan and a provider to establish an agreement for the delivery of
healthcare services to the health plan's members. Each negotiating situation is unique, but
the negotiation process is typically driven by the following factors:
• Common desire to deliver quality healthcare services to a population

• Conflicts that can arise from differing motivations and constraints
• Give-and-take exchanges between the health plan and the provider to resolve the areas
of disagreement
Both parties typically want contract negotiations to result in favorable terms for the delivery of
healthcare services and acceptable reimbursement arrangements. However, the health plan
and the provider often have different points of view about the meaning of favorable terms and
acceptable reimbursement. Providers usually desire a reimbursement arrangement that
maximizes their income, while the health plan wants to minimize the cost of reimbursement.
1
Another mutual objective for negotiating is the framework established for future
relationships. The interpersonal relationships developed during the negotiation process are
integral to effective contract implementation and for problem solving during the term of the
contract. Additionally, the health plan has a goal of developing a provider panel that meets
the plan's needs for access and adequacy, while the provider typically wants to maintain or
increase patient volume.
Give-and-Take Exchanges Between Health Plans and Providers
The give-and-take exchanges between a health plan and a provider involve key business
and medical management issues of care-delivery, including:
• Patient volume directed to the provider

• Levels and timing of payment
• Operational issues
• Financial risk associated with the delivery of care
• Utilization and quality management programs
Negotiation often requires the health plan, the provider, or both to make concessions in some
areas to receive favorable terms in other areas. The health plan may agree to limit the total
number of providers in the network and guarantee a certain volume of patients to a provider
in exchange for the provider's acceptance of a lower reimbursement rate.
Health plans and providers have varying degrees of knowledge and expertise in negotiating
contracts. A common perception is that health plans always have the advantage because they
are more knowledgeable and sophisticated about the negotiating process. Another widely held
belief is that most providers accept, without question, standard contract terms and health plan
reimbursement arrangements to establish relationships with health plans and to maintain their
patient bases. Health plan contract negotiations may favor either the health plan or the
provider-depending on each party's respective leverage, negotiation skills, and preparation.
Many providers, especially healthcare institutions and provider organizations, have recognized
the importance of negotiating health plan contracts and have devoted the necessary resources
to develop an effective approach to negotiation.
Health plan contract negotiation may involve:
• face-to-face meetings
• written correspondence
• telephone conversations
• multiple reviews of the contract's legal and financial aspects
2
Length of Health Plan-Provider Negotiations
The intensity and length of the negotiations depend on the volume and scope of services
covered under the agreement.
Example: Health plan contract negotiations with an integrated delivery system (IDS) or a
hospital are usually lengthier and more complex than negotiations with a single-specialty
provider organization.
Many provider contracts automatically renew at the end of the specified contract period unless
one of the parties notifies the other, in writing, of its desire to renegotiate terms or terminate
the relationship. If a contract is not automatically renewable, the health plan and the provider
renegotiate contracts annually or at the end of the specified contract term. Even when both
parties find the initial agreement satisfactory, changing circumstances may necessitate an
amendment to the contract or even developing a new contract.
Changes Resulting in Contract Modification
Any of the following changes may result in a significant modification of the provider contract.
• Actual utilization of services that is higher or lower than projected utilization

• Demographic changes (i.e. membership growth or an increase in the average age of
the member population)
• Changes in the health plan industry (i.e. competition from a new entrant into a
market or a merger among health plans)
• New product offerings (i.e. the addition of Medicare, Medicaid, and workers'
compensation plans)
• Changes in the provider community (i.e. the development of provider organizations or
new affiliations among provider organizations)
• Technological advances (i.e. newly approved medical procedures, such as telehealth)
The process for renegotiation is similar to the initial negotiation of the contract, although
renegotiation may require less time and effort, depending on the number and type of issues to
be reexamined.
3
The Negotiation Process
The process of negotiating health plan contracts typically includes the following activities:
• Preparation
• Bargaining
• Closing
Thorough preparation is often the key to successful negotiation, while the lack of preparation is
frequently identified as the reason for failure. The following four (4) activities are important for
both health plans and providers in preparing for contract negotiation:
1. Assembling the negotiating team
Who will conduct the actual negotiations, and should other team members be involved
or consulted?
2. Information gathering
This is an important step to assess the market position and capabilities of both parties.
3. Developing specific negotiating objectives
What does each party hope to accomplish? What are each party’s priorities, and are
there any issues that qualify as “must haves” or “deal breakers?”
4. Formulating a negotiating plan
How will the actual negotiation go? Who will do the talking, and for how long? Which
subjects will be covered, in what order?
4
Contract Preparation
Assembling the Negotiating Team
The first phase in contract preparations is assembling the negotiation team.
When health plans negotiate with independent practitioners and small groups of
providers who are not affiliated with a provider organization, these providers usually
do their own negotiating. In these situations, the health plan may simply send one or
two representatives to conduct the negotiation.
Because of the complexity of issues involved in provider contracting health plans,

provider organizations, and healthcare facilities often assemble teams of skilled
personnel who work together to negotiate agreements. Negotiation teams vary in size
and composition based on the volume and nature of the services covered by the
contract, the expected difficulty of reaching an agreement, and the perceived
importance of securing the agreement. In many instances, the size and composition of
the health plan's team mirror that of the provider's team.
Members of the Negotiating Team and Their Roles
Various team members have different levels of authority to make contracting decisions.
Some members of the negotiation team provide information and others provide
support for the team and do not participate in or even attend bargaining sessions.
These teams usually include the following members:
Team Leader Information Systems Manager

Financial Manager Actuarial Support
Legal Counsel Health Plan Consultant(s)
5
Team Leader
Each team has a leader who assumes overall responsibility for the negotiation process. The role
of the team leader is to coordinate the team members’ activities, provide direction and
support, and act as a spokesperson. Serving as the primary contact with the other party, the
team leader typically manages the flow of information to and from team members. Effective
negotiation team leaders often have the following characteristics:
• Thorough understanding of provider contracting issues

• Ability to be appropriately assertive
• Ability to consider the other party's position while pursuing the goals of his or her
own organization
• Experience in dealing with a variety of personalities under stressful situations
• Knowledge of the local healthcare market and patient population
For provider teams the leader can be a:
• Vice-president or Director of health plans

• Chief Executive Officer (CEO)
• Chief Financial Officer (CFO)
• Chief operating officer (COO)
On the health plan side, a provider relations coordinator, contracting specialist, or director of
network development often fills the leadership role, although the CEO or COO may lead
negotiations with a large provider organization.
Financial Manager
The financial manager's primary role is to guide the negotiation of the financial aspects of the
contract. The financial manager analyzes all contract provisions that involve monetary values,
such as reimbursement arrangements, liability insurance clauses, and claims submission and
payment. Based on this analysis, the financial manager determines the team's financial
objectives.1
For health plan and large provider organization teams, the organization's CFO or the director of
finance or accounting usually assumes the financial manager role. In smaller provider
organizations or medical groups, the office manager assists with financial negotiating.
6
Legal Counsel
Both health plans and providers frequently include one or more attorneys on their negotiating
teams or at least consult with counsel. Ideally, an attorney who offers advice about provider
contracting is knowledgeable about health plans and has previous experience with the
negotiation process. The attorney's role is to evaluate the wording of specific clauses in the
agreement to ensure that the client's legal rights are protected and to ensure compliance with
state and federal regulations. Attorneys pay close attention to issues that involve legal or
financial risk. The attorney may be a contracted consultant or an employee of the health plan
or provider.
Information Systems Manager
Providers and health plans need a great deal of clinical, financial, and administrative
information to negotiate effectively. Negotiating teams rely on data provided by their
organization's information systems (IS) manager to help them assess the opportunities, risks,
benefits, and drawbacks presented by a proposed agreement. IS managers typically provide
an analysis of a contract's impact on information systems for:
• Claims processing and payment

• Billing and accounts receivable
• Membership and benefit management
• Utilization management (UM)
• Administrative support
Actuarial Support
A health plan or a provider may retain an actuary to assist the financial manager in the
analysis of the contract's financial provisions. An actuary is an insurance professional who
applies probability rules and statistics to calculate values relevant to a health plan's
operations. Actuaries have the training to design provider reimbursement arrangements and
estimate costs and revenues under a given contract.
Health Plan Consultants
Either party may enlist health plan consultants to assist with preparation and bargaining. An
experienced health plan consultant understands industry-specific factors, such as current
reimbursement rates, health plan contract models, and UM policies. A local consultant often
has direct knowledge of the other party's negotiating team and contracting strategies.
7
Information Gathering
Information gathering is the second phase of the preparation process for health plan-provider
contract negotiations.
To prepare for a negotiation, health plan and provider negotiating teams compile and
evaluate information about their organizations, the other participating contracting party’s
information, and local market conditions. A team with extensive knowledge about the other
party is in a better position to assess the other side's strengths, weaknesses, position in the
market, and relative negotiating power. In general, the organization with the most to lose by
not securing the agreement has less negotiating power and is more willing to compromise.
For example, if providers are in short supply in a geographic area, the health plan will
probably need to offer more generous reimbursements and looser controls on UM to ensure
that it can assemble a network adequate to meet member needs. 2 If a health plan's
membership is very large, providers may need to make more concessions to have access to
the plan's members.
It is important for each party to collect data about its own strengths and weaknesses. Internal
analysis can help the negotiating team identify organizational goals, capabilities, and
limitations. A provider must know the costs of the services it offers to effectively negotiate
reimbursement. A health plan must determine the capabilities of its claims department before
it negotiates turnaround time for claims processing. By examining its characteristics, each
party can also predict the negotiating strategies that the other party is likely to use.
Information About the Provider
Before a health plan begins negotiating with a provider, the health plan must first evaluate
the provider's ability to meet the plan's needs regarding:
• Access
• Scope of services
• Quality
• Utilization
• Cost-effectiveness
• Administrative capabilities
• Adherence to health plan concepts
8
The provider performs a self-assessment for the same criteria, which can help to identify
negotiation leverage and opportunities for shared benefit. The below chart lists factors that
can influence the calculus, both positively and negatively, for each side: 3
Factor Potential Negotiation Impact
Practice location(s) and patient Good location(s) enhancing patience

convenience convenience can be a plus for both sides.
Competition from other providers of the Low competition is a plus for the
same specialty provider, while high competition may be
a plus for the health plan.
Sub-specialization or specialized training If a health plan needs to beef up its
of providers provider network in a certain specialized
area, this can be a plus for both sides.
Patient satisfaction data to share Good data increases provider leverage,
while no or poor data decreases provider
leverage.
Quality/outcomes data and performance Good data increases provider leverage,
metrics to share while no or poor data decreases provider
leverage.
A health plan may not have access to detailed information about a provider’s quality and
utilization unless the provider has previously participated in one of the health plan's networks.
If the provider has participated in another network, the health plan can review claims,
performance management assessments, and member satisfaction reports for the provider.
For providers who are new to the health plan, the health plan can learn a great deal by
examining the application that the provider submitted. Health plans also check with
purchasers and prospective purchasers for information about candidates for the network.
Another way to gain information is to ask the provider directly for further details on the scope
of services offered, QM program, UM program, and other capabilities. Providers are often
willing and able to provide useful information to health plans with whom they wish to contract
(i.e. nonconfidential quality scores from other payers, nonconfidential patient case studies or
testimonials, and hospital quality data).
Accrediting agencies are another source of information about healthcare facilities and provider
organizations that have sought accreditation or certification.
9
Information About the Health Plan
A provider contemplating a health plan contract seeks information about the health plan and
its operations. Factors of interest to the provider include:
• Health plan's financial condition

• Characteristics of the health plan's member population
• Network management policies and procedures
• UM program
• QM program
• Payer fee schedule and reimbursement performance comparisons
A provider that is contemplating a financial risk-sharing arrangement with a health plan should
investigate the health plan's information systems capability. Adequate data from the health
plan on UM, QM, costs, and other performance measures are critical for the successful
management of risk by providers. One useful source of such information is the Health
Effectiveness Data and Information Set (HEDIS), a tool with 81 measures used by most health
plans to evaluate their performance on dimensions of care and service. 4
Introduction of Information Systems
Previously, health plans and providers faced a critical lack of data management systems
needed to perform well under their risk-sharing agreements. This is because most payer
systems were designed to process claims, while provider systems were designed in a fee-for-
service environment in which doctors were paid each time they performed a service.
To comply with managed care contract terms, both parties found it necessary to operate
outside the design of their normal systems. 5 This has changed more recently, with
information systems in healthcare becoming increasingly more advanced. Today, financial
and operational management on both sides is aided by accounting software for healthcare
organizations, healthcare billing systems, healthcare policy, and contract management
software. Negotiating parties can draw on these tools to gather needed information to
negotiate successful provider contracts.
The health plan usually sends the provider an application, a list of credentialing requirements,
and a copy of the proposed contract, which will offer some information about the health plan.
The contract can include the proposed reimbursement schedule. The provider may also request
a copy of the health plan's policy and procedures manual for more details about the UM and
QM programs.
10
Sources for Additional Information on Health Plans
Providers may also check the following sources for additional health plan information:
• Health plans and healthcare professional societies and publications

• State insurance department records (including financial analyses of health plans)
• Health plan annual reports (if the company is publicly held)
• Newspaper and magazine articles
• Websites for the health plan and other healthcare organizations (i.e. regulatory or
accrediting agencies)
• Marketing and promotional materials from the health plan
• Employees and former employees of the health plan
• Customer surveys and focus groups
• Industry consultants
Information About Local Market Conditions
For further information to aid in provider contract negotiation, the health plan and the
provider also examine the local market for answers to the following questions:
• How does the supply of providers in the community compare to the health plan's
needs for providers?
• What affiliations exist among local providers?
• How many other health plans operate in the same local market?
• What terms and reimbursement arrangements do these competitors offer?
• Which providers do local consumers and purchasers prefer?
The answers to these questions will give some indication of each party's need to secure
the contract and willingness to negotiate.
Developing Negotiating Objectives
The third phase of preparation for health plan-provider negotiations is developing objectives.
Based on the information gathered, the health plan and the provider set the negotiating
objectives to identify the specific outcomes desired. Each objective typically defines a
negotiating range to indicate how much the health plan or provider is willing to compromise on
a given point. The negotiating range often specifies:
• Best possible outcome that could be achieved

• Most likely outcome
• Least desirable outcome that a party will accept
11
Financial Objectives
For each point subject to negotiation, the health plan and the provider should identify both an
initial offer (asking) position and a final offer (bottom-line) position.
Example: Suppose that the health plan per diem reimbursement (overall daily rate) for an
acute care hospital in a geographic area ranges from $2,500 to $3,500 per day. A hospital that
expects to receive $2,800 per day might establish its negotiating range between $3,200 (initial
offer position) and $2,850 (final offer position). If the health plan expects to pay $2,600 per
day, it may set a negotiating range between an initial offer position of $2,400 per day and a
final offer position of $2,750.
The health plan and the provider generally try to keep their initial and final offer positions
secret, although each may attempt to estimate the other's final offer. It is common practice to
make an initial offer that is lower or higher than actual expectations; however, the parties
should not waste valuable negotiating time with completely unrealistic offers.
Nonfinancial Objectives
Health plans and providers also set objectives for issues other than financial
provisions.
Example: Providers should also consider how responsive the payer is to claims
problems, how the proposed contractual relationship will affect overall workflow
(including the inclusion of new policies), and whether the health plan allows
delegated credentialing-which can streamline patient access to new physicians. 6
A health plan may be focused on creating a long-term partnership to enhance

network access/capabilities, quality improvement strategies, preventive medicine,
and movement towards value-based arrangements.
The health plan and provider should set priorities for achieving their different
objectives and determine which points they are willing to negotiate. Some provisions
or characteristics of the provider contract are always non-negotiable, such as
compliance with:
• state and federal laws on antitrust and fraud and abuse

• state laws on corporate practice of medicine
• federal laws regarding tax-exempt operations
• certificate of need (CON) requirements
• state licensure regulations
12
Certificate of Need (CON) Programs
Certificate of Need (CON) programs are aimed at restraining health care facility costs and
facilitating coordinated planning of new services and facility construction. Many CON laws were
initially put into effect across the nation as part of the federal Health Planning Resources
Development Act of 1974. Despite numerous changes in the past few decades, 35 states
currently maintain some form of the CON program, including Indiana- which enacted legislation
to establish a certificate of need program in 2018. Puerto Rico, the US Virgin Islands and the
District of Columbia also have CON programs. 7
The below chart identifies certain issues that frequently are negotiated in provider contracts.
ISSUE EXAMPLE
Explanation of key contract terms and Definition of “medical necessity”
other language
Specific services to be furnished by the Immunizations, smoking cessation
provider programs
Claims administration and Timeframes for claim submission by the
processing/claim payment by the health provider; documentation required for a
plan “clean claim”; payment timing.
Utilization management requirements Authorization systems or utilization
review programs.
Length of contract/contract termination Short-term or multi-year contract?
circumstances Termination with or without cause?
Method and rate of reimbursement for Discounted fee-for-service (FFS), per
covered services diems, capitation, performance-based,
bundled/episode based
Liability coverage of each party Liability insurance requirements for
either/both parties
Formulating a Negotiating Strategy
The fourth phase of preparation for health plan-provider negotiations focuses on the
formulation of a negotiating strategy.
For each objective, the health plan or the provider team plans and rehearses how to
state its position. When time permits, the team members may role-play the
presentation under various scenarios. The team attempts to anticipate the other
party's response to the presentation and develops contingency positions for each
possible response from the other party. When practicing presentations, the team
members critique their positions to identify and correct weaknesses or omissions. The
presentation should highlight the value that the provider or health plan brings to the
agreement.
13
Example: The provider's presentation may emphasize its scope of services and a high
level of patient satisfaction. The health plan may choose to stress prompt payment and
simple administrative requirements for providers. It can also demonstrate the volume
of plan members that it can direct to the provider.
For successful negotiation to occur, each party should present its points in a manner that
leaves issues open for discussion. A negative relationship is likely to develop if either party
feels coerced by perceived threats.
Organization of the Negotiation
Used for distribution at the initial meeting, a negotiating team may prepare a written outline
of its positions and proposals. The outline should indicate the order in which topics will be
negotiated. Typically, the parties negotiate the scope of services and contract language before
reimbursement because the reimbursement arrangement should reflect the services to be
reimbursed and how those services are to be delivered.
The parties also organize other information that they will need for bargaining. Both teams
usually bring the following materials to the first meeting:
• Background information on the other party

• Data to aid in the explanation of positions and to serve as a resource for both teams
• Copy of the proposed contract with potential problem areas marked
• List of suggested changes in contract wording and provisions
• Specific questions for the other party
Negotiating Style Options
Health plans and providers should also consider negotiating style options. The ideal
negotiation style for provider contracting is a collaborative approach, with both sides focused
on reaching mutually agreeable terms. However, health plans and providers adjust their
negotiation styles to suit a specific situation. The teams may test different negotiating styles
during practice sessions. Health plans and providers should consider the impact of each
negotiating style on future relations with the other party.
The negotiating plan also covers logistical issues, such as where and when to negotiate.
Negotiating in a familiar environment can be a major advantage. An organization negotiating in
its surroundings has a distinct advantage in terms of comfort level and ready access to
additional data and support. To level the playing field, health plans and providers commonly
negotiate in a neutral location or rotate meetings between each other's locations. In the case
of solo or small group practices where individual practitioners negotiate their contracts, health
plans often conduct the negotiation process at the provider's office for the provider's
convenience.
14
The critical issue for negotiation timing is to allow adequate time for preparation beforehand.
In many cases, the health plan, the provider, or both are eager to establish the contractual
relationship, but the parties should resist the temptation to rush into a contract without a
complete understanding of the contract's provisions and a plan for a negotiation.
Bargaining
Bargaining
Bargaining is often the most challenging stage of the negotiating process. Contract
bargaining requires the health plan and provider to focus on achieving their own goals while
managing the needs and expectations of the other party. Bargaining may take place through
a variety of means including:
• Face-to-face meetings
• Mail correspondence
• Electronic mail or facsimile
• Telephone conferences
The bargaining process varies greatly from one contracting situation to another. In many cases,
the negotiating teams need multiple contacts before they reach an agreement on all issues,
especially if the proposed contract covers a broad scope of services. Although the course of
negotiations is not predictable, many health plans and providers find that establishing a time
frame for completing the bargaining process motivates both sides to manage negotiations
efficiently.
During each meeting, a member of each team should document, in detail and writing, the
issues discussed and the outcome of the discussion. The written record of the meeting serves
as a reference for the team as it plans strategies and tactics for subsequent meetings. Each
meeting record should indicate the following information:
• Date
• Names and titles of participants
• Names of any observers and their relationship to the negotiation
• Proposals made
• Issues resolved
• Areas of disagreement still outstanding
15
The Initial Bargaining Meeting
In many cases, the negotiating teams meet in person for the initial meeting. The main
purpose of the first meeting is to set the stage for a detailed discussion of the issues. The
initial meeting between the provider and the health plan is an opportunity for the teams to
establish personal relationships that will facilitate both the negotiation process and the
subsequent administration of the contract. Sometimes the entire first meeting is devoted to
introductions and the exchange of background information, especially if the health plan and
the provider have had little previous contact.
Although some meetings are less structured, the first meeting often follows a written agenda.
The two parties sometimes collaborate to prepare the agenda. An agenda developed under a
collaborative approach establishes a feeling of cooperation and is more likely to reflect the
objectives and priorities of both sides. The agenda lists the topics to be discussed and the time
allotted to each issue.
Example: An initial meeting agenda might read as follows.
1. Introduction of participants (20 minutes)

a. Health plan team
b. Provider team
2. Statement of goals (30 minutes)
a. Provider team
b. MCO team
3. Review of contract options available (20 minutes)
a. Single-product contracts
b. Multiple-product contracts
4. Identification of principal issues to be negotiated (30 minutes)
5. Planning for next meeting (20 minutes)
16
Follow-up Contact Between the Teams
After the initial bargaining meeting, the negotiating teams review the outcome from
the first meeting and adjust their negotiating plans accordingly. Attorneys for each of
the parties review the contract and create alternative provisions or language to
address specific issues. At follow-up meetings, or through other contacts, the teams
make additional proposals, counterproposals, and discuss areas of disagreement.
Ideally, the health plan and the provider ultimately reach an agreement on each
issue so that the contract can be formalized within the projected time frame.
Negotiations sometimes reach an impasse when neither party is willing to
compromise further to reach an agreement. When negotiations stall, parties
sometimes postpone further talks to allow each side to reassess its position.
Negotiations resume if the parties believe they can resolve the disagreements. If
neither team is willing to alter its stance, negotiations cease.
Negotiations are often delayed while the parties exchange and evaluate data. In
some cases, the negotiation process must readdress previously negotiated issues
when a decision on one section of the contract affects the terms in an earlier
section.
Closing
Closing the Agreement
At the final meeting, the negotiating teams clarify any unresolved details, review the
contract to ensure that the document includes the agreed-upon terms, and submit
any final wording changes for the contract. Both sides must have a clear
understanding of the contract's provisions and the procedures for dealing with
questions and problems that may arise after the contract becomes effective. The
teams also finalize the procedures necessary to implement the contract.
The parties determine who will prepare the final contract and when the contract will be
available for review by the team leaders and their attorneys. The closing meeting presents
another opportunity for the parties to build their relationship as the teams designate contact
persons and establish procedures for administering the contract.
The actual signing of the contract takes place after negotiations are completed. In many
cases, provider contracts require the signature of a health plan or provider executive and the
negotiating team leaders. Once executed, the contract becomes a part of the health plan's
official provider file.
17
Summary
Contract negotiation is a communication process. This communication process takes place

between health plans and providers as they are driven by:
• Common desire to deliver quality healthcare services to a population

• Conflict based on the contract parties' differing motivations and constraints
• Give-and-take exchanges between the health plan and the provider to resolve the areas
of disagreement
Both parties want contract negotiations to result in favorable terms for the delivery of
healthcare services and acceptable reimbursement arrangements.
In this lesson, we learned that the process of negotiating health plan contracts includes these
key activities:
• Preparation
• Bargaining
• Closing
Of these perhaps the most important to successful negotiations is preparation. The preparation
process involves four (4) phases:
1. Assembling the negotiating team

2. Information gathering
3. Developing specific negotiating objectives
4. Formulating a negotiating plan
Teams usually include the team leader, financial manager, legal counsel, information systems
manager, actuarial support, and knowledgeable health plan consultant(s). Once a team has
been selected, it is time to gather information. To prepare for a negotiation, health plan and
provider negotiating teams compile and evaluate information about their organizations, the
other participating contracting party’s information, and local market conditions. Once the
information has been gathered, each team develops its negotiating objectives. Each objective
typically defines a negotiating range to indicate how much the health plan or provider is willing
to compromise on a given point. The negotiating range often specifies:
• Best possible outcome that could be achieved

• Most likely outcome
• Least desirable outcome that a party will accept
The final phase of the health plan-provider contract negotiation preparation involves
formulating a strategy. For each objective, the health plan or the provider plans and rehearses
how to state its position. For successful negotiation to occur, each party should present its
18
points in a manner that leaves issues open for discussion.
Once preparation is completed, the health plan and provider move to the next stage of the
negotiation process – bargaining. This is often the most challenging stage of the negotiating
process. It is important to keep in mind, that each party must focus not only on achieving its
own goals but, also on managing the needs and expectations of the other party.
The final stage of the negotiation process involves closing the agreement. At this stage, the
negotiating teams must clarify any unresolved details, review contract language to ensure that
the document includes agreed-upon terms. Beyond the contract language, the negotiating
teams must finalize any procedures necessary to implement the contract. Upon signing, the
executed contract becomes part of each parties’ official files.
19
Notes:
1
https://www.topmastersinhealthcare.com/job-profiles/health-care-financial-manager/ (accessed August 2019)
2
Keith J. Mueller, et al, Insuring Rural America: Health Insurance Challenges and Opportunities, July 2018, available
at https://www.rupri.org/wp-content/uploads/Insuring-Rural-America.pdf (accessed August 2019).
3
Eric Beier, MD, 5 Steps to Better Payer Contract Negotiation, MediGain e-book, available at
https://cdn2.hubspot.net/hubfs/207376/Older/docs/eBooks/5-Steps-to-Better-Payer-Contract-Negotiation-
eBook.pdf (accessed August 2019).
4
https://www.ncqa.org/hedis/
5
Abernathy, Mark, Avoid Common Problems In Risk-Sharing Contracts, Managed Care Magazine, April 1, 2000;
available at https://www.managedcaremag.com/archives/2000/4/avoid-common-problems-risk-sharing-contracts
6
Gruessner, Vera, Health Payer Tips for Negotiating Managed Care Contracts, HealthPayerIntelligence-xtelligent
Healthcare Media, January 5, 2016; available at https://healthpayerintelligence.com/news/health-payer-tips-for-
negotiating-managed-care-contracts (accessed August 2019).
7
http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx#1
20
AHM 530: Provider Contracting: Part 3 - Responsibilities of Health Plans and Providers Under Contracts
Provider Contracting: Part 3 - Responsibilities of Health Plans

and Providers Under Contracts
Introduction
In this lesson, we examine contract provisions that govern the responsibilities of each party in
the contract, pointing out areas that may require negotiation. These contract provisions
provide a clear understanding of the healthcare services that are to be delivered to the health
plan's members and identify which party is responsible for delivering those services.
Contract provisions are also used to document procedures and processes designed to reduce
the possibility of confusion or disagreements about contractual obligations, address the various
concerns of the contracting parties, and establish prudent and reasonable standards of
operation for the health plan and its healthcare providers.
• Identify key health plan and provider contractual responsibilities typically addressed in
provider contracts
• Describe a low enrollment protection clause and its use in capitated contracts
• Explain how and why health plans modify existing provider contracts
• Identify issues regarding physician/patient communication and explain how these are
addressed in provider contracts
• Explain the importance of describing a provider’s scope of service in the provider
contract
• Describe the types of termination clauses used in provider contracts
1
The Health Plan's Contractual Responsibilities
The health plan is responsible for giving providers a contractual framework for delivering
healthcare services and for being paid for those services. This framework includes the
administrative and operational support providers need to effectively implement the terms of a
health plan contract. Health plan support includes:
• ensuring that providers have enough patient volume by using various marketing
strategies to attract plan members
• enrollment and assignment of members
• fulfilling administrative service commitments, especially the processing and payment of
claims promptly
• conducting credit checks on self-insured employer groups
• maintaining the health plan's licenses and accreditation
• giving providers information on member eligibility, utilization management (UM),
quality management (QM), and claims
• benefit design and interpretation (coverage decisions)
• notifying providers of changes to the contract
2
Marketing Strategies
Provider contracts often include a provision outlining the rights of each party to use the names
and trademarks of the other party. Health plans want the right to use providers' names and
addresses to market its network to purchasers, members, and potential members. The
provider's name, specialty, address, and telephone numbers will be listed in the health plan's
provider directory.
The plan usually grants providers the right to post approved signs indicating the providers'
participation with the health plan. Generally, neither party can use the name or trademarks of
the other party in any other way without the approval of the other party. Other uses can be
negotiated as part of the contract or can be negotiated later. One purpose of this limitation is
to maintain confidentiality and to prohibit the use of such information after the contract is
terminated.1
Announcing its participation in a health plan may offer a greater patient base to the provider. A
well-known and respected provider's inclusion in the health plan's provider directory is likely to
draw new purchasers or members to the health plan. A provider who can substantially
contribute to the health plan's growth may seek to negotiate a higher rate of reimbursement.
The provider and the health plan will also want to come to an agreement regarding the
provider's ability to comply with the health plan's marketing strategy. These strategies may
have an impact on the provider's operations, and it makes sense to outline any specific
requirements in the contract.2
Example: A health plan's marketing may generate a large demand for routine physicals among
members by advocating annual comprehensive physical examinations or may promise
members extended hours of access to providers.
3
Delivery of Patients
A fundamental component of the relationship between the health plan and the provider is the
ability of the health plan to deliver patients to the provider. Health plan contract provisions
related to patient delivery refer to the ability and commitment of the health plan to enroll and
maintain enough members for providers to have an adequate patient base.
Patient delivery is also one of the most significant factors a health plan considers when
determining whether provider services should be reimbursed on a capitated or a fee-for-service
(FFS) basis. Larger patient bases help to dilute the risk of capitation and make this payment
method more appealing to providers.
Capitation and fee-for-service (FFS) are two common modes of payment for healthcare
providers. In capitation, doctors are paid a set amount for each patient they agree to see, while
FFS pays doctors according to what procedures are used to treat a patient.
4
Low Enrollment Protection
Without the promise of an adequate number of members, certain providers (i.e. physician
organizations, primary care providers (PCPs) may lack the financial incentive to contract with a
health plan. To reduce concerns regarding the number of members assigned to such providers,
health plans may include low enrollment protection language in capitated contracts.
This clause requires the health plan to reimburse the provider on an FFS basis until a
predetermined number of members, such as 100, have selected the provider. When the
number of members reaches the enrollment threshold, the provider’s reimbursement changes
to a capitated arrangement. Low enrollment protection eases a provider into capitation,
although at greater risk to the health plan. Some health plans use low enrollment protection on
an ongoing basis to determine provider reimbursement when the provider's patient load
fluctuates.
Example: If the threshold is set at 250 members and the provider’s assigned membership falls
below that level during the contractual relationship, the reimbursement method reverts to FFS
until the provider’s assigned patient load reaches the enrollment threshold again.
If a health plan capitates all providers regardless of the number of members assigned to them,
providers may be able to negotiate a per member per month (PMPM) dollar amount higher
than the normal capitation rate. The higher rate helps protect the provider against financial loss
during the period when health plan enrollment is low. Unless otherwise specified, capitation
rates will remain at the higher level, regardless of the number of members who select the
provider, until the contract is renegotiated. This protection usually does not apply under
reimbursement arrangements other than capitation.
5
Administrative Service Commitments
Health plans frequently offer, and providers increasingly require, commitments regarding the
health plan's administrative service responsibilities. The most common commitment made by
the health plan is for the timely payment of claims. Health plans must pay providers according
to state prompt payment laws. Although the laws vary from state to state, the provider
agreement must reflect appropriate prompt payment deadlines, this is typically within a certain
number of days after submission of a “clean claim”.3
All fifty states and the District of Columbia have “prompt-pay” statutes applicable in the
healthcare context. These statutes require health plans to pay claims submitted by providers
within specific time limits or face penalties and other sanctions.4
There is a good deal of variation in state prompt payment laws across the country.
Example: Some laws specify that they apply to “clean claims” only (i.e. Alabama, Alaska,
Arizona, Arkansas, Colorado, Connecticut, Delaware), while others do not apply to “clean
claims” only (i.e. California, Georgia, Hawaii, Illinois, Iowa). The prompt payment deadlines also
vary as well.
Example: New Hampshire’s statute applies to “clean claims” only, with electronic claims to be
paid in 15 calendar days and written claims to be paid in 45 calendar days. Missouri’s statute
does not apply to “clean claims” only, and electronic claims must be paid in 45 days.
Depending on state law requirements, claims that are not complete and that require additional
information (i.e. claims that do not qualify as “clean claims” as defined in the provider
agreement) may be subject to strict application of the timely payment of claims clause. The
contract or the provider manual should specify the requirements for a “clean claim.”
Health plans may owe interest or penalties in connection with claims that are paid after the
payment deadline.5 If the health plan wants to retain the right to recoup money paid to
providers for any reason, such as an overpayment by the plan to the provider, the provider
agreement should address that right and describe how the recoupment process will work.6
6
Checking the Financial Soundness of Self-Funded Employer Group Plans
The health plan generally does not take financial responsibility for claims generated by self-
funded plans. If an employer group covered by a self-funded plan goes bankrupt and fails to
provide funds to the health plan for payment to providers for services rendered to the
employer group's members, most plans disavow any responsibility to the provider. While many
providers recognize the practical necessity of working with self-insured employers, providers
may demand assurance from a health plan that a process is in place to examine the self-insured
group's financial soundness.
Health Plan's Maintenance of Licensure and Accreditation
A health plan requires its providers to maintain their professional credentials and privileges
such as admitting privileges and specific procedure privileges for network hospitals. The health
plan verifies a provider's professional qualifications through the credentialing process and
reconfirms and updates this information during periodic recredentialing.
The credentialing standards typically are non-negotiable; however, the parties may negotiate
the issue of who will perform the credentialing process. The health plan may delegate this
activity to a provider organization or a third party, such as a Credentials Verification
Organization (CVO). Both the health plan and the provider must have confidence in the quality
and accuracy of the delegate's credentialing processes.
The provider expects the health plan to commit to maintaining the appropriate operating
licenses and accreditation. Adding this reciprocal commitment to the contract helps reassure
the plan's providers that the agreement is one of mutual commitment and not a set of
unilateral demands imposed on providers by the health plan. This contract section
communicates to the provider the health plan's standards for operation.
Example: If the health plan states that it will maintain accreditation from the National
Committee for Quality Assurance (NCQA) or the Utilization Review Accreditation Commission
(URAC), network providers will understand the type of credentialing and information-reporting
requirements the plan will place on network providers.
7
Reports and Information Required of the Health Plan
Providers rely on reports from the health plan to assist them in managing their costs and
quality, particularly in contracts that involve risk-sharing or capitation payment systems. It is in
the health plan’s best interest to provide regular data reports to providers. Such reports help
each party meet contractual obligations, identify potential problems, and meet state or federal
reporting requirements. A health plan that commits to these reports in the contract is likely to
earn more confidence from potential provider partners.
Reports and information typically furnished to providers by health plans include:
• provider manual
Details of administrative and operational procedures that providers must follow when
delivering healthcare under the insurer’s benefit plan.
• eligibility and capitation reports
Identifies the members of the plan, the benefits they are eligible to receive, and which
provider they have selected.
• utilization reports
Details and summarizes the provider’s record of patient utilization, provider referral
patterns, emergency room use, drug prescription patterns, and related financial
information. These are especially important for providers who have a financial risk
arrangement such as capitation.
• periodic performance data and comparisons with other providers
Includes the results of quality improvement activities, member satisfaction data,
member complaint, and grievance statistics, utilization, and medical record and office
site review findings.
• plan's intended use of medical incident reports
Indicates whether the plan will submit this information to regulatory or accreditation
bodies.
8
Modifying the Provider Contract
Contracts must be periodically be updated or amended to keep up with changes in the

healthcare industry and with state and federal laws. Contract modifications are required when
either:
1. The health plan updates any programs or benefit plans that may affect provider
compensation or the ability of the provider to fulfill the obligations of the contract
2. Legal, accreditation, or regulatory requirements mandate changes to the contract
Amendments are formal contract provisions that are attached to an existing contract and allow
binding changes to be made without having to revise or renegotiate the entire contract.
Example: An amendment to the contract may change the frequency with which providers must
submit certain reports.
All provider contracts must include a provision that clearly outlines the procedures and
expectations for contract amendments and modifications. Contracts that contain unilateral
amendment language allow payers to change contract provisions without notifying or seeking
approval from the provider (subject to any state law requirements concerning provider
notification).7 This contract language permits the health plan to amend an existing contract as
long as the provider is given advance notice (such as 30 days before the amendment becomes
effective). A delay in implementation gives providers an advance notice of a change and allows
them to terminate the contract before the change becomes effective. If there is no response
from the provider during the lead time, the amendment becomes effective. If the provider
objects to the change, the provider may negotiate for the change provision to allow the original
contract terms to remain in effect until the end of the contract.8
Providers do not have the opportunity to approve or respond to changes in one situation.
Under the change in law provision, health plans may change or amend contracts without the
approval of their providers if modifications are made to comply with new legal and regulatory
requirements.
Example: A state regulatory agency may impose standards for member’s access to provider
services, such as a maximum time frame (perhaps 30 days) within which a member should be
able to obtain an appointment for a routine physical examination.
9
The contract often cites the provider manual revision as an avenue for advising providers of
changes in operational and administrative procedures and guidelines. If the provider manual is
being used in this way, the contract should contain language that specifically addresses the
provider’s right to object to changes that are not mandated by law, regulatory, or purchaser
requirements. If the provider is contractually bound by changes noted in a provider manual, the
contract should contain wording that guarantees the provider advance notice of changes and
the right to terminate the contract without cause if the changes are unacceptable. A typical
amendment clause might read:
Except as set forth in this Agreement, this Agreement may be amended only by mutual
agreement of the parties except that [Plan] may amend this Agreement as necessary to comply
with federal or state law. [Plan] may revise the provider manual to make routine changes.
Routine changes are defined as any changes other than changes that are both:
• Substantive
• Inconsistent with the terms of this Agreement. [Plan] shall provide at least sixty (60)
days’ prior written notice of any changes to the provider manual that are not routine
changes, as defined herein.
Many provider contracts are automatically renewed through an evergreen clause, which allows
the terms of the contract to renew unchanged each year. If providers desire changes to the
contract, they must be aware of the renewal date and notify the health plan of their intent to
renegotiate the contract within the time contractually specified.
10
The Provider’s Contractual Responsibilities
Agreement to Provide Services
The core purpose of any health plan-provider contract is to reach an agreement that the
provider will deliver services to health plan members according to certain terms and conditions.
The responsibility of the provider to deliver services is usually subject to the provider's receipt
of member eligibility-as indicated by a member ID card or some other eligibility certification.
The provider is typically required to deliver services to the health plan's members with the
same quality, timeliness, duration, and scope as the provider would deliver to other patients.
The provider is also prohibited from discriminating against members based on:
• physical disability
• age
• race
• gender
• religion
• sexual orientation
• national or ethnic origin
• political beliefs
• gender identity
• expression
• health status
The contract may also encourage providers to refer patients only to other participating
providers whenever appropriate and practical.
Providers may also want to include in the contract a provision that allows them to change the
scope of services they provide without notice to or consent from the health plan.
Example: Under such a provision, a provider that has offered a specific surgical procedure that
is covered by the health plan can later choose to stop performing that procedure if the provider
determines that it can no longer offer that service on a cost-effective basis.
11
Responsibility for Medical Care and Provider-Patient Communication
Health plan contracts include statements that place responsibility for medical care on the
providers rather than on the health plan. Such statements indicate that the provider must make
all final decisions regarding the delivery of care. The provider is encouraged to discuss with
patients all available treatment alternatives, including treatments not covered by the plan.
Before rendering a non-covered service, the provider must document (in writing) that the
member is aware that the service is not covered by the health plan. Some provider contracts
also explicitly allow participating providers to discuss health plan payment arrangements with
patients who are covered by the plan. Providers who are concerned about any perceived
restrictions on their relationships with patients may insist upon negotiating specific contract
language that will avoid misunderstandings.
In the past, some contracts contained a gag rule. A gag rule was the language that limited the
provider’s ability to discuss certain treatment options with patients. Currently, provider
contracts typically include a clause stating that providers must maintain open communications
with patients regarding appropriate treatment plans, even if the services are not covered by the
member's health plan.
The given example is a sample contract clause that requires providers to provide maintain open
communications.
Participating physician shall maintain the physician-patient relationship with each member to
whom he or she provides medical care and treatment and be responsible for the medical care
and treatment of such members. Nothing contained in this agreement is intended or shall be
interpreted:
1. To interfere with the physician-patient relationship

2. To discourage or prohibit a Participating Physician from discussing preventive, or
treatment options, including medication, and without regard to what is covered under
the Member’s Plan
3. To discourage or prohibit providing other medical advice or treatment deemed
appropriate by the Participating Physician
12
Covered Services
Covered services refer to all healthcare services available to members under the benefits
provided by their health plan. To assure that contracted providers have a clear understanding
of their obligations to provide specific covered services, the contract should detail all the
applicable covered healthcare services for each provider type. When a provider's contract
applies to more than one benefit plan, an attachment or exhibit to the contract should define
covered services according to each benefit plan.
Covered services defined in the health plan contract are usually related to the reimbursement
methods agreed upon with the physician or another provider. The covered services are
identified as capitated services or services to be reimbursed under another payment method,
such as discounted fee-for-service (DFFS).
Contractually covered benefits that are excluded from the provider's responsibility should be
clearly listed in the contract.
Example: Benefits that are excluded from a Primary Care Physician’s (PCP's) responsibilities
may include:
• out-of-area treatment
• procedures that are more appropriately performed by a surgeon or other specialist
• ambulance service
13
PCP Scope of Services
Primary care providers (PCPs) who contract with a health plan under capitated payment
arrangements should receive a detailed scope of services listing as an exhibit in the contract.
The scope of services provision details:
• which services are covered under the capitation payment

• differences between each benefit plan
• services that are reimbursed under another payment method or that require prior
authorization
Generally, all services included in the scope of services are covered by a PCP's monthly
capitation payment. Within the constraints of their benefit plan, these services may be
provided as medically necessary and without prior authorization to the health plan’s members.
A detailed PCP scope of services listing:
• eliminates the guesswork about payment responsibility

• avoids disputes about responsibility for specific services
• enables the health plan's claims operation to adjudicate claims more accurately because
payment responsibility is clearly defined
• deters inappropriate referrals to specialists for services that should be rendered by the
PCP
A provider contract that contains a detailed PCP scope of services listing as an exhibit to the
contract might include a clause such as the following:
“Primary Care Services” shall mean (i) those Covered Services provided to Enrollees that provide
initial and basic primary medical care, including but not limited to those Covered Services
specifically identified as Primary Care Services on Exhibit A hereto; and (ii) the supervision and
coordination of the delivery of Covered Services to Enrollees.
The contracts may also identify the use of a formulary and any restrictions on prescribing
nonformulary drugs.
14
Practice Capabilities and Limitations
This section of the contract identifies services that are covered benefits but are excluded from
the provider's responsibility (usually based on specialty). A provider should limit their obligation
to provide covered services to those allowed by the provider’s facilities, staff, and other
resources. A provider should not assume the obligation to provide any services he or she does
not typically offer.9 Identification of service capabilities and limitations can prevent disputes
over the performance of those services in the future.
Example: Some examples of practice capabilities/limitations in managed contracts might

include:
• internists who are contracted as PCPs may specify that they do not see patients under
the age of 17
• an orthopedic surgeon may exclude podiatry services, back problems, bone tumors, and
revision of joint replacements
In some cases, a health plan limits the scope of services for its providers by contracting with
other providers for specific services (i.e. laboratory or radiology services). Providers who have
the facilities and capability to handle services that have been removed from the list of required
services may wish to negotiate with the health plan to perform and be reimbursed for these
services.10
Benefits with Special Limitations
Some benefits are limited to a specific number of visits, treatments, or supplies during each
benefit year.
Example: A plan may cover one routine Pap smear a year for adult females, or behavioral
health benefits may cover a maximum of 30 days at an inpatient chemical dependency facility
during the benefit year.
To assure that a provider does not unknowingly deliver services above the allowed number of
services without first informing the patient of his or her responsibility for any related charges,
the contract details any benefit plan limitations. The health plan must have procedures in place
that allow the physician to verify if a member's benefits for a specific type of service have been
exhausted. The contract must also state who bears financial responsibility for services that are
rendered after a benefit has been exhausted.
15
Compliance with Administrative and Operational Policies
The health plan will want a commitment from providers to comply with the rules and
procedures contained in a provider manual. This manual will include detailed billing
instructions, such as the type of claim form to be used (i.e. CMS Form 1500); the coding system
to be used to describe services; and the documentation required to support a claim. Prior
authorization requirements, methods for verifying member eligibility, and other processes are
typically described in similar detail.
Prior Authorization Requirements and Referrals
The primary goal of the health plan's prior authorization program is to review a physician's
request to provide nonemergency outpatient and inpatient services. This review examines the
medical necessity and appropriateness of proposed services and determines service coverage.
The authorization program (along with other required procedures) is generally described in
detail in the health plan's provider manual and any other documents that explain the health
plan's utilization management (UM) program.
To assure that providers are contractually obligated to follow the requirements of the
authorization and referral programs, the contract includes provisions that explain the
responsibilities of both the health plan and provider under such programs. Some commonly
imposed authorization and referral conditions include:
• contracted PCPs must make referrals only to specialty providers that are contracted
with the health plan
• specifications that no referral is needed for emergency care (including any associated
ambulance transportation)-if exceptions are noted
• obstetrical/gynecological services, outpatient behavioral health services, and laboratory
services, radiology, and routine imaging studies
• PCPs must obtain prior authorization (preauthorization) for all referrals that do not
meet these requirements
16
Responsibilities of Each Party
The contract must document the steps involved in the referral authorization process and the
responsibilities of each party including:
• a description of the procedures for obtaining the health plan’s authorization and the
circumstances under which a referral is allowed
• identification of responsibility for obtaining a referral
• procedures for member self-referrals for certain preventive health services (i.e. annual
well-woman exam and other gynecological services)
• any financial disincentives applicable to the provider’s failure to make referrals within
contract guidelines (i.e. failure to secure the required authorization for a health care
service may result in a claim denial following a retrospective review)
• claim denials may not be billed to the patient by the provider
• mechanism to resolve disputes about which treatments are medically necessary
17
Patient Options in Event of Denial
Health plans typically have an appeals process that allows the patient to appeal to the
health plan's prohibition of outside referral.
If care has already been administered, patients covered by ACA Marketplace plans in fact, have
two options regarding claim denials. There are two ways to appeal a health plan decision:
• Internal appeal
If the enrollee’s claim is denied the enrollee has the right to an internal appeal. They
may ask their insurance company to conduct a full and fair review of its decision. If the
case is urgent, the insurance company must expedite this process.
• External appeal
The enrollee has the right to take their appeal to an independent third-party for review.
External review means that the insurance company no longer gets the final say over
whether to pay a claim.
Provider contracts include provisions advising contracted specialists about procedures to obtain
authorization. These authorizations are used to render services outside the scope of the original
referral from the PCP.
Example: A PCP might refer a patient to an orthopedist for treatment of a fracture, with a
specified follow-up period based on the diagnosis. If complications arise during the patient's
treatment or recovery, the orthopedist may need to request authorization for a treatment
period extension or additional procedures.
Some health plans may require that the specialist's request be submitted to the PCP; others
request that the specialist contact the health plan's UM department for authorization of
additional services. In all instances, the contract should require the specialist to provide
consultation reports to the PCP for services rendered. This requirement supports the
coordination of care between the PCP and specialists involved in the patient's current medical
condition.
18
Provisions Found in Provider Contract
Access
Defined by health plans, access standards are guidelines that are consistent with applicable
laws and regulations and assure that every member receives the benefits provided by his or
her health plan in a timely manner. These benefits should be appropriate to the member's
medical condition and consistent with the reason for seeking care. Access standards should be
outlined in the contract to ensure proper compliance.
Health plan access standards might include:
• 24-hour access to emergency care

• Members discharged from an emergency room with a diagnosis of depression should
have an appointment with an in-network psychiatrist for follow-up care within two
weeks
• Call to a primary care provider should result in a new appointment within 30 days
Covering Physician(s)
Contracted physicians make routine arrangements with covering physicians to meet the
obligation of availability under a contract's access standards. In a covering arrangement, several
physicians with similar specialties within the same practice (or in local proximity) will usually
rotate and cover for each other after business hours. Using covering physicians, contracted
providers can assure the availability of routine services during business hours and emergency
services 24 hours per day, 7 days per week. The health plan contract should describe the
requirements for a contracted physician's use of covering physicians. A typical provision
addresses the following issues:
• Is the covering physician required to be credentialed and contracted by the health

plan?
• Is the contracted physician solely responsible for obtaining coverage from a licensed
physician who will comply with the health plan's UM and peer review procedures,
accept payment from the contracted physician, and not bill members for services
rendered?
• Is the contracted physician required to indemnify the health plan for any professional
liability issues that may occur as a result of a patient's treatment by a noncontracted
covering physician?
These provisions may also apply to PCPs located in rural areas when the PCP does not have
hospital admitting privileges and must refer a patient requiring hospitalization to a physician
who does not contract with the health plan.
19
Covering Physicians Clause Example
Example: A typical “covering physicians” clause in a provider contract might read as follows:
Provider shall also ensure that the Covering Physician will not under any circumstances, bill
Members (except applicable copayment) or Health Plan for Covered Services.
Provider shall not delegate any of its responsibilities under this Agreement other than to a
Covering Physician or Subcontractor, in accordance with the provisions of section __ of this
Agreement.
Provider agrees to be responsible for making suitable arrangements with the Covering Physician
regarding the amount and manner in which Covering Physician will be reimbursed or otherwise
compensated for services provided on Provider’s behalf, as further described on Attachment A.
Provider shall ensure that Covering Physician complies with and supplies all items required
under section __ below.
Provider agrees to ascertain and ensure that any Covering Physician will cooperate with and
accept the findings of Health Plan’s peer review procedures as they relate to services provided to
Members and that such Covering Physician will seek Authorization from the Health Plan prior to
all hospitalizations, except for Emergencies or as otherwise provided in the QI/UM Program.
20
Participation in Utilization Management (UM) Programs
As a condition of participating in the health plan network, providers are required to accept and
abide by the health plan's UM program. As a partner with the health plan in the delivery of
healthcare to members, a provider's cooperation is fundamental to implementing UM
programs that ensure quality care and cost-effective treatment.
Utilization management programs usually include preauthorization and concurrent and

retrospective review of services to assure that members receive appropriate services for
medically necessary care.
• Preauthorization
Also known as prospective review, is typically used as a method of reducing medically
unnecessary admissions or procedures by denying cases that do not meet criteria or
allocating them to more appropriate care settings before the act.
• Concurrent review
Carried out during (and a part of) the clinical workflow, in support of point of care
decisions. It may include a case-management function that includes coordinating
and planning for safe discharge or transition to the next level of care. The focus here
is on reducing denials and placing the patient at a medically appropriate point of
care.
• Retrospective review
Considers whether an appropriate level of care was applied after it was
administered. It will typically look at whether the procedure, location, and timing
were appropriate according to the criteria. According to a medical plan or medical
insurance provision, this form of review typically relates to payment or
reimbursement. Alternatively, a retrospective review may reflect a decision as to the
ongoing point of care.11
UM programs also extend to the areas of discharge planning and case management. The health
plan contract documents how the health plan monitors and responds to noncompliance.
21
Provider’s Participation in UM Program
A provider's agreement to participate in the health plan's UM program is documented by a

contract provision that specifically outlines the participation requirement. Typically, the health
plan contract provision describes the participation requirement briefly and then cites a contract
attachment that describes the UM program in detail. In other instances, the provider manual is
referenced in the contract as the source of a detailed description.
The provider's participation in the UM program usually involves:
• meeting the health plan's authorization program requirements

This may involve prospective, concurrent, and retrospective reviews of services
rendered. For the UM program to review the medical necessity and appropriateness of
inpatient and outpatient services to determine coverage, this review can also include
care coordination with specialty providers.
• complying with a review process that includes provider or member reconsideration
requests and health plan decision appeals
Providers may negotiate to include a contract provision that requires a peer reviewer to
review any case in which the health plan denies a service for medical necessity. This
provision may also specify that the peer reviewer will be available to discuss with the
provider any denials made by the health plan.
Changes to the UM program should be documented in an amendment to the contract or an

update to the UM program description. Health plans frequently agree to notify providers of
changes in UM programs 30 to 60 days before the changes are implemented.
22
Participation in Quality Management Programs
Quality of care and service improvements have taken center stage as a national issue because
of intensive healthcare cost-containment efforts and increased competitive pressures in the
healthcare industry. As a result, health plans have established quality management programs
that:
• monitor and evaluate the quality of care and service rendered by providers
• monitor performance and compliance with UM programs, contractual and regulatory
obligations, and other programs related to service and quality, such as credentialing
providers and resolving member or provider complaints and grievances
• develop and implement remedies to problems with access, quality of care, utilization,
and administrative problems
• meet regulatory and accreditation agency requirements and standards
To ensure the successful implementation of a QM program, health plans require the support
and cooperation of their contracted providers. Health plan contracts include a general provision
that obligates the provider to participate in the health plan's QM program. The provider is
required to treat all QM activities and findings in a confidentially.
Providers may wish to negotiate a provision that addresses a possible situation in which a
patient refuses treatment despite the recommendations of the provider and the health plan. If
the provider has informed the patient of the consequences of refusing treatment, the patient's
choice is termed an informed refusal. If such a provision is included in the contract, the
requirements for documenting an informed refusal should be specified.
The health plan is required to maintain ongoing communications with providers regarding QM
activities, findings, and resulting program changes. The health plan's basic expectations for
provider participation in the QM program are outlined in the contract. The health plan should
seek the participation of network providers in the QM program to achieve commitment and
buy-in to the program. Some federal and state programs impose requirements for provider
compliance with QM programs. The QM program description generally is included as an exhibit
to the contract or in the health plan's provider manual.
23
Reports, Credentialing, and Patient Grievance Process
Reports and Information Required of Providers
Just as health plans are required by contract to deliver certain information to providers,
providers have a responsibility to submit reports and information to their health plans.
Providers typically require the following types of information:
• reports on services provided under capitation

• promptly submitted claims (i.e. within 60-90 days) for non-capitated services
• member complaint data
• risk management reports of adverse incidents involving members or the provider’s staff
• practice changes (locations, opening and closing of practices to new members,
changes in a provider’s hours of operation, and changes in a provider’s
privileges)
• developments that may cause a provider to fall outside the plan’s credentialing
requirements (receipt of medical board sanctions, loss of license, or receipt of
malpractice claims)
Credentialing and Recredentialing
Providers are typically required to participate in the credentialing and recredentialing processes
established by the health plan. Health plans that are accredited by NCQA and URAC are
required to maintain control over the credentialing process. Other licensing and accrediting
bodies (i.e. CMS and state insurance departments) have similar requirements. If the health plan
maintains adequate oversight and audit rights for this process, the health plan may choose to
delegate credentialing activities to its provider networks, integrated delivery systems (IDSs), or
credentialing verification organizations (CVOs). The health plan must define in this section who
will be responsible for credentialing and what information will be required from providers who
perform credentialing activities.
Health plan contracts should mandate providers to maintain the credentials and privileges (i.e.
hospital admitting or specific procedure privileges) that were required for initial participation in
the provider network.
24
Patient Grievance and Complaint Processes
The health plan wants to know if members are satisfied with their healthcare or the
administration of the health plan. Contracts usually require providers to notify the plan of
member complaints and to participate in complaint resolution processes. Some types of
complaints should be reported as they occur; others may be studied on a long-term basis.
Example: It may be more useful to survey members periodically about their satisfaction with
wait-times at physicians' offices than to have physicians report every complaint about a long
stay in the waiting room. On the other hand, any complaint about the healthcare given by the
provider should be reported immediately.
Mutual Obligations of Health Plans and Providers
Mutual Obligations
While the health plan and its providers each have different responsibilities under the provider
contract, some commitments are the responsibility of both parties. Some of the most
important mutual obligations under the provider contract include the responsibility to:
• verify members' eligibility

• define the specific elements of the billing and payment process
• maintain accurate records
• share appropriate information
• maintain patient confidentiality
• maintain appropriate liability insurance
• understand and comply with the contract's termination and due process clauses
• maintain compliance with federal and state requirements
25
Eligibility Verification
The health plan and the provider are jointly responsible for verifying the eligibility of
members seeking medical care. While providers must initiate the verification process, the
health plan must have established mechanisms to verify the member's eligibility for covered
services. Along with verification methods, a description of the provider's responsibility in the
eligibility verification process should be included in the contract. The financial responsibility
for services provided to ineligible patients should also be defined in the contract.
One way for providers to verify eligibility is to check each patient’s Member identification (ID)
card. Member ID cards provide benefit plan information, coverage-effective dates, and certain
demographic data. Providers may also access the health plan’s website or provider portal to
verify eligibility. If eligibility cannot be verified through these methods, the PCP may be
instructed to call the telephone verification line or the health plan's member service
department.
Health plan-contracted specialists and other providers are usually required to verify eligibility
on the date services are rendered. This procedure is especially important for services that were
previously authorized but, not actually provided on the day of authorization.
26
Financial Responsibility
Sometimes providers unknowingly render services to an ineligible patient and then become
financially liable for the error because the capitation for that patient has already been deducted
from the health plan’s payment to the provider. To avoid potential disputes that arise in such
situations, the health plan contract should define financial responsibility for services provided
to ineligible patients.
Liability Scenario 1 Liability Scenario 2

Oscar Rivera participated in his employer’s Sharon Caldwell broke her ankle in an
healthcare plan. Two months after Mr. accident and sought treatment from her
Rivera quit his job, he made an PCP. The doctor checked Ms. Caldwell’s
appointment with the PCP associated with Member I.D. card and the plan’s provider
the plan. The doctor checked the plan’s portal but could not positively verify
provider portal to verify Mr. Rivera’s eligibility. She assumed that Ms. Caldwell
eligibility and provided services. He only was eligible and provided the needed
later discovered that Mr. Rivera was not services, only to find after the fact that Ms.
eligible for coverage. Caldwell was not eligible for benefits.
To protect providers who receive confirmation of a patient’s eligibility for services from the
health plan, some health plans include an eligibility guarantee clause within the contract.
Providers are not financially responsible for the services rendered if the patient is later found to
be ineligible.
The health plan may also include a clause in the purchaser’s contract that relates to retroactive
enrollment changes. Such a clause typically places a time requirement on a purchaser’s
reporting of changes in a member’s eligibility status. Such a clause insulates both the provider
and the health plan from financial responsibility.
Providers can also stipulate a time limit for retroactive capitation deductions (i.e. 60 days). If
the health plan does reverse capitation payments, it may agree to reimburse physicians for any
services provided after the member’s termination date at a discounted FFS rate. It is important
for health plans to identify the product lines that providers are representing It is equally
important for providers to understand the various benefit packages that they might encounter
as they provide services to health plan members.
27
Different Product Lines
If the health plan has multiple product lines (i.e. commercial, Medicare, and Medicaid plans),
the contract should specify which health plan members have access to a provider's services and
how the members will be differentiated. This information is particularly important in situations
where providers are not contracted to provide services to health plan members in all product
lines.
Different Benefit Plans
To remain competitive in today's health plan market, health plans typically offer multiple
benefit plans, such as an HMO, a PPO, and a POS option, within each product line. For a
provider who is unaware of the variables in covered services, the member's financial
responsibility (i.e. copayments or deductibles), or the out-of-network options available for each
benefit plan, this profusion of plans can create a challenging situation. Any confusion about a
specific plan's benefit schedule can result in a member not receiving services that are covered,
a member being asked to pay an incorrect copayment, or the member filing a grievance against
the physician or the health plan.
To eliminate any confusion about benefits and covered services, the health plan contract
should include an exhibit that summarizes all benefit plans by product line. Some states require
separate and different contracts for each product line. More detailed benefit plan information
is usually included in the health plan's provider manual.
The method and level of compensation are key issues for both health plans and providers, so
we will review pertinent contract language alone.
28
Provider Payment
The contract will usually include a payment exhibit which lists the specific rates that the health
plan agrees to pay providers. By using an exhibit, the health plan can adjust payment over time
without changing the entire contract.
The detailed process of coding and submitting a claim for payment is generally described in the
provider manual. The following key elements of the billing and payment process are typically
discussed in a provider contract:
• No-balance billing clause
It is important for health plans to assure plan members that they will not encounter
unexpected costs. A major goal of health plan contracting is to obtain a provider
commitment accepting the health plan's payment as payment in full and will not bill
members for anything other than contracted copayments, coinsurance, and deductibles.
This commitment is made in the no-balance-billing clause of the provider contract. For
the acceptance of the health plan's payment as payment in full, providers receive a
guarantee that the health plan will pay them directly.
This clause is particularly pertinent in an age of widespread concerns about exorbitant

surprise bills from out-of-network providers.
29
• Payment for services not covered

While the obvious focus of a provider contract is the business relationship for covered
services, the health plan must also address issues related to services that are not
covered under the contract. The plan usually allows providers to collect payment from
the member for services that are explicitly excluded from the benefit plan.
Example: Most cosmetic surgery is excluded from coverage by most health plan
contracts. If a member elects to have cosmetic surgery, a contracting provider may bill
the patient directly for this service.
In situations where the health plan judges services to not be medically necessary or
where care is delivered outside the referral rules provider payment may become less
clear. Most commonly, the health plan allows contracting providers to bill patients for
services considered not medically necessary if the provider notifies the patient in
advance that the service will not be covered by the health plan. Some plans allow a
specialist who did not receive the necessary referrals or prior authorizations to bill for
care if the patient is informed in advance that the care will not be covered by the plan.
Other plans do not allow such billing.
• Insolvency of the health plan
Even if the health plan is insolvent or goes out of business, most state insurance
departments and CMS require that HMO provider contracts bind providers to deliver
care. This provider requirement is usually limited to the duration of the group or
member contract with the plan. In addition, a state insurance department will usually
intervene in health plan insolvency to identify another health plan that is willing to
assume responsibility for the customer contracts. However, virtually all HMO contracts
bind providers to continue to provide services even if the health plan cannot pay for
them.
• Insolvency of self-insured groups
Many health plan contracts now explicitly state that the ultimate responsibility for
paying claims lies with the self-insured group, not the health plan. The health plan
commits to pay providers for claims related to these groups only if the group provides
funds to the health plan to allow for payment. If the group fails to provide funds, the
plan will not pay the claims, and the provider may pursue the member for payment. To
demand assurances on the creditworthiness of these purchasers, some providers are
beginning to require higher payments from self-funded plans than from fully funded
plans.
30
• “Surprise medical bills” and related laws/regulations
The term “surprise medical bill” describes charges arising when an insured person
inadvertently receives care from an out-of-network provider. This can happen in a
medical emergency, when the patient is unable to select the emergency room, treating
physicians, or ambulance providers. Surprise bills can also happen when a patient
receives planned care at an in-network facility (i.e. hospital or ambulatory service
center) but later discovers that a provider treating her (i.e. anesthesiologist or
radiologist) does not participate in the plan’s network.12
Surprise medical bills have two components:
1. Higher amount the patient owes under her health plan, reflecting the difference in
cost-sharing levels between in-network and out-of-network services
2. Additional amount the provider may bill the patient directly, also known as “balance
billing.”
States have begun enacting laws to protect some patients from surprise medical bills,
though these laws generally do not apply to people with large employer coverage
whose employers self-insure.13 The most comprehensive state laws hold consumers
harmless against surprise medical bills. Health plans are required to cover out-of-
network claims and apply the in-network level of cost-sharing for surprise medical bills.
These laws also prohibit providers from “balance billing” patients covered by state-
regulated plans; instead, the out-of-network provider is limited to collect no more than
the applicable in-network cost-sharing amount from patients in such cases.
After addressing patients, these laws provide payment resolution for the surprise
medical bill amount. Some states, like California, adopt a payment standard for all
applicable surprise medical bills (i.e. 125% of Medicare fee-for-service), while others,
like New York, establish a dispute resolution process for use in arriving at a payment
amount. Still, others employ a combination of both approaches. Provider contracts
should consider applicable “surprise medical bill” laws and regulations when describing
provider billing and payment obligations.
31
Administrative Provisions
Types of Administrative Issues
Contract provisions focused on administrative type issues:
• Claims filing procedures

• Coordination of benefits and subrogation
• Records, confidentiality, and audit rights
• Liability insurance and indemnification requirements
Claims Filing Procedures
While detailed claim filing procedures are usually described in the provider manual, a
comprehensive contract may describe some billing process requirements.
Example: The contract may specify the acceptable claim form. It should also specify the time
frames during which the plan will accept “clean claims” (typically 120 days from date of service,
although some plans accept claims filed within one year of the last date of service). 14
Health plans generally do not pay claims submitted outside these time limits. If claim-filing time
limits are not addressed in the health plan-provider contract, the health plan may find itself
subject to legal action if it declines to pay late claims. The health plan may also specify
requirements for the electronic filing of claims. The federal Health Insurance Portability and
Accountability Act (HIPAA) has mandated the electronic filing of claims, but the time frames for
implementing this requirement are uncertain.
Finally, the plan should specify the procedures for recouping claims paid in error, consistent
with state laws addressing this area.
32
Coordination of Benefits and Subrogation
The health plan has a legitimate concern to pay only its fair share of provider bills when more
than one payment source is involved. Where two or more health plans are involved,
coordination of benefits rules determines which health plan is primary and which is secondary.
Provider contracts typically require providers to submit information to the health plan
regarding other coverage a patient may have. Provider contracts may also restrict how much a
provider can collect from the plan if the plan is secondary. Contracts limit secondary collections
to specific amount. When paired with payments from a primary health plan, these payment
rates would not exceed those agreed to under a contract with a secondary plan.
Subrogation is a health plan's contractual right to recover from a third party some portion of
the benefits paid to a member by the health plan.
Example: If a third party is responsible for injuries to a plan member, the health plan may file
a claim for the resulting healthcare costs against the third party. If a plan member receives
payment for healthcare costs as a result of legal action against a third party, the health plan
may be entitled to recover from the member all or part of the benefits the plan paid to the
member for the related illness or injury. When the provider is aware of a court settlement
that includes payments for medical expenses, the contract typically requires the provider to
cooperate with the plan in subrogation efforts. Subrogation will reduce plan payments to
account for the settlement amounts assigned to medical expenses.
33
Records, Confidentiality, and Audit Rights
Provider contracts normally include provisions that require providers to keep legible and
complete records of care rendered to patients treated under the health plan agreement, in a
manner that meets the professional standard of care (as reflected in medical professional
responsibility rules).15 Such provisions give the health plan access to records of care so it can
audit providers' business operations and complete UM or QM activities (i.e. medical-record
compliance reviews, clinical studies, complaint or grievance resolution, authorization of
services, or determinations of medical necessity).16
At the same time, federal and state laws safeguard the confidentiality of patient records.
Providers must comply with any applicable medical record privacy and confidentiality laws,
including HIPAA and state-specific rules.17
To assure that health plans and their providers comply with state and federally mandated
programs, such as Medicare or Medicaid, state and federal regulatory agencies also require
access to medical records. A typical contractual clause addressing this area might read as
follows:
Providers must maintain all medical and other records in accordance with the terms of their
Provider Agreement and the Provider Manual. Subject to applicable state or federal
confidentiality or privacy laws, [Plan] or its designated representatives, and designated
representatives of local, state, and federal regulatory agencies having jurisdiction over [Plan],
shall have access to provider records, on request, at the provider’s place of business during
normal business hours, to inspect and review and make copies of such records at no cost to the
Plan. When requested by [Plan] or its designated representatives, or designated representatives
of local, state, or federal regulatory agencies, the provider shall produce copies of any such
records and will permit access to the original medical records for comparison purposes within
the requested time frames and, if requested, shall submit to examination under oath regarding
the same.
As part of a member's enrollment, health plans generally obtain member consent to access and
review medical records. The member signs the authorization while completing the necessary
enrollment forms. Members also authorize providers to access their medical records for
purposes of rendering treatment by completing the history and release forms during the first
visit to a provider or by signing a release form at the time the medical information is needed.
34
Following health plan requirements and applicable state and federal laws, the contractual
provision relating to the confidentiality of medical records is usually brief and requires that
providers maintain the medical records of the health plan's members in a confidential manner.
The provision also, prohibits the unauthorized disclosure of medical records or related patient
information. This clause is often incorporated with the contractual provision which allows
access to medical records.
Finally, the health plan often requires providers to keep the contents of the provider contract
confidential. Similarly, when the plan sends reports to providers comparing the performance of
the individual provider to other similar providers, the plan may require that the comparison
data be kept confidential. On the other hand, the plan frequently reserves the right to reveal
some provider-specific data to current and prospective customers or their representatives
(such as insurance brokers). Such information is used as part of the plan's strategy for
marketing its products and its network of providers.
Liability Insurance and Indemnification Requirements
The health plan wants to know that providers have adequate malpractice and general liability
insurance. The plan usually requires this coverage to protect the plan against being included in
lawsuits that members bring against providers. Contracts should specify the amounts of
insurance required for individual judgments and aggregate amounts for multiple judgments. If
the provider party is an organization or aggregation of practitioners, the insurance amounts
should be specified at both the provider organization level and the individual practitioner level.
The plan should require a notice of claims made against the provider if the claims are related to
the health plan or its members.
Health plans typically require providers to sign agreements with indemnification or hold-
harmless clauses. An indemnification clause requires the provider to reimburse a health plan
for costs, expenses, and liabilities incurred by the health plan as a result of a provider's actions.
A hold-harmless clause specifies that the provider agrees not to sue or file any claims against a
plan member for covered services, even if the health plan becomes insolvent or fails to meet its
financial obligations.
35
Contract Termination
Termination Provisions
Now let’s turn our attention to some of the last provisions in a typical health plan-provider
contract, those dealing with the term of the contract and termination provisions:
• Contract term and termination

• Immediate termination with cause
• Due process
• Transition of care
Contract Term and Termination
Every provider contract must specify the term (length) of the contract, as well as the renewal
and termination processes. Many health plans request contract terms of more than one year in
order to offer their customers more stability in benefits, network access, and pricing.
A termination clause describes how and under what circumstances a contractual relationship
can end. Termination can either be without cause (or at will), with cause, or immediate with a
cause.
Termination Without Cause
Termination without cause allows either the health plan or the provider to terminate the
contract without any obligation to provide a reason for the termination or to offer an appeals
process. The decision to terminate the contract can be made at any time during the contract
or upon contract renewal. There is no hearing or appeal process, and regulatory and
accreditation agencies do not require a report regarding the termination. When a health plan
terminates a provider's contract without cause, the termination decision should be careful to
state that the decision is based on nonclinical criteria.
Example: The health plan may say that its network contains "more practitioners than necessary
to serve member's needs" or that the terminated provider "lacks appropriate credentials."
Termination without cause by either party may require notice periods from 90 days up to 365
days. Both long and short notice periods have advantages and disadvantages. Longer periods
allow more time for renegotiation and give the health plan more time to create alternatives for
meeting member needs. On the other hand, long termination periods do not allow the plan to
make necessary changes quickly, either in the provider panel or the agreement.
36
Termination with Cause
Termination with cause requires the health plan to give the provider a reason for the
termination action. Termination with cause gives each party the right to end the contract if
either party breaches the contract terms. The acceptable grounds for termination with cause
must be specifically stated in the contract and clearly worded. The contract should not include
ambiguous terms or language that allows the health plan to immediately terminate contracts
based on its sole judgment of what is in the best medical interest of members. These types of
provisions are often the basis for disputes and result in contract loopholes.
Contracts containing a termination with cause provision usually include a cure provision. A cure
provision, also called a remedy or corrective action provision, specifies a time period
(depending upon the problem, this can usually be 30 to 90 days,) for the party who has
breached the contract to remedy the problem and avoid termination of the contract. The cure
period is useful in circumstances where the problem can be objectively measured and remedied
such as:
• failure to make timely payments

• failure to provide required services
• noncompliance with stated billing procedures
Contracts that contain an opportunity to cure breaches of the contract usually include some
type of contractually specified penalty for repetitive breaches.
37
Immediate Termination with Cause
Sometimes termination without an opportunity to cure is appropriate. These situations

include:18
• Provider practices that pose a clear danger to members (failure to maintain adequate
instrument sterilization procedures)
• Loss, suspension, or restriction of a provider’s license
• Failure to meet the health plan’s credentialing criteria
• Failure to maintain professional liability insurance
• Insolvency or bankruptcy of provider
• Provider's loss of participating status in Medicare or Medicaid programs
Any of these situations should constitute grounds for immediate termination of the contract
because the plan's members are placed at risk.
Mutual termination language also should be included in the provider contract, with special
consideration given to the health plan’s need for enough time to plan for a provider’s departure
from the network. Health plans have network adequacy standards to uphold and may need
time to recruit a replacement provider into the network.19
38
Due Process
Due process is an important provision of the health plan contract, particularly if immediate
termination with cause is contractually allowed. The due process clause, which defines the
provider's right to appeal the health plan's termination decision and to defend its position,
should be included in all contracts that allow termination with cause. The contract or other
supporting documentation to the contract should clearly outline the due process procedures
that will be followed if a provider decides to appeal a termination decision.
Many states have enacted legislation governing contract terminations and due process. In
general, these laws stipulate that health plans must list in writing the reasons for the provider's
termination and allow the provider to appeal. State laws in this area establish time frames for
the communication, review, and appeal of provider contract terminations.
Many states also prohibit provider termination and retaliation for actions intended to benefit
patients, and provider contracts should reflect these limitations.
Example: Under Pennsylvania law, provider agreements may not permit the health plan to
terminate a provider for (i) advocating for medically necessary and appropriate healthcare
services for members; (ii) filing a grievance on behalf of members; or (iii) protesting a plan
decision that the provider believes interferes with the provider’s medical judgment.20
Transition of Care
When a provider terminates his or her contract with a health plan, the health plan must have
an action plan for reassigning members to new providers. To avoid gaps or inconsistencies in
care, the reassignment method must assure that treatment plans in progress are not disrupted
and that each member's overall care is transitioned seamlessly.
Provider contracts should clearly state the responsibilities of both the provider and the health
plan to avoid disrupting care. The health plan protects its interests by stipulating that the
physician is responsible for rendering services to members until the treatment plans are
complete or until the health plan has made reasonable and medically appropriate provisions for
the transfer of patients to a new physician. The contract should also include the time period for
the transition, as well as how the provider will be reimbursed post-termination.
39
Lesson Summary
This lesson focused on key health plan and provider contractual responsibilities typically
addressed in health plan-provider contracts.
Health plan’s contractual responsibilities include:
• ensuring that providers have enough patient volume by using various marketing
strategies to attract plan members
• enrollment and assignment of members
• fulfilling administrative service commitments, especially the processing and payment of
claims in a timely manner
• conducting credit checks on self-insured employer groups
• maintaining the health plan's licenses and accreditation
• giving providers information on member eligibility, utilization management (UM),
quality management (QM), and claims
• benefit design and interpretation (coverage decisions)
• notifying providers of changes to the contract
The provider’s contractual responsibilities include:
• agreeing to provide services to plan members

• assuming responsibility for the medical care of member-patients
• spelling out practice capabilities and limitations
• agreeing to comply with the health plan’s administrative and operational policies
including prior authorization requirements and referral rules
Providers also need to be cognizant of contractual provisions concerning access standards and
the need for physician practice coverage to be credentialed. Providers also need to be aware of
their need to participate in both utilization management (UM) and quality management (QM)
programs.
Health plans and providers share mutual responsibility in some areas including:
• Verification of eligibility to receive benefits

• Understanding who is responsible should benefits be provided to ineligible patients
In today’s consumer-focused environment, health plans and providers need to understand the
laws and regulations around such issues as surprise medical bills.
40
Health plan-provider contracts typically contain provisions dealing with administrative type
issues such as:
• claims filing procedures

• coordination of benefits and subrogation
• records and confidentiality
• the need for malpractice insurance
Some of the last provisions in a typical health plan-provider contract are those that deal with
the term of the contract and termination provisions. Issues are covered such as:
• contract length (a year or more)

• reasons for immediate termination with cause
• due process provisions
• transition of care for members so that they continue to receive care and services in a
seamless manner
41
Notes:
1Peter Reid Kongstvedt, Essentials of Managed Care, 2007, p. 686; available at

https://books.google.com/books?isbn=0763739839 (accessed August 2019).
2
Gruessner, Vera, Health Payer Tips for Negotiating Managed Care Contracts, HealthPayerIntelligence-xtelligent
Healthcare Media, January 5, 2016; available at https://healthpayerintelligence.com/news/health-payer-tips-
for-negotiating-managed-care-contracts (accessed August 2019).
3
An Interstate Comparison of Healthcare Prompt-Pay Laws, January 31, 2016, available at
http://www.tlrfoundation.com/sites/default/files/pdf/TLR_Prompt_Pay_PDF_V01.pdf (accessed August 2019)
4
id.
5
Maine imposes penalties in the amount of 1.5% per month after the due date on claims that are unpaid or
undisputed, for example. Me. Stat. tit. 24-A, § 2436 (3). Montana imposes penalties in the amount of 10% per
annum, with fines up to $25,000 (unless the insurer consistently paid 90% of outstanding amounts to the claimant
within 20 working days and all amounts within 30 working days of receipt). Mont. Code Ann. § 33-18-233.
6
Jason Brocks, Health Plan Network Provider Agreement Essentials, April 19, 2019, LEXIS Practice Advisor Journal,
available at https://www.lexisnexis.com/lexis-practice-advisor/the-journal/b/lpa/posts/health-plan-provider-
agreement-essentials-checklist (accessed August 2019).
7
Some states require payers to notify providers of any changes to a provider contract, but many do not. Jacqueline
LaPointe, Key Terms, Components of Payer Contracts Providers Should Know, Practice Management News, July 11,
2018, available at https://revcycleintelligence.com/news/key-terms-components-of-payer-contracts-providers-
should-know (accessed August 2019).
8
id.
9
Managed Care Contracts – Key Provisions for Providers, FindLaw, available at https://corporate.findlaw.com/law-
library/managed-care-contracts-key-provisions-for-providers.html (accessed August 2019)
10
Lisa Eramo, 5 tips to negotiate favorable payer contracts, Medical Economics, Vol. 95 / Issue 16, May 22, 2018,
available at https://www.medicaleconomics.com/business/5-tips-negotiate-favorable-payer-contracts (accessed
August 2019)
11
Donabedian, Avedis (2003). An introduction to quality assurance in health care. Oxford University Press. pp. 92–
93. ISBN 9780195158090; O. Olakunle, B. Iskla and K. Williams, Concurrent Utilization Review: Getting It Right, The
Physician Executive Journal, Vols. May–June, pp. 50-54, 2011.
12
Kaiser Family Foundation Health System Tracker, An examination of surprise medical bills and proposals to
protect consumers from them, available at https://www.healthsystemtracker.org/brief/an-examination-of-
surprise-medical-bills-and-proposals-to-protect-consumers-from-them/# (accessed August 2019)
13
As of 2019, nine states (CA, CT, FL, IL, MD, NH, NJ, NY, and OR) have enacted and implemented laws taking a
comprehensive approach to surprise bills, while several other states have similar comprehensive legislation in the
works, and the U.S. Congress is examining legislative approaches to this issue as well.
14
Brocks, supra, at 4.
15
id. at 9.
16
id.
17
id.
18
id. at 10.
19
id. at 10-11.
20
28 Pa. Code § 9.722.
42
AHM 530 Provider Contracting: Part 4 – Compensation Arrangements Between Health Plans and
Providers
Provider Contracting: Part 4 - Compensation

Arrangements Between Health Plans and Providers
Introduction
The costs associated with delivering healthcare are substantial. Compensation arrangements
between a health plan and a provider are an important consideration for both parties. In many
cases, these arrangements go far beyond merely paying for services rendered. A health plan's
approach to provider compensation can also influence the utilization of healthcare resources by
providers and the cost-effectiveness of the care that they deliver.
This lesson provides detailed information on compensation arrangements and describes the
advantages and disadvantages of each method. It also discusses financial incentive programs,
ways providers and health plans may negotiate methods of protection against financial loss,
and factors that influence how a health plan chooses to compensate the providers in its
network. After completing this lesson, you should be able to:
• Explain how a health plan transfers financial risk to providers through reimbursement
arrangements
• Describe the advantages and disadvantages of the various payment systems
• Explain how health plans use incentives in compensation arrangements
• List and describe ways to manage a provider’s financial risk
• Identify factors that influence the way a health plan compensates its providers
1
Providers
Types of Provider Compensation
Many approaches to provider compensation in managed care exist. Changing conditions within
the industry have created variations on the three basic approaches. Although we refer to how
providers are paid for services rendered to health plan members as compensation, it is also
accurate to refer to this process as one of provider reimbursement.
The three most common reimbursement methods are: 1
• Fee-for-service (FFS)
• Salary
• Capitation
Most provider compensation arrangements are based on one of these reimbursement

methods. Many provider compensation agreements also include an incentive program that
affects the total financial compensation for a provider.
A key concept to understand is risk sharing. Risk sharing is the process by which a health plan
and a contracted provider each accept partial responsibility for the financial risk and rewards
involved in cost-effectively caring for the members enrolled in the plan and assigned to a
specific provider.
Health plans frequently negotiate compensation arrangements that transfer some (or all) the
financial risk associated with delivering healthcare services to their network providers. In the
healthcare industry, financial risk refers to the possibility that the actual costs of a plan
member's care will be greater than the projected costs. Based on the volume and nature of
the healthcare services they deliver, providers who share financial risk stand to gain or lose
income. Risk sharing encourages a health plan's providers to consider cost-effectiveness when
choosing among care options for plan members.
The role of financial risk for each reimbursement approach and for incentive programs is
discussed throughout this lesson.
2
Providers
Fee-for-Service Payment Systems
Fee-for-Service Payment Systems
In a fee-for-service (FFS) payment system, the health plan reimburses the health plan member,
or the provider, an amount based on the actual medical services delivered. An FFS system is a
retrospective payment system - one that pays after the service has been provided. FFS
payment is the method that has traditionally been used to compensate healthcare providers for
their services, and most health plans, to some extent, still rely on some form of FFS.
Providers are generally familiar with FFS payments. In many cases, providers strongly prefer FFS
systems because the level of reimbursement is directly related to the volume and intensity of
services delivered. The provider can expect to be reimbursed each time a plan member receives
services, and the amount of reimbursement depends on the amount of time and other
resources used to deliver the services.
Example: A physician who spends an hour with a patient and uses expensive equipment and
supplies to perform tests or treatments typically receives more compensation than a provider
who talks to a patient for fifteen minutes and performs no diagnostic or therapeutic
procedures. There is some evidence that providers are more aware of patient satisfaction when
receiving FFS remuneration. 2
Total healthcare costs under an FFS system may be relatively high. The connection between
the volume of services and income does not provide any incentive for providers to supply
only those services that are medically necessary. In many cases, excessive medical services
can result in higher total healthcare costs and do not offer any additional benefit to the plan
member. A system that rewards providers for each service rendered does not directly
encourage them to practice preventive medicine or to promote wellness. 3
Drawbacks to FFS
There are several drawbacks from the payer perspective to FFS. These drawbacks include:
• excessive utilization
• improper coding
In this module we will focus on two of the drawbacks.
3
Providers
Excessive Utilization Under FFS
Excessive services under FFS often take the form of churning. Churning occurs when a provider
sees a plan member more often than necessary or provides more diagnostic or therapeutic
services than necessary to increase revenue.
Example: A provider might direct a member to schedule monthly visits for cholesterol check-
ups when quarterly visits would suffice. Plan members typically lack the knowledge to detect
churning and tend to do what their providers tell them to do.
Pre-Authorization Solution
Pre-Authorization Solution - To prevent churning, health plans often include a contractual

requirement that providers use an authorization system. These authorization systems can be
used to obtain prior approval from the health plan for selected tests and treatments or detect
patterns of churning using profiling data.
An authorization system helps the health plan to monitor and manage provider utilization. The
contract usually states that the health plan is not required to pay for services that were not
authorized by the health plan.
UR Solution
UR Solution - A health plan contract may also include a requirement that mandates providers
to participate in periodic utilization reviews (UR). The contract should provide financial
incentives to reward a provider's appropriate utilization of services and to penalize excessive
utilization and underutilization. One effective way to increase appropriate medical resource
utilization is to use peer review. In fact, providers may negotiate to assure that the contract
specifies that their utilization patterns will be evaluated by another medical professional.
Peer review is analysis of a clinician's care of patients. This review is conducted by the clinician's
professional colleagues. The provider's care is generally compared to applicable standards of
care and the group's analysis is used as a learning tool for the group members. The peer review
process is also used to analyze a provider's qualification for participation in a health plan's
network.
Providers should have a contractual right to know the standards that will be applied to their
utilization of services. The contract, its accompanying exhibits, or the provider manual should
make the provider aware of any benefit limitations or coverage requirements. Some states
mandate that utilization standards be included in the provider contract itself.
4
Providers
Improper Coding Under FFS
FFS payment methods are also subject to the misuse of coding systems. Providers under FFS
arrangements submit charges for services using codes, such as the American Medical
Association's Current Procedural Terminology (CPT) code system. A code system provides a
uniform communication method about the services and procedures performed.
Unfortunately, a code system is subject to abuses such as:
• upcoding
• unbundling
Upcoding is a type of false billing in which a provider submits a code for a procedure with a
higher level of reimbursement than the procedure performed. For example, a provider might
submit code for a comprehensive office visit, when the services provided represent an
intermediate level of service.
Unbundling is the submission of separate charges for different components of a service

rather than one charge for the entirety of the service. This is done to increase the level of
reimbursement.
Example: A surgeon might unbundle his fee for removing a gallbladder by submitting three
separate charges for the preoperative physical examination, the surgical procedure, and
postoperative care. These charges should all be included in one code for the surgical
procedure itself.
The health plan-provider contract or the provider manual should specify the code system that
the provider should use. It should also clearly state the health plan's policy on upcoding or
unbundling of procedures. Some health plan claims administration departments use computer
software that is specifically designed to review claim codes and detect upcoding and
unbundling so that claims processors can determine the appropriate amount to be paid.
5
Providers
FFS Variations
Because cost management is a primary goal of network management, health plans rarely pay
full FFS charges to providers. In most cases, providers are willing to accept less than full FFS to
gain access to the health plan's members. Many providers prefer receiving the fees paid directly
by a health plan (even if they are lower) over billing and trying to collect full charges from
patients who are not under health plans. The most common types of FFS reimbursement
currently used by health plans include:
• discounted fee-for-service payment systems

• fee schedules, including relative value scale payment systems
• payment systems that "bundle" related services together for payment purposes and
pay a set fee based on the type or amount of care delivered (i.e. case rates and per
diem payments)
6
Providers
Discounted Fee-for-Service
Discounted Fee-for-Service
A discounted fee-for-service (DFFS) payment system is a payment system in which the health
plan negotiates with the provider a percentage discount from the usual FFS charges.
Discounted fee-for-service (DFFS) payment systems were one of the first methods developed
by health plans to manage the costs of provider reimbursement. The discount is typically a
specified percentage that is applied to fees traditionally paid under an FFS system. The base
fees may be derived from one of several sources including:
• standard fee schedules of indemnity health insurers

• usual, customary, and reasonable (UCR) fees determined to be prevailing in each
market
• usual fee schedules of the provider or health plan
• standard fee schedule of a major insurer (i.e. Medicare)
The negotiated discount for DFFS is applied across all procedures contained in the designated
fee schedule. Most providers and payers can adapt their claim systems to administer DFFS
because there is a direct correlation between payment and the service rendered. The health
plan calculates the discount based on whichever amount is lower--the billed charge or the
DFFS.
Example: If the provider charges $250 for a procedure, but the discounted FFS is $225 (90% of
the provider's usual fee), the health plan will base its payment on the DFFS, which is lower
than the provider's billed charge. Conversely, if the provider charges only $200 for the
procedure, the provider will receive payment based on the submitted charge, because it is
lower than the DFFS.
7
Providers
Advantages of Discounted Fee-for-Service
For a health plan, the primary advantage of DFFS payment is that it pays providers lower fees
than under the standard FFS. Using DFFS does not always guarantee overall cost savings. If the
DFFS is based on a percentage of the provider's standard charges, providers may simply raise
their "standard" charges so that the DFFS payment approximates the desired reimbursement.
Also, because a DFFS system affects the cost per service but not the level of utilization,
providers may attempt to make up the decreased revenue for each service by performing a
greater number of services.
DFFS is attractive to providers because most of the financial risk remains with the health plan,
with minimal risk transferred to the provider. Providers' contractual commitment to
participate in utilization management and quality management is vital to assuring that they are
treating members appropriately.
DFFS discounts for specific services or procedures may be calculated on a sliding scale based
on the volume of services the provider performs.
Example: An obstetrician's DFFS percentage might be 10% for performing 0 to 5 deliveries in a

month but rise to 15% for 6 or more deliveries in a month. The sliding scale offers some
protection to the provider that has a low service volume or a small member base.
The DFFS reimbursement method is typically used in markets with low health plan penetration,
as well as in situations where health plans and providers have low patient volume. As providers
and health plans establish relationships and health plan penetration increases, DFFS can be
used as a transitional reimbursement method.
8
Providers
Discounted Fee-for-Service Example
Dr. Nicole Enberg has entered into a provider contract with Canyon Health Plan, which
specifies that Canyon will compensate her under a typical discounted fee-for-service (DFFS)
payment system. The following information applies to two procedures that Dr. Enberg
provided to Canyon plan members:
Dr. Enberg's Charge FFS for This Procedure
Procedure A $150 $160
Procedure B $120 $110
Under the DFFS system, the amount that Dr. Enberg is entitled to receive from Canyon is $150
for Procedure A and $110 for Procedure B. Under a DFFS payment system, the health plan
calculates the payment based on the lower amount, the billed charge, or the DFFS. The billed
charge of $150 is less for Procedure A and the DFFS of $110 is lower for Procedure B.
9
Providers
Silent PPO
Some health plans include a controversial element in their overall strategy for managing DFFS
payment known as silent PPOs. A silent PPO is an arrangement in which an entity that
negotiates discounts with providers sells access to those discounts to other, unrelated health
plans to use when paying for services provided to the unrelated health plan's members. Silent
PPOs (also called rental networks, non-directed PPOs, ghost PPOs, or blind PPOs) are used to
reduce the cost of provider services by health plans that either do not have a specified
provider panel or offer coverage for out-of-network services as a means to reduce the cost of
provider services.
A silent PPO generally takes no financial risk. The network "shops" around to find the lowest
rates a provider has agreed to with any insurer, then "rents" that discounted rate to another
entity without the provider’s knowledge. The members of the silent PPO might be insurance
companies, self-insured employer health plans, or another silent PPO. The silent PPO could also
be a middleman and resell their created network of healthcare providers.
The opinion is divided about the ethical aspects of using silent PPOs. Healthcare providers and
many health plans oppose the use of silent PPOs on the grounds that this practice allows
health plans to claim contractually unentitled discounts. While some states have outlawed or
placed restrictions on the use of silent PPOs, they remain legal in other states. 4 Some health
plans view silent PPOs as a means to reduce the cost of reimbursing providers. Silent PPOs
continue to face scrutiny by various regulatory and accrediting agencies and has been referred
to the courts. 5
Health plans and providers concerned about the potential use of silent PPOs should consult the
relevant legal and regulatory requirements to ensure they are reflected in the provider
contract. The parties can address the issue by contract by including the following terms:
• limiting the entities who can access the provider’s negotiated rates
• requiring the health plan to keep the provider’s negotiated rates confidential
10
Providers
Fee Schedule System
A fee schedule is an acceptable fee determined by the payer (a health plan, Medicaid, or
Medicare programs) for a procedure or service which the provider agrees to accept as
payment in full. A fee schedule may also be called a fee maximum or capped fee.
A fee schedule system is simpler for a health plan to administer than a DFFS system since the
payment for each service is the same for all providers in the network. Providers cannot
manipulate the cost for a service included on a fee schedule. They may still be tempted to
increase the number of services performed to make up for the lower payment per service.
Nonetheless, health plans continue to use various types of fee schedule systems.
Relative Value Scale Payment Systems
A relative value scale (RVS) payment system is a system that assigns a weighted unit value to
the CPT code for each medical procedure or service based on the cost and intensity of that
service. The weighted value is multiplied by a conversion factor to determine the fee that a
health plan will pay to a provider.
The conversion factor represents the dollar value of each unit of service. The conversion
factor is typically based on the health plan's historical experience with costs and may be
updated periodically to reflect growth in actual expenses. Services requiring greater resources
are assigned a higher number of units and are awarded higher fees.
Example: Assume that a health plan has a conversion factor of $10 per unit. A service that is
assigned a unit value of 10.0 will be reimbursed at $100 (10.0 units x $10 = $100), while a
service with a unit value of 15.0 will be reimbursed at $150 (15.0 units x $10 = $150).
Unfortunately, the straight RVS system has an important drawback. In practice, RVS unit
values for procedural services, (i.e. surgeries or diagnostic tests), have generally been higher
than the unit values for cognitive services (i.e. office visits or research on medical conditions).
Because many of the services provided by primary care physicians (PCPs) are cognitive, PCPs
typically have not fared well financially under a straight RVS system. To address the imbalance
between payments for procedural and cognitive services, many health plans use the
Resource-Based Relative Value Scale (RBRVS).
11
Providers
Resource-Based Relative Value Scale
The Resource-Based Relative Value Scale (RBRVS) is an RVS payment system that attempts to
take into account all resources that providers use in the delivery of care, including physical or
procedural, education, mental (cognitive), and financial, when assigning a weighted unit value
to each medical procedure or service. 6 RBRVS was originally created for Medicare and because
it is based on uniform definitions of physician work, it has eliminated many of the more
dramatic reimbursement irregularities within the Medicare physician fee schedule. By
extension, it has also eliminated any other payment systems derived from the Medicare
physician fee schedule.7 Some specific advantages of RBRVS include:
• each listed service across the entire spectrum of specialties that may perform the
service
• current CPT coding (updated annually)
• third party develops with physician input (continues to include physician input in
updates)
• each update of the system is available to all interested parties in advance of
implementation in the next year
12
Providers
Limitations of Resource-Based Relative Value Scale
Because RBRVS was developed around the needs of the senior population, the system
originally did not include weighted unit values for all types of procedures (i.e. childhood
immunizations and other pediatric-specific CPT codes and practice expense calculations, or
for anesthesia, etc.). 8 To deal with the limitations of the RBRVS system as it was originally
designed, the American Academy of Pediatrics (AAP) has continued to propose new CPT
codes relevant to pediatrics and to the CPT Editorial Panel of the American Medical
Association (AMA), some of which have been accepted and incorporated into the CPT
nomenclature. 9 Health plans that use the RBRVS system usually obtain codes for anesthesia
procedures from the RVS system published by the American Society of Anesthesiologists. 10
Another method that health plans may use to compensate PCPs at a more realistic level is to
establish separate conversion factors for different types of services, such as primary care,
surgical services, and nonsurgical services. The primary care conversion factor may take into
consideration the complexity of the cognitive ability required for PCPs to diagnose, prescribe,
and coordinate treatment for a patient with multiple problems.
Either the health plan-provider contract or the provider manual should specify the relative
value scale that will be used in calculating payments to providers. The health plan should also
give the provider information regarding the source of the conversion factor and the method
for updating the conversion factor. While most unit values for procedures are not subject to
negotiation, the provider may seek to negotiate the value of conversion factors.
A continuing disadvantage of fee schedule systems for health plans is that they do not transfer
a significant amount of financial risk to the provider. Reimbursement is still made for each
service and the providers can increase their reimbursement by performing a greater number
of services.
Bundled Service Compensation Plans
Bundled Service Compensation Plans
In this section we will discuss two types of bundled service compensation plans:
• Case rates
• Per diem payment systems
13
Providers
Case Rates
A case rate is a single fee that the health plan pays the provider for all services associated with
an entire course of treatment. A case rate may also be called a bundled payment. In the
hospital setting, a bundled payment covers all services related to a surgical procedure.
Example: In the case of a surgery, instead of the anesthesiologist, surgeon, and facility
submitting separate bills (which would be consistent with FFS reimbursement), the hospital
charges one, all-inclusive price for everything related to the surgery. 11
Examples of episodes of care that may be reimbursed by case rates are:
• removal of a cataract
• hospital stay for treatment of pneumonia
• delivery of a baby
A case rate system transfers risk to the provider for the intensity of services delivered.
The provider stands to gain or lose on each case based on:
• number and type of tests and treatments

• use of specialists
• length of stay at a healthcare facility (for inpatient care)
Case rates offer providers the incentive to take an active role in managing cost and
utilization. Providers can increase their net income from a case rate by improving the
efficiency of treatment and maintaining quality of care. If the provider can treat a patient at
a cost that is less than the case rate, the provider will increase the income generated by the
case. Providers that have accurate accounting systems that allow them to identify fixed
costs may use this information to negotiate case rates. Providers may also seek to negotiate
higher case rates for member populations that have higher levels of disease and disability,
such as the elderly, thereby increasing the complexity of case management.
Health plans must consider certain critical issues in negotiating case rates. Case rates do not
provide the opportunity for payers to benefit from the provider's cost savings. The provider will
receive the same payment for the case, regardless of the costs the provider incurs for treating
the patient. As a result, the health plan must take care in developing each case rate to
accurately reflect the costs in treating an illness or injury.
14
Providers
Initial Development of Case Rates
While a case rate system is straightforward to administer, the initial development of the
rates is a complex process. A case rate should reflect how difficult and time-consuming a
course of treatment is relative to other available courses of treatment. The health plan
must determine:
• which individual services will be included in a case rate

• the probability that each service will be required during the case and the number of
times each service is required per case
• appropriate fees for each service component
The standard case rate may be adjusted for the severity of the patient's condition or
complications that arise because of multiple medical problems. Given this information, the
health plan can calculate weighted payments for each possible service, and then add the
service payments to obtain a case rate. When a health plan pays providers case rates, the
contract should state the methodology used to establish the case categories and case rates.
15
Providers
Diagnosis-Related Group System
Case rates are often based on CPT codes or, for inpatient care, on Medicare's Diagnosis-
Related Groups (DRGs).
The Diagnosis-Related Group (DRG) system classifies hospital patients into groups according
to a variety of factors:
• Primary and secondary diagnoses

• Surgery and other procedures
• Complications
• Age
• Gender
The DRG payment is based on the average expected use of hospital resources for a specific
DRG in a geographical area. The hospital receives a fixed payment for each patient, regardless
of the actual length or cost of the hospital stay. Some health plans use the DRG system to
compensate hospitals because DRGs were developed primarily to reimburse healthcare
services for the senior population, DRG rates and diagnoses may not be appropriate for all
populations.
A case rate system eliminates problems with unbundling and upcoding because the package
rate covers all components of the treatment. Health plans often monitor the quality of care
delivered under case rates to reduce any provider temptation to cut corners on the services
provided. The health plan also retains the risk that a selected course of treatment may not have
been necessary. Utilization management programs are a necessary adjunct to a case rate
system to ensure that providers are treating only the cases for which medical intervention is
indicated.
Per Diem Payment Systems
Health plans often pay hospitals and other healthcare facilities for inpatient care on a per
diem payment system. Under this system, a health plan pays a specific negotiated fee to a
hospital for each inpatient day. Because the hospital receives a set fee per day regardless of
the actual services delivered, a per diem system places the healthcare facility at risk for
controlling utilization and costs internally.
16
Providers
Salary Payment System
We now turn our attention to the second most common overall way health plans approach
provider compensation namely, salary payments.
Salary is a reimbursement method that entails a fixed payment that occurs over some time.
Payment does not depend on the number of health care activities or the number of patients.12
The most obvious difference between a salary system and other types of provider
compensation systems is that the salary system changes a provider's status from an
independent contractor to an employee of the health plan that pays the salary. The salary
system, which offers advantages for both providers and health plans, is often used by staff
model HMOs.
Paying salaries to providers simplifies a health plan's administration of reimbursement.

Receiving a salary also relieves the administrative burden on the provider, who no longer has to
submit claims or bill patients to receive payment. Salaried providers are required to submit
information about patient treatment for the health plan's utilization and quality management
programs. A salary system simultaneously stabilizes expenses for the health plan and income
for the provider. Salaries eliminate much of the financial incentive that providers might have to
perform unnecessary services under an FFS payment agreement. 13
One important disadvantage to a straight salary system is that this type of reimbursement does
not reward providers who work efficiently and effectively nor penalize providers who have
excessive utilization.14 To avoid decreased productivity and poorer quality of service from
providers, health plans may institute a salary system with salary ranges or incentive plans that
consider individual performance. For salaried providers, incentive plans often measure hours
worked and hours on call as well as patient satisfaction. The addition of incentives makes the
salary system more complex to develop and administer.
17
Providers
Salary Payment System Risk
Most of the risk under a salary system stays with the health plan. The health plan must assume
the risk that operational costs, including salaries, may exceed revenues. The salary system itself
creates a high fixed cost. Even if plan premiums or membership levels are lower than
anticipated, the health plan must continue to pay provider salaries.
A health plan that pays providers through a salary system may also increase its risk of liability,
because, as employees, the providers are agents of the health plan. The courts have generally
held that a company’s control over the actions of its employees is greater than the control a
company has over the actions of independent contractors. As a result, a health plan that
employs providers may face greater liability for its providers' acts of negligence. 15
The only risk assumed by the provider under a salary system is service risk, which is the risk
that patients will demand more services than had been anticipated when the salary schedule
was designed. If member demand for services is greater than originally expected under the
salary arrangement, providers must spend the extra time and effort necessary to deliver the
required services without receiving additional compensation. Unlike financial risk, service risk
does not affect the level of compensation to a provider.
The salary, plus any benefits paid to a provider, should approximate the income of local
providers of the same specialty who are compensated under one of the FFS arrangements. The
total value of the benefits package usually equals 20% to 30% of the salary. The benefits that
accompany a provider salary are usually comprehensive, but the specific components vary
from one reimbursement arrangement to another and may be subject to negotiation between
the health plan and the provider.
18
Providers
Capitation
Capitation
Capitation is a fixed amount of money per-member-per-month (PMPM) paid to a

provider for covered services. Unlike FFS reimbursement arrangements, capitation is a
prospective payment system, and the amount of the compensation is independent of the
actual volume and cost of the services provided. 16 As a result, capitation eliminates a
provider's incentive to provide unnecessary services. Capitation also encourages
providers to practice preventive medicine to improve plan members' health status and
decrease the need for future intensive medical services. The use of capitation allows the
health plan to transfer a greater proportion of risk to providers than the use of FFS or
salary systems.
A capitated provider who cost-effectively delivers quality care can benefit from the
system. Providers may be at risk for loss if they have plan members (as patients) with
serious illnesses or injuries, especially if the provider's member base is limited. While a
provider with many plan members receives enough PMPM payments for relatively
healthy members to cover a few expensive cases, a provider with fewer plan members
could suffer financial loss from one catastrophic case.
Since there are no claims to process or adjudicate, in most cases, capitation is easier and less
expensive for a health plan to administer than an FFS system. Because the capitation payment
rate remains consistent from month to month, the only variable for a provider is the number
of members covered. A standard PMPM payment generally makes the health plan's expenses
more predictable.
A health plan contemplating the use of capitation faces two potentially serious challenges.
First, because the level of payment per patient remains the same regardless of the actual
services delivered, capitation has the potential to induce providers to underutilize medical
resources; this can delay or deny medically indicated treatment. Second, providers may also
be tempted to influence members who require a great deal of time or costly treatments to
switch to another provider; this can reduce the original provider's utilization and costs.
Fortunately, such patterns of practice are rare, and health plans make efforts to educate and
work with providers to prevent this type of situation.
Because capitation eliminates the need for claims, a health plan must establish another
method to collect data on patients and services rendered. Health plans typically require
capitated providers to submit encounter reports to supply information for QM, UM, and
performance management. The health plan-provider contract or the provider manual should
be specific on the types of reports the provider must submit.
19
Providers
Because the scope of services may vary from one provider to another, the capitation contract
should specify which services are covered by the arrangement. Capitation may be applied to
primary, specialty, facility, and ancillary care settings. Numerous capitation variations include
some or all these types of providers. The most common approaches to capitation are partial,
specialty, professional services, and global capitation.
Partial capitation
Partial capitation is a capitation payment that includes only primary care services. Partial
capitation is the most common type of capitation. It is used by many independent practice
association (IPA) model HMOs to pay their primary care providers. This is also known as PCP
capitation.
A typical PCP capitation arrangement covers:
• office visits
• minor procedures performed in the office
• provider visits to hospitalized members
• supplies
• care management
Capitation usually excludes:
• radiology
• laboratory testing of blood or other specimens
• immunizations
• drugs
These services may be reimbursed under a separate payment plan.
Example: With an approved PCP, an IPA negotiates a fee of $500 per year per patient. For an
HMO group comprised of 1,000 patients, the PCP would be paid $500,000 per year and, in
return, be expected to supply all authorized medical services to the 1,000 patients for that year.
The simplest approach to partial capitation is to standardize the basic PMPM rate and the
services included in the rate across all PCPs in the network. Many health plans adjust the basic
rate according to the age and sex distribution within a provider’s population. Some health
plans have flexible capitation agreements that consider the capabilities of individual
providers.
20
Providers
Example: A health plan that does not typically include radiology under capitation may
authorize PCPs with radiology equipment to perform simple radiology studies in exchange for
a higher PMPM rate. The services to be covered under partial capitation may be a point of
negotiation between the health plan and the provider. Generally, capitation is suitable for
PCPs when the provider's panel size approaches 100 members.
Specialty Capitation
Specialty capitation pays individual specialists, or a single-specialty group, on a capitation

basis to provide a specified set of specialty services to all the plan's members. Commonly
capitated specialties include cardiology, orthopedics, radiology, and eye care. Expensive
procedures are often excluded from the capitation and are reimbursed on some type of FFS
basis. Specialty capitation is less common than PCP capitation because the number of
patients seeing any one specialist is often too low to adequately spread the risk of
catastrophic cases.
Professional Services Capitation
Professional services capitation is capitation that covers all physician services. 17 Professional
services capitation can be accomplished in one of two ways. With the first method, the health
plan contracts with a medical group, clinic, or multi-specialty IPA that assumes responsibility
for the costs of all physician services related to a patient's care.
Under the second model, the health plan pays a PCP organization a capitation amount that
covers all physician services. In addition to providing primary care, the PCP provider
organization arranges and compensates all specialty care services delivered to the PCP
organization's members. Some PCP organizations may object to bearing full risk for specialty
care services that are not under the organization's control and may negotiate for a method
of reimbursement that will share risk with the health plan.
21
Providers
Global Capitation
Global capitation also called integrated delivery system capitation or full-risk capitation, is a
capitation payment that covers virtually all a member's inpatient and outpatient medical
expenses, including primary and specialty care, facilities, and some ancillary services. Global
capitation arrangements transfer electronically all the financial risk for healthcare services to
the provider organization. In a global capitation arrangement, a provider organization-in many
cases, an integrated delivery system (IDS)-either provides all healthcare services needed by
members or subcontracts with other providers for the necessary care. The IDS must pay for the
subcontracted services out of its global capitation payment.
Provider organizations that accept professional services capitation or global capitation

typically negotiate for capitation rates that adequately compensate them for the additional
risk they are assuming. Both the health plan and the provider organization must determine if
the provider organization's internal structure and financial strength are adequate to assume
this level of risk. Some providers may retain consultants or actuaries to help them negotiate
risk contracts.
Financial Incentive Programs
Financial Incentive Programs
In addition to their basic compensation arrangements with providers, many health plans also
use financial incentive programs. Although cost savings is a major focus for incentives, a health
plan typically considers more than financial outcomes when deciding how to structure incentive
programs. Health plans often rely on incentive plans to promote desired behaviors such as the
regular provision of preventive healthcare services, compliance with UM programs, or
participation on the health plan's medical management committees. In many cases, a portion of
a provider's income depends on how well the provider meets the health plan's expectations.
By linking a portion of the payment to specific performance measures, the health plan can align
the financial goals of providers with the health plan's goal of delivering high-quality care in the
most cost-effective manner.
Generally, the three performance-based adjustments that health plans make to the basic
methods of provider reimbursement are based on:
• withhold arrangements
• retrospective utilization targets
• bonuses 18
22
Providers
Withhold Arrangements
A withhold is a percentage of providers’ payment that is held back during a given period to
offset or pay for any claims that exceed the budgeted costs for a referral or hospital services.
Withholds are generally used by health plans to give financial risk to PCPs who are paid by fee-
for-service, discounted fee-for-service, or capitation. The health plan retains part of the
financial risk because the plan is typically responsible for making up any deficit if cost overruns
exceed the amount of money in the withhold.
Often, withholds also will be included in contracts with specialists. If health plan premiums
from enrollees are lower than health plan payments to physicians, health plans withhold a
certain percentage of every physician payment to cover this deficit. If PCPs’ referrals to
specialists and hospitals exceed the withhold funds, then they receive no bonus. If these
providers keep costs within the budgeted amount, then unspent withhold funds are shared in
the form of bonuses. The use of withholds and bonuses creates incentives for PCPs and other
providers to restrict access to specialists and hospital services because more service use
decreases the chance that the health plan will give bonuses. Since withholds are commonly
applied to all services, withholds support the incentives that already exist in capitation or
discounted fee-for-service for physicians to be conservative in treating patients.
Retrospective Utilization Targets
Retrospective utilization targets are the financial benchmark used by health plans to determine
provider bonuses. If a provider meets the predetermined baseline or target of medical service
use, the provider receives a bonus. These targets incentivize providers to manage patient care
cost-effectively. Utilization targets for specialty care and hospital care are important
benchmarks that health plans work with physicians to achieve.
Often, health plans base a utilization target on the experience of a group of physicians (or risk
pool), not just one physician. By being in a risk pool, a specific physician is less constrained to
provide fewer tests and procedures for a specific patient than if a utilization target was based
on the patient alone. Utilization targets create incentives for physicians to treat patients
appropriately and cost-effectively, particularly for specialty and hospital care. Individuals with
chronic conditions or need for specialty care may have to work with their primary care
physicians to ensure that they can access preferred physicians and or services.
23
Providers
Bonuses
Bonuses are from unspent withhold funds that occur when the utilization of medical services by
a provider’s patients is lower than an estimated utilization target. A provider’s bonus may also
be based on measures of patient satisfaction, access, and outcomes of care.
A bonus rewards a provider for providing more primary and preventive care. A bonus also
rewards providers for doing fewer tests and procedures. PCPs may also receive bonuses tied to
managing access to specialists and hospitals.
In some bonus arrangements, individual physicians (or groups of physicians) who significantly
exceed the utilization target may have to make payments to the health plan at the end of the
year. Because providers in the latter compensation arrangement are not obliged to return
payments to the health plans, this constraint puts PCPs at even greater financial risk than
arrangements with only simple bonuses. Providers who may have to return funds to the health
plan have an even greater incentive to manage access through referrals to specialists and
hospitals. A provider's bonus may also be based on measures of patient satisfaction, access,
and outcomes of care.
24
Providers
Considerations for the Size and Composition of Risk Pools
Free Riders
When incentives are based on the performance of the entire panel of providers or on a large
subset of that panel, the performance of individual practitioners is not highlighted. HMOs and
point-of-service (POS) options that base incentives on aggregate performance may encounter
problems with practitioners who do not meet performance standards for quality, utilization,
or cost-effectiveness, but still receive the benefits of the incentive plan based on the overall
performance of the group of providers. These poor performers obtain a "free ride" based on
the efforts of other providers. A situation in which poor performance receives the same
rewards as good performance appears inequitable and can create dissension among providers
and dissatisfaction with the health plan.
Because of the potential for "free riders," provider selection for health plans with group-based
incentives should focus on selecting providers with practice patterns that match the health
plan's goals. The health plan can explore practice patterns during the application process with
specific questions about utilization, quality management, and average costs of services. This
approach requires a strong local presence that regional or national health plans may not be
able to provide. Determining practice patterns is much easier if the provider has already
participated in one of the health plan's other networks.
Health plans that structure incentives on an aggregate basis should also monitor individual
practitioners' performance to detect poor performers and address the deficiencies. One way to
encourage better performance is to individualize the risks and rewards of the risk pool.
Health plans can also lessen the "free rider" problem by distributing performance-based
incentives to smaller provider pools. Poor performance will be more apparent in a smaller
group because each practitioner's results have a greater impact on aggregate results as the
size of the group decreases.
Example: A PCP whose own utilization is too high is not eligible for any surplus funds from risk
pools. Because many individual providers have too few members to dilute the risk of a
disproportionate number of catastrophic cases, many health plans base risks and rewards only
on aggregate results.
25
Providers
Risk Pool
One way for the health plan to reduce the size of performance pools is to contract with
provider organizations (i.e. IPAs, PHOs, or group practices) and base the incentive on the
organization's performance. While the HMO or POS may find it difficult to influence individual
performance through an incentive plan based on an entire service area, the health plan can
influence smaller provider groups that act as an economic unit. Under HMOs and POS options,
members tend to follow predictable paths to obtain care. Most members first visit a PCP for
most care-even in open access HMOs. If they need further care, members generally follow the
recommendation of their PCP. Patients with chronic conditions generally see the same
providers on a routine basis. If providers are organized into a PHO, multi-specialty group, or
IPA, many patients are likely to stay within that provider organization for all care. If an HMO or
POS has sufficient data on the frequency of member use of the provider group or organization,
the health plan can statistically assign members to the separate organizations.
Financial incentives to improve costs, quality, access, and satisfaction can then be built
around the patient base for each provider organization rather than around the entire plan
membership.
Although a risk pool should not be too large, in the incidence of costly cases, the number of
providers covered by a pool must be great enough to compensate for random fluctuations.
Pools of 10 to 20 providers allow for effective peer reviewing and the coaching of inefficient
providers to improve provider performance. Peer review works best among providers who
already have established working relationships, so the health plan should consider existing
provider affiliations when setting up risk pools.
Because risk pools allow the health plan to share risk and reward with providers, they can
function as a negative incentive, a positive incentive, or both. An incentive arrangement that
puts providers and health plans at risk for both gain or loss can create a greater sense of
collaboration and shared goals than do withholds or bonus pools.
26
Providers
Limiting Provider Risk
Methods of Limiting Provider Risk
Even providers who efficiently practice and comply with health plan utilization standards
sometimes exceed the health plan's capitated payments.
Example: A region may experience a high incidence of influenza with symptoms so severe
that many plan members need hospitalization. A PCP may be responsible for the care of a
plan member who develops cardiomyopathy and needs a heart transplant.
There are many other situations in which providers can incur unexpectedly high costs that are
beyond their control. To protect providers against business losses, many health plan-provider
contracts include provisions to help providers manage financial risk. The most common
methods of managing provider risk are:
• carve-outs
• stop-loss provisions
• reinsurance (stop-loss insurance)
• risk adjustment
27
Providers
Carve-Outs
A carve-out is a medical service that is removed from the scope of services covered by the
basic payment method and is reimbursed under a separate payment mechanism. Carve-outs
are often associated with capitation, and a health plan may establish carve-out funds through
small deductions from capitation payments. In some instances, the same provider will still
provide the service, but they will be reimbursed on a fee-for-service basis. In other instances,
carve-out services will be provided by an entirely different provider. 19
Carve-outs can be used with other risk-sharing compensation arrangements as well, such as
per diem payments to hospitals or case rates. Providers may wish to negotiate with the health
plan the carve-out extent and the effect they have on the amount of compensation paid to the
provider.
Health plans sometimes use disease-specific carve-outs in which the services for high-cost
diseases or procedures (i.e. AIDS or organ transplants) are delivered by providers who
specialize in the appropriate services. This protects the normally capitated providers from
unexpected service costs.
A disease-specific carve-out usually requires the plan member to obtain the service from a
given provider, who may be capitated under a separate agreement or may be paid under a
different reimbursement method than the plan's PCPs. In addition to carving out specific
diseases, health plans also carve out entire fields of care that require specialized knowledge
and skills not possessed by the typical PCP. Behavioral healthcare, vision care, and dental care
are types of healthcare that health plans typically remove from the scope of PCP services. This
type of arrangement is known as a specialty services carve-out.
A third type of carve-out, called a specific-service carve-out, is usually associated with a

capitation arrangement. With a specific-service carve-out, the capitated provider still provides
the carved-out service but receives additional reimbursement on a case rate or DFFS basis. For
instance, health plans often carve out immunizations from PCP capitation.
28
Providers
Immunization Carve-Outs
Health plans find it advantageous to exclude immunizations from capitation for several
reasons:
1. Immunizations are a service that health plans want PCPs to perform routinely.
Immunizations are a component of the Health Plan Employer Data and Information Set
(HEDIS), which is an important measure of quality for many health plans.
2. Paying DFFS for immunizations ensures that not only will PCPs be diligent about
performing immunizations, but that they will also promptly submit the information for
payment.
3. Immunization drugs and supplies can be costly, 20 so the extra reimbursement offsets
the high costs incurred by the PCP.
Stop-Loss Provisions
Providers who are compensated on risk-sharing bases such as capitation, case rates, or per
diems often negotiate a stop-loss provision in their contracts. A stop-loss provision specifies
that once the costs for a case have reached a certain threshold, costs beyond that point will
be reimbursed under a different payment method, such as DFFS.
Example: A hospital that accepts case rates may find that costs quickly exceed
reimbursement for a patient with severe cardiovascular disease who requires an extended
intensive care unit stay, blood products, multiple antibiotics, and sophisticated cardiac
support devices.
A stop-loss provision is not the same as stop-loss insurance. A contractual stop-loss provision
transfers risk back to the health plan after the provider has incurred a specific level of cost
overrun.
29
Providers
Stop-Loss Insurance
Stop-loss insurance is insurance purchased by an individual provider, a provider organization,

or a healthcare facility to protect itself against all or part of the losses that it may incur in the
process of providing healthcare services to a health plan's members under a risk-sharing
arrangement. Stop-loss insurance is also known as provider excess insurance or medical
provider reinsurance.
Stop-loss insurance comes in two forms:
• Individual stop-loss coverage

• Aggregate stop-loss coverage
The form of insurance that protects providers from losses associated with healthcare for an
individual member during a given period (usually one year) is individual stop-loss coverage,
which is often called specific stop-loss coverage or per-patient stop-loss coverage. Stop-loss
insurance against cumulative losses from healthcare services delivered to all plan members
during a specified period is aggregate stop-loss coverage. Each stop-loss insurance program
typically covers one type of care such as professional services or hospital services, so
providers may need multiple stop-loss insurance agreements to protect against loss.
Under individual stop-loss coverage, the provider group or facility assumes sole responsibility
for all medical costs up to a specified dollar amount, known as the attachment point. The
provider and the stop-loss insurer share costs above the attachment point, up to a specified
maximum amount. The portion of costs that the provider pays over the attachment point is the
coinsurance. Coinsurance intends to keep the provider attentive to costs even after the
attachment point has been reached.
30
Providers
Individual Stop-Loss Insurance Works Example
Example: Suppose that a provider group purchases individual stop-loss coverage for primary
and specialty care services with a $5,000 attachment point and 10% coinsurance. If the
accrued cost for the primary and specialty care treatment of a patient is $8,000, the provider
group assumes responsibility for the first $5,000 (the attachment point) plus 10% of the
remaining $3,000 (the coinsurance) for a total of $5,300. The insurer would reimburse the
provider group for the remaining $2,700.21
If a provider purchases aggregate stop-loss coverage for certain services, the insurer is
responsible for a stated proportion of the provider's costs that exceed a given threshold.
Aggregate stop-loss insurance agreements usually state the threshold amount as a percentage
of the total projected costs for the provider for a certain period, usually one year.
In most cases, the health plan acts as the stop-loss insurer for its providers. Providers who
obtain stop-loss insurance from the health plan may pay for the insurance by direct premium
payments or by deductions from their monthly capitation payments. Due to state regulations
on the sale of insurance, some agreements between health plans and providers for stop-loss
insurance call the arrangement capitation protection or income guarantee programs.
Other providers purchase stop-loss insurance from a commercial insurance carrier and pay
premiums to that carrier. Providers who contract with more than one health plan may find it
less expensive to buy a single stop-loss insurance policy from a commercial company to cover
all their risk-sharing arrangements than to make separate stop-loss insurance arrangements
with each contracted health plan. Providers with very large health plan patient bases (usually
more than 30,000 members) may be able to provide their stop-loss protection by
accumulating enough funds through PMPM payments to cover any excess costs.
Example: Suppose that a provider group with 5,000 plan members purchases aggregate stop-
loss coverage for its hospital risk pool with a threshold of 115% of projected costs and a 10%
coinsurance provision. The provider group funds a hospital risk pool at $40 PMPM. The
estimated risk pool (projected costs for hospital care) for the year would total $2,400,000 ($40
x 5,000 members x 12 months). The stop-loss insurer would reimburse the provider group for
90% of hospital costs in excess of $2,760,000 (1.15 x $2,400,000). If actual hospital costs are
$3,000,000, the insurer reimburses the provider group for $216,000 (0.90 x [$3,000,000 -
$2,760,000]). 22
31
Providers
Individual Stop-Loss Coverage Example
Example: A provider group purchased from an insurer individual stop-loss coverage for
primary and specialty care services, with an $8,000 attachment point and 10% coinsurance. If
the group's accrued cost for the primary and specialty care treatment of one patient is
$10,000, then the amount that the insurer would be responsible for reimbursing the provider
group for these costs. is: $1,800.
Individual stop-loss coverage protects providers from losses associated with healthcare for an
individual member during a given time-period, usually one year. The provider group assumes
sole responsibility for all medical costs up to a specific dollar amount, known as the attachment
point. The portion of costs that the provider group pays over the attachment point is the
coinsurance. In this situation, the provider group pays the first $8,000 of treatment for this
patient. The provider group pays 10% of the amount over $8,000 and the insurer pays 90% of
the amount over $8,000. [$10,000 - $8,000 = $2,000 $2,000 x .9 = $1,800].
In most cases, capitated PCPs who only assume risk for primary care services do not need stop-
loss insurance because they are unlikely to incur very high costs. Unless the provider
organization has obtained stop-loss insurance to absorb part of the loss, a provider
organization that accepts a significant amount of risk (either global or professional services
risk) and then faces several catastrophic cases could incur crippling losses. Generally, if a
provider accepts risk for services outside the scope of the provider's capabilities, the provider
needs stop-loss insurance.
Example: Suppose that a small group of obstetricians is capitated for all professional and
hospital services. If one of the group's patients delivers triplets prematurely, the resulting
hospital and specialty care costs could escalate rapidly. Unless they have stop-loss insurance,
the group is likely to experience a large financial loss on the case.
Because the health plan has a vested interest in providers' continued financial viability, it is
wise to clarify the responsibility for obtaining stop-loss insurance coverage.
32
Providers
Risk Adjustment: Case-Mix (Severity) Adjustment
Health plans may adjust capitation rates according to the characteristics of a provider’s
patient population or a particular patient. The characteristics that influence the payment
adjustment include the following factors:
• Demographics (age/sex)
• Patient health status
• Serious illnesses or chronic health conditions
• Geographic practice variations
Case-mix (severity) adjustment, also known as risk adjustment, affects compensation rates,
performance measurement, or both. An adjustment for case mix or severity is a statistical
adjustment that is made for an individual provider’s patient population to compensate for
utilization and clinical variances.
When rates are adjusted, providers typically receive a higher PMPM rate for members under
the age of 2 years or over the age of 50. Adjusted rates are higher for females than males at
most ages. Also, national and regional plans may adjust their basic capitation rates to reflect
geographical practice differences that influence utilization and healthcare costs. Health plans
may also adjust payment rates and standards for performance measurement if the provider
specializes in high-cost medical conditions. Some providers, such as regional referral centers or
providers who have a reputation for excellence in a specific field, attract a disproportionate
number of patients requiring high-cost treatments.
33
Providers
Value-Based Contracting
Increasingly, stakeholders (including government, employer groups, and members) seek to shift
the focus of the health care system to improving outcomes, lowering costs, and increasing
overall access to care. This has led some health plans to try to transition away from the
traditional fee-for-service reimbursement model to one of increased collaboration, outcome-
based payment, and new benefit design. This trend is also referred to as value-based
contracting.
Value-based contracts are still a work in progress. Most value-based contracts are structured
according to a shared savings model. Shared savings arrangements vary, but they typically
incentivize providers to reduce spending for a defined patient population by offering them a
percentage of any net savings they realize.23
In practice, value-based contracting often means that the provider’s contract contains one or
more of the following alternative payment methodologies: 24
• A portion of the provider’s total potential payment is tied to the provider’s

performance on cost-efficiency and quality performance measures. While providers
may still be paid FFS for a portion of their payments, they may also be paid a bonus or
have payments withheld. For value-based contracts, the bonus is not paid unless the
provider meets specified cost-efficiency and or quality targets.
• Clinical integration fees paid to providers are contingent on the provider engaging in
practice transformation to adopt technology and processes that alter the way they
deliver care, such as a patient-centered medical home. In addition to PCPs functioning
as medical homes, a similar payment methodology may be utilized with other types of
providers.
The types of process changes that increasingly are believed to drive value include:
• being accountable to the patient

• creation of advanced care teams to include nurse care managers and pharmacists
• automated processes to address prevention and wellness 25
Value-based payment for providers continues to trend as a major topic in healthcare. But the
move value-based payment continues to take time, with alternative compensation
arrangements continuing to dominate provider contracting.26
34
Providers
Patient-Centered Medical Homes
The patient-centered medical home (PCMH) model holds promise to improve health care in
America by transforming how primary care is organized and delivered. The PCMH encompasses
five functions and attributes:
• Comprehensive care
• Patient-centered
• Coordinated care
• Accessible services
• Commitment to quality and safety
Comprehensive Care – The PCMH is accountable for meeting the majority of each patient’s
physical and mental health needs. This requires a team of healthcare providers. In some cases,
this will involve the development of virtual teams linking themselves and their patients to
providers and services in their community.
Patient-Centered – The PCMH provides health care that is relationship-based with orientation
toward the whole person. The PCMH actively supports patients in learning to manage and
organize their own care at the level the patient chooses.
Coordinated Care – The PCMH coordinates care across all elements of the broader health care
system, including specialty care, hospitals, home health care, and community services and
supports.
Accessible Services – The PCMH delivers accessible services with shorter waiting times for
urgent needs, enhanced in-person hours, around-the-clock telephone or electronic access to a
member of the care team, and alternative methods of communication such as e-mail and
telephone care.
Commitment to Quality and Safety – The PCMH demonstrates a commitment to quality and
quality improvement by ongoing engagement in activities such as using evidence-based
medicine and clinical support tools to guide shared decision making with patients and their
families. The PCMH will also engage in performance measurement and improvement,
measuring and responding to patient experiences, and practicing population health
management.
35
Providers
Selecting Reimbursement Arrangements
No approach to provider reimbursement is best for every situation instead health plans modify
reimbursement arrangements to meet their needs and combine basic payment methods with
incentives. A variety of factors influence a health plan's decision on how to compensate its
providers including:
• legal and regulatory requirements

• type of provider
• level of health plan market maturity
• effects of compensation on provider relations
Legal and Regulatory Requirements
While health plans should avoid rewarding more care at the expense of better care, health
plans must also avoid compensation methods or incentives that lead to underutilization.
Medicare, Medicaid, and some states regulate provider compensation to reduce the risk that a
provider may deny medically necessary care to cut costs. These regulations and laws prohibit
health plans from offering providers financial inducements to limit medically necessary services
for an individual plan member. In addition, Medicare, Medicaid, and some states require health
plans to disclose information about physician incentive arrangements to the appropriate
governing body (CMS, the state Medicaid agency, or state insurance commission) and to plan
members on request. Health plans should also monitor their compensation arrangements for
compliance with the Stark laws, state laws on corporate practice of medicine, and
Medicare/Medicaid fraud and abuse regulations.
State insurance laws may limit a provider's ability to enter into risk-sharing arrangements.
Some states view provider organizations that accept financial risk for the delivery of
healthcare services as insurance companies and regulate them accordingly. When
determining if a provider organization is functioning as an insurance company, state
insurance regulators consider several factors. Among the most important factors are the level
of risk that the provider organization accepts and the extent to which the provider
organization is at risk for the cost of care beyond its scope of services.
36
Providers
Service Quality and Healthcare Quality
To ensure that payment and incentive plans motivate appropriate and efficient use of
resources (rather than the rationing of services), many health plans incorporate QM
performance measures into their reimbursement arrangements. These QM components often
address both service quality and healthcare quality. Another way that health plans discourage
underutilization is by limiting the amount of payment placed through withholds and bonuses
to a certain percentage of the provider's base compensation.
Service quality refers to a health plan’s success in meeting the nonclinical customer service
needs and expectations of plan members. Healthcare quality is the degree to which health
services for individuals and populations increase the likelihood of desired health outcomes and
are consistent with current professional knowledge.
Type of Provider
A health plan often uses a variety of reimbursement arrangements to meet the needs of the
different types of providers in a network.
Example: A health plan may capitate PCPs, pay specialists DFFS, pay hospitals on a per diem
basis, and use case rates for some ancillary services. The health plan may also tailor the
reimbursement approach to suit individual provider organizations and hospitals.
Most health plans and provider organizations compensate PCPs through some form of
capitation or FFS, often in conjunction with withholds, risk pools, or both. Network model and
group model HMOs sometimes capitate PCPs for all professional services, while PPOs almost
always pay PCPs on a DFFS, fee schedule, or case rate basis.
Staff model HMOs typically pay PCPs on a salary or salary-plus-bonus basis. A salary system is
best suited to a health plan with a limited number of practice settings. In general, having a few
centralized locations for care promotes scheduling and operating efficiencies as well as more
effective management of utilization. Health plans with less structured practice settings, such as
IPA model HMOs, typically favor a risk-sharing payment system for PCPs to encourage
compliance with UM and QM programs.
As of 2017, 86% to 95% of all U.S. doctors and hospitals were still reimbursed on a fee-for-
service basis. 27
37
Providers
Specialty Care Provider
Although the use of capitation is growing in some specialty fields, specialty care providers most
often receive DFFS payment. Specialty capitation is usually more appropriate for large groups of
specialists who see enough plan members dilute the risk of catastrophic cases.
Health plans sometimes reimburse healthcare facilities on a DFFS, DRG, or capitation basis,
but per diem rates are most common.
Ancillary service providers typically receive some form of FFS payment, although the use of
capitation for ancillary care is growing. Capitation is often appropriate for low-cost ancillary
services that members frequently use, such as laboratory analysis of blood samples. One
characteristic of ancillary services, that has important contractual and financial implications for
a health plan, is that most patients gain access to ancillary services through a referral from a
primary or specialty care provider. Some health plans build guidelines for ancillary service
referrals into their incentive plans to encourage their primary and specialty care providers to
use ancillary services judiciously.
Level of Health Plan Market Maturity
In less mature health plan markets, many providers are in solo or small group practices and may
not choose to contract with a health plan. These providers may not have a good understanding
of capitation or how to manage care under capitation. In these markets, a health plan, at first,
may need to offer an FFS-based payment system to attract the desired providers to contract
with the plan. Once providers become familiar with the health plan's cost management, UM,
and QM programs, they are more likely to accept a risk-sharing arrangement such as a
withhold, risk pool, or even capitation.
Capitation is more prevalent in markets in which providers have already formed their
organizations. These providers are usually more knowledgeable and receptive to health plan
concepts. They are also more likely to have the necessary information systems and skills to
monitor and improve costs, UM, and QM.
38
Providers
Effects of Compensation Arrangements on Provider Relations
A health plan wants to develop and maintain long-term, mutually beneficial relationships with
its providers. Health plans will offer compensation at a level appropriate to the:
• type of provider
• needs of the plan's members
• specific geographic region
The health plan will also seek to balance risk with reward. Providers will be more motivated to
accept financial risk in a reimbursement system if they are adequately rewarded for doing so. If
providers perceive that the payment approach is fair, they are more likely to put forth their
best efforts for the health plan's members and to renew their contracts with the health plan.
Retaining good providers improves the continuity of care for members and saves the health
plan the costs of recruiting new providers.27 To avoid any misunderstandings that could disrupt
the relationship between the health plan and its providers, the reimbursement system must be
simple enough for the average provider to understand .
39
Providers
Summary
This lesson focused on provider compensation and how it is handled in the context of health
plan-provider agreements. The three most common types of provider compensation used in
health plan-provider contracts:
• Fee-for-service (FFS)
• Salary
• Capitation
In an FFS payment system, the health plan reimburses the provider based on the actual number
of services delivered. This raises two potential drawbacks:
• Excessive utilization
• Improper coding (i.e. upcoding)
Health plans rely on variations of FFS as part of their goals of cost management while delivering
appropriate and timely quality care. These variations include:
• Discounted fee-for-service
• Fee schedules
• Systems that bundle related services together for payment purposes
Health plans, particularly staff model HMOs, often approach provider compensation through
salary arrangements. Paying salaries to providers simplifies health plan administration for both
the health plan and the provider. Drawbacks to salary compensation arrangements is that they
fail to reward providers who work efficiently and effectively. To overcome this drawback,
health plans often couple salary systems with incentive plans that do consider individual
performance factors (i.e. Number of hours worked and patient satisfaction). Another drawback
to a salary compensation system is that the health plans assumes the risk of operational costs.
40
Providers
The third overall way that health plans handle provider compensation is through capitation.
One of the benefits of capitation is that it encourages the practice of preventive medicine which
can help to stave off major health care events, particularly for the chronically ill, and the high
costs associated with those events. In this section, we observed that capitation can be
approached in several ways for different types of medical practices and varying health plan
goals. These include:
• Partial capitation
• Specialty capitation
• Professional services capitation
• Global capitation
In addition to their basic compensation arrangements with providers, health plans also rely on
financial incentive programs to further their goals. These incentive programs fall into the
following arrangements:
• Withhold arrangements
• Retrospective utilization targets
• Bonuses
We next studied ways health plans seek to limit provider risk.
The most common ways that health plans seek to manage the risks faced by their providers
include:
• Carve-outs
• Stop-loss provisions
• Stop-loss insurance
• Risk adjustment to account for factors such as the age and health status of a provider’s
mix of patients
We ended this lesson by looking at some of the factors health plans use to select
reimbursement arrangements for different situations including the level of health plan market
maturity and the effect of compensation arrangements on health plan-provider relations.
41
Providers
Additional Reading
The Intelligent Payer: A Survival Guide, Accenture 2018, available at

https://www.accenture.com/_acnmedia/pdf-82/accenture-intelligent-payer-survivor-guide.pdf
(accessed August 2019)
Gruessner, Vera, Health Payer Tips for Negotiating Managed Care Contracts,
HealthPayerIntelligence-xtelligent Healthcare Media, January 5, 2016; available at
https://healthpayerintelligence.com/news/health-payer-tips-for-negotiating-managed-care-contracts
Dan P. Ly and Sherry A. Glied, the impact of Managed Care Contracting on Physicians, J. Gen.
Intern. Med. January 2014; 29(1):237-243; available at
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3889938/ (accessed August 2019)
Brent C. James, MD and Gregory P. Poulsen, The Case for Capitation, Harvard Business review,
July-August 2016, available at https://hbr.org/2016/07/the-case-for-capitation (accessed August
2019)
James D. Reschovsky, et al., Effects of Compensation Methods and Physician Group Structure on
Physicians' Perceived Incentives to Alter Services to Patients, March 31, 2006,
https://doi.org/10.1111/j.1475-6773.2006.00531.x
Jan Greene, Fee for Service Is Dead. Long Live Fee for Service?, Managed Care Magazine,
September 6, 2017, available at https://www.managedcaremag.com/archives/2017/9/fee-service-
dead-long-live-fee-service (accessed August 2019).
Debra Ryan and James Pizzo, 6 practices for effective managed care contracting, Healthcare
Financial Management Association, October 2017, available at
https://www.kaufmanhall.com/ideas-resources/article/6-practices-effective-managed-care-contracting
Luke Rudmik, et al., Physician payment methods: a focus on quality and cost control, Journal of
Otolaryngology - Head & Neck Surgery, Vo. 43, Art: 34 (2014), available at
https://journalotohns.biomedcentral.com/articles/10.1186/s40463-014-0034-6 (accessed August
2019)
42
Providers
Notes:
1
Luke Rudmik, et al., Physician payment methods: a focus on quality and cost control, Journal of Otolaryngology -
Head & Neck Surgery, Vo. 43, Art: 34 (2014), available at
https://journalotohns.biomedcentral.com/articles/10.1186/s40463-014-0034-6 (accessed August 2019)
2
id. at 2.
3
id.
4
The National Conference of Insurance Legislators (NCOIL) has adopted model legislation aimed at regulating silent
PPOs. See Janet Farrer and Barry Senterfitt, Silent PPOs under scrutiny, Managed Healthcare Executive Magazine,
October 1, 2009, available at https://www.managedhealthcareexecutive.com/letter-law/silent-ppos-under-
scrutiny (accessed August 2009). Several state legislatures have adopted forms of the NCOIL Mode Act, including
Connecticut, Colorado, Florida, Indiana, and Ohio. Other states, including Arkansas, California, Kentucky,
Louisiana, Maryland, Minnesota, North Carolina, Oklahoma, South Carolina, Texas, and Virginia, have enacted laws
that limit or prohibit silent PPOs. See Martha Swartz, Preferred Provider Contracting: Beware of Rental Networks
and Third Party Guarantors, Physicians News, July 14, 2011, available at
https://physiciansnews.com/2011/07/14/preferred-provider-contracting-beware-of-rental-networks-and-third-
party-guarantors/ (accessed August 2019).
5
Swartz, supra, citing cases in which the courts rejected a payer’s right to make discounted payments to a health
care provider when the discount was “sold” to the payer without the provider’s knowledge (HCA Health Services of
Georgia v. Employers Health Ins. Co., 240 F.3d 982 (11th Cir. 2001) and Mitzan v. Medview Services, Inc., 1999 WL
33105613 (Mass. Super., June 16, 1999)).
6
https://www.ama-assn.org/about/rvs-update-committee-ruc/rbvs-overview (accessed August 2019).
7
American Academy of Pediatrics, Committee on Coding and Nomenclature, Application of the Resource-Based
Relative Value Scale System to Pediatrics, Pediatrics, May 2004, Vol. 113 / Issue 5, available at
https://pediatrics.aappublications.org/content/113/5/1437 (accessed August 2019).
8
Id.
9
id.
10
https://www.anesthesiallc.com/publications/anesthesia-industry-ealerts/1175-2019-physician-fee-schedule-
highlights-for-anesthesia-providers
11
Alan Ayers, Do You Understand The Three Different Reimbursement Methods For Urgent Care?, The Journal of
Urgent Care Medicine (2019), available at https://www.jucm.com/understand-three-different-reimbursement-
methods-urgent-care/ (accessed August 2019).
12
Rudmik, supra, at 3-4.
13
Id.
14
Id.
15
Adapted from Health Plan Finance (Washington, D.C.: Academy for healthcare Management, 1999).
16
Ayers, supra.
17
Joseph Ruggio, MD, Capitation of Professional Services: What We Know, white paper published Jan. 8, 2018,
available at https://fmcna.com/insights/white-papers/capitation-of-professional-services-what-we-know/
18
University of Illinois, Urbana-Champaign, How Do Health Plans Pay Physicians?, available at
http://www.geom.uiuc.edu/usenate/payreport/how.html (accessed August 2019)
19
https://bpaco.com/glossary/carve-outs/
20
https://www.cdc.gov/vaccines/programs/vfc/awardees/vaccine-management/price-list/index.html
21
https://www.hcaa.org/page/selffundingstoploss
22
https://www.investopedia.com/terms/a/aggregate-stop-loss-insurance.asp
43
Providers
23
Bobbi Brown and Jared Crapo, The Key to Transitioning from Fee-for-Service to Value-Based Reimbursement,
Health Catalyst Insights, July 28, 2014, available at https://www.healthcatalyst.com/insights/hospital-transitioning-
fee-for-service-value-based-reimbursements (accessed August 2019)
24
United Healthcare, Shifting from Fee-for-Service to Value-Based Contracting Model, available at
https://consultant.uhc.com/assets/vbc_overview_flier.pdf (accessed August 2019)
25
Id.
26
Jan Greene, Fee for Service Is Dead. Long Live Fee for Service?, Managed Care Magazine, September 6, 2017,
available at https://www.managedcaremag.com/archives/2017/9/fee-service-dead-long-live-fee-service (accessed
August 2019).
27
Robert Pearl, MD, Healthcare’s Dangerous Fee-For-Service Addiction, Forbes, Sept. 25, 2017, available at
https://www.forbes.com/sites/robertpearl/2017/09/25/fee-for-service-addiction/#bf34b8ec8adb (accessed
August 2019).
44
AHM 530: Retention: Keeping Providers Happy, Quality Outcome Measures, and Provider Performance
Retention: Keeping Providers Happy, Quality Outcome

Measures, and Provider Performance
Introduction
This module focuses on ongoing network management and provider retention issues,
which are both equally critical to a health plan’s success.
Once a provider network is in place, a health plan must manage the network on an ongoing
basis. To ensure that the health plan continues to offer plan members appropriate access to
medical services, the health plan must:
• regularly monitor the environment and the patient population

• identify changes that have occurred
• adjust the size and composition of the network to accommodate changes
The health plan must take steps to retain network providers by increasing their satisfaction with
the plan and increasing their involvement in plan management.
To ensure that plan members receive quality medical care, the health plan must also manage
the performance of individual network providers. By effectively managing its provider network,
the health plan can present evidence of a quality product to its purchasers and plan members.
• List factors that health plans examine when reassessing access and availability
• Explain the importance of provider retention
• Describe methods that health plans use to provide continuing education to
network providers and their staffs
• Explain how referral programs assist providers with utilization management
• List some of the issues that a health plan typically addresses through surveys of
providers and their staffs
• Explain why health plans measure the performance of network providers
• Describe the importance of provider profiling
• Describe common types of performance measures
• Explain how outcomes research and outcomes measurement can be used to
benchmark provider performance
• Describe some of the methods health plans can use to change provider behavior
1
Continuing Management of Network Adequacy and Provider Satisfaction
Critical Component of Ensuring Network Adequacy
A critical component of ensuring network adequacy and provider satisfaction is network

monitoring. It is impossible to understand how the network is performing or to assess provider
satisfaction levels without conducting a detailed review, monitoring, and examining the
resulting data.
There are various methods employed by health plans to increase provider satisfaction. The goal
of these methods is to keep providers in the network and to continue to serve members. Many
of these methods focus on provider education, greater provider involvement in plan
management, and improvements in administrative support and service.
Reviewing and Modifying the Provider Network
Health plans reassess the adequacy of their networks according to a periodic schedule and or
on an as-needed basis. Certain situations may prompt expedited or immediate review:
• Changes in the geographic area served by the plan

• Changes in the benefits offered by the plan
• Changes in the legal/regulatory environment
• Other situations where the health plan receives information suggesting that the
provider mix may be inadequate or may require updating.
Geographic
Example: A change in the geographic area served by the plan should prompt further review. If
an area experiences a significant influx of non-English speaking residents, the health plan
likely will need to evaluate the need to add more providers who speak the language(s) spoken
by the new residents.
Benefits
Example: Changes in the benefits offered by a health plan may also prompt review and
potential modification of the network. The addition or expansion of chiropractic benefits
should result in a review of the network to ensure an adequate number of contracted
chiropractors. If the plan gains or loses a large employer as a purchaser, this may directly
impact the overall volume of services required and the number and type of providers included
in the network.
2
Legal/Regulatory
Example: Changes in legal or regulatory requirements related to network adequacy, should

prompt review and further action. If a state that previously required health plans to make
providers available within 30 miles of members or 30 minutes of driving time changes its
requirements to 20 miles or 20 minutes, this change would require review.
3
Other Situations
Health plans often receive information through various reports (and other means) that
prompt review and possible modification of the provider network. Examples of such situations
include:
• During the process to authorize a referral to a specialist, the utilization management

(UM) department learns that there is limited availability for the recommended specialty
care services
• Member satisfaction surveys, member complaints about appointment lead times, or
office hours indicate that specialty care (or even primary care) is not readily accessible
in a specific area
• Contracted PCPs provide feedback to the health plan that needs more specialists or
different types of specialists in the network
• A review of utilization and claims report identifies a high level of use of noncontracted
providers by plan members. The use of nonparticipating specialists is often an
indication of limited network providers, inconvenient provider locations, a lack of the
necessary types of providers, or the absence of members’ preferred providers in the
network
• A provider organization terminates its contract with the health plan. Depending on the
number of members receiving healthcare from this provider organization, and the
amount of excess capacity in the rest of the network, the health plan may need to add
providers to ensure that there is an adequate number of providers to meet member
needs.
Example: When assessing a proposed referral to a rheumatologist, the Utilization Management

(UM) Department of the Talbott Health Plan discovers that the network has too few
rheumatologists to serve member needs in a timely manner or the rheumatologists’ practice
sites are located too far from members’ homes and workplaces. This should prompt Talbott to
conduct further review and make plans to potentially increase the number of rheumatologists
who participate in its provider network.
Health plans also use capacity reports generated by their information systems to identify
primary care physician (PCP) practices that have reached the practice capacity thresholds
developed by the health plan. These reports identify which PCPs have closed their practices to
new members and the length of time the practices have remained closed, and PCPs who have
recently reopened their practices. This data is used to determine if additional PCPs must be
recruited to fill any gaps in the network.
4
Network Management
The Role of a Network Management Department
The health plan’s network management department is a critical resource to assure that
appropriate network review and modification takes place. This department may receive
suggestions and recommendations regarding network modification directly from patients,
physicians, or other medical staff.
To ensure success in this area, network management departments should request to be

notified immediately of any major reported access problems. They should also develop a
system to obtain network information on a regular basis from the following sources:
• The medical director, physician advisors, pharmacy director, and or UM and quality
management (QM) committees
These health plan personnel and committees are likely to be aware of access or
availability problems that could have (or have had) a negative impact on the quality of
care.
• The plan’s customer service department
The customer service department can provide the network management staff with
regular network updates and on member complaints about unmet needs (i.e.
requests for different provider types).
• The marketing research, business development, sales, or marketing departments
These departments have regular contact with purchasers and sometimes with members.
These departments serve as a good source of information about providers that
members would like to add to the network and problems that members have
experienced with current providers.
• Contracted provider organizations
Based on the services that their patients need; provider organizations may have
suggestions about changing the number or types of providers in the network.
Satisfaction survey results from members and providers can provide critical information
relating to network adequacy and related concerns. Member satisfaction surveys should
indicate how well the network is meeting the needs of the members. Provider surveys tell the
health plan and its network management about areas that need improvement.
5
Common Indicators of Network Adequacy
When reassessing the adequacy of the health plan’s network relative to the healthcare
needs of its members, the network management staff examines a variety of factors.
Figure 1 lists indicators that are often used to evaluate network access and availability.
Figure 1: Common Network Adequacy Indicators
Figure 1
Common Network Adequacy Indicators
• PCP-to-member ratios and • Changes in practitioners’

geographic locations of PCP admittance and procedural
cites relative to members’ privileges at network
homes and or workplaces hospitals
• The number of PCPs • Characteristics of the
accepting new patients and member population
the amount of primary care (number, age, income,
capacity available for new diversity)
plan members • Access to care as measured
• The utilization level of the by indicators (i.e. the use
emergency department of out-of-network
• The number and types of providers and appointment
contracted specialists and lead times for preventive
geographic access to them health, routine care,
• PCPs’ referral patterns to urgent care, and specialty
specialists care)
• The level and reason for
member disenrollment
from the plan
• Reasons for providers’
voluntarily leaving the
network
In order to best meet member needs, by evaluating these factors, the health plan
can determine what changes, it should make to the size and composition of the
network. For each of the common network adequacy indicator factors previously
mentioned, the health plan collects and analyzes data to measure its performance
against the network adequacy standards set forth by federal and state laws,
regulatory agencies, and accrediting agencies. Maintaining access to primary care is
especially important for health plans that require members to initiate all non-
emergency episodes of healthcare through their PCPs.
6
Narrow Networks
Since the adoption and implementation of the Patient Protection and Affordable Care
Act (ACA), which became fully effective in 2014, the need to continually monitor and
make necessary adjustments to the network has remained constant. Although fewer
individuals are uninsured as a result of ACA, data suggests that 45% of adults, between
the ages 19 of 64, in the United States remain inadequately insured.1 while Narrow
networks are often an attractive means to control costs and keep premiums and co-
payments low. In the past several years there has been an increased use of narrow
networks that may contribute to provider referral issues and associated gaps in
coverage.2 Network analysis provides a means to identify and attempt to address
persistent gaps in coverage.
A narrow network health plan generally includes a smaller network of doctors,

hospitals, and treatment centers than a standard plan option. Providers who
participate in a narrow network typically agree to a lower service price with the
expectation that they will get greater patient volume (this may help to keep down
premiums).
When a health plan’s provider network does not meet the applicable standards for
service access and availability of, the health plan must develop and implement action
plans to correct the deficiency. The corrective action plan may address physician-
specific access problems (i.e. limited office hours) or a network-wide problem (i.e. too
few PCPs in a geographic area). In a network-wide problem, the network management
department initiates the selection, negotiation, and contracting processes to add PCPs
to the network. The health plan must continue to reevaluate network adequacy to
determine whether the implemented action plans have improved member access to
services.
Excess Providers
The reassessment of a health plan’s provider network may reveal the existence of
more providers than necessary to meet member needs.
If providers are salaried, the health plan usually has no alternative but to lay off some
providers.
When the health plan contracts with providers, health plans often prefer to maintain a
broad panel to enhance the appeal of the health plan to purchasers and potential
members. Maintaining large networks also reduces the chance of disrupting existing
provider-patient relationships. Because a plan’s administrative costs typically increase
with each additional contracted in-network provider, a health plan sometimes chooses
to decrease the size of the network by either not renewing or terminating some of
these provider contracts.
7
Monitoring Adequacy
One technique that a health plan can use to maintain network adequacy is the systematic
monitoring of provider contract status. By monitoring the status of provider contracts and
contract negotiations, the health plan can avoid delays in renegotiations that may result in a
network that cannot meet member needs. To monitor and manage contract status, a health plan
develops or purchases a database system that identifies:
• providers due for recredentialing

• provider contracts due for renewal or renegotiation
• contract negotiations in progress and stalled negotiations
• new providers and the dates that their contracts become effective
• changes in geographic location or services offered by a practice
• PCPs who have closed their practices to all new members or to certain
population segments (i.e. children or Medicare beneficiaries)
• recently terminated providers
Strategies for Provider Retention and Relationship-Building
Provider Retention and Relationship-Building
Provider retention is critical to maintaining a network that meets legal, regulatory, and
accreditation standards for adequacy. Health plans try to retain a stable base of providers
from one contracting period to another, especially if their contracted providers have
demonstrated the ability to deliver high-quality and cost-effective care.
The process of credentialing and contracting with new providers takes time and money. Plan
members are typically dissatisfied if their chosen providers are no longer in the network. Even
a health plan that wants to reduce the size of its provider network needs to renew contracts
with some of its providers. To improve retention rates, health plans use a variety of
approaches to enhance provider satisfaction and encourage providers to remain with the
health plan.3 These approaches include:
• training for providers and their staffs

• provider satisfaction surveys
• provider involvement in medical management committees
• various types of administrative service and support
Throughout the implementation of their educational and support activities, health plans also
try to establish good working relationships with their providers to enhance provider
satisfaction and loyalty to the health plan.
8
Health Plan Initiatives
Health plans actively work to foster the development of true partnerships between the
health plan and contracted providers through their provider relations staff. Provider relations
personnel are responsible for communicating with providers regarding questions about
health plan procedures, changes in health plan processes, and areas of dissatisfaction with
the health plan.
Approaches to provider relations vary greatly among health plans. A health plan that
wants to differentiate itself in the eyes of its contracted providers will develop a
positive, open relationship with its providers. To create this type of relationship, a
health plan must dedicate the services and personnel required to ensure that
contracted providers:
• have easy access to information and appropriate plan personnel

• are familiar with the health plan’s services
• can resolve problems quickly
• are reimbursed for services on time
• receive consistent communications regarding health plan operations, quality
management activities, and provider performance
• are encouraged to participate in the development of health plan
policies, clinical procedures, and other medical management activities
Health plans and contracted provider organizations may also create joint operating
committees that include key personnel from each entity. The members of these
committees collaborate to:
• identify and resolve problems

• develop quality management activities
• discuss improvements to administrative functions
• maintain two-way communications
Communication is a key element for developing a strong, mutually supportive

relationship between a health plan and its providers. Some of the communication
methods often used by health plans to educate network providers and collect
information regarding provider needs are illustrated in Figure 2.
9
Figure 2: Common MCO Provider Communication Methods
Figure 2
Common MCO Provider Communication Methods

• Periodic meetings • Programs to respond to
between health plan provider appeals and
personnel and providers disputes related to
• Surveys to measure contractual, utilization, or
provider satisfaction and other administrative
identify unmet needs issues
• Provider newsletters • Websites/provider portals
• Provider manuals • Phone updates
• Provider participation on • Dedicated provider
health plan QM and UM information lines or
committees service representatives
Active participation by providers and their staff in these various methods and
programs is critical for communication efforts to be effective. Providers and their
staff should respond to these opportunities by providing feedback to the health plan,
attending meetings, and participating in health plan programs. Apathy from either
party can result in poor provider relations, disgruntled providers, and dissatisfied
health plan members.
10
Provider Orientation
Once the contract is signed, the health plan’s provider relations staff conducts a provider
orientation program to communicate all operational aspects of the health plan contract to new
providers. Provider relations personnel may hold the orientation program on an individual basis
at the provider’s location or on a group basis for all newly contracted providers -either in person,
telephone, or webinar. The timing of this orientation is important. Unless the health plan has
furnished the provider with an administrative manual and other resources at the time of
contracting, the orientation should take place before the provider begins to deliver services to
health plan members. While programs vary from one health plan to another, a typical new
provider orientation covers the following topics:
• Health plan administrative requirements, including forms and paperwork

• Member identification and eligibility verification processes
• Review of benefit plans and member copayment responsibilities
• Referral authorization and other UM processes
• Claims and reimbursement processes
• Overview of QM programs and committee structure
• Member rights and responsibilities, including the complaint and grievance process
• Provider rights and responsibilities, including credentialing requirements, the
scope of services, appeal processes, and peer review
The orientation process usually does not address specific UM and QM guidelines or detailed
steps for completing and submitting claims or encounter forms.
Some providers are employed directly by the health plan, as with staff model health
maintenance organizations (HMOs), or through a provider organization (as with some medical
groups). For these providers, the orientation is more of a “new employee” orientation, as
opposed to an introduction to managed care, because the health plan’s processes are already
in place at the practice site.
11
Visits and Phone Calls by Provider Relations Staff
After the initial orientation, most of the subsequent interaction between provider relations
personnel, providers, or provider staff is via telephone or electronic communication (i.e.
email, videoconference, or electronic presentation). Many health plans also establish
visitation programs and require their provider relations representatives to visit each provider
practice site periodically. Provider relations staff may schedule additional visits or calls to
providers who are experiencing problems that can be addressed through further education.
For instance, a provider relations representative may work with a provider’s staff to show
them how to prepare routine UM and QM reports.
A health plan may enhance the relationship-building aspect of calls and visits by assisting
providers and their staffs with issues that are not necessarily health plan-related.
Example: The provider relations representative may suggest alternative methods for
appointment scheduling, patient registration, or medical records management to improve the
operations of the practice. Provider relations staff can also offer other value-added services
(i.e. materials on improving provider-patient communications) or on managing the care of
special populations (i.e. Medicaid recipients).
Although the health plan sets goals for the frequency of provider visitations, the actual number
of visits per provider that a provider relations representative makes depends on the size of the
network, the geographic location of the network providers, and on the size of the health plan’s
provider relations staff.
12
Provider Manuals
Before or during the orientation, the provider receives a copy of the health plan’s provider
manual. This manual is a valuable reference that includes information to help providers meet
the managed care contract requirements. The provider manual reinforces contractual
provisions, especially if the contract references the manual as an attachment that documents
required health plan processes. Some of the components commonly included in provider
manuals include those listed in Figure 3.
Figure 3: Provider Manual Contents
Figure 3
Provider Manual Contents
• A health plan contact list for departments and individuals responsible for various
functions within the plan and who can assist the provider with issues relating to
their functional area
• Benefit plan descriptions and applicable copayments, deductibles, and
coinsurance
• Eligibility verification processes
• A description of the UM program, including procedures for obtaining referrals and
authorizations, appealing negative decisions, and obtaining the criteria for the
plans’ UM decisions
• A description of the QM program and specific quality-improvement activities and
results
• Clinical practice guidelines
• A copy of the health plan’s drug formulary, if applicable
• Credentialing criteria, due process procedures, and provider obligations to notify
the health plan of practice changes
• Requirements for medical record-keeping practices and office practice sites.
• Claims submission processes, if applicable
• A list of applicable state and federal regulations regarding participation in the
health plan’s network
• Special instructions regarding Medicare and Medicaid prog
• Required provider office procedures (i.e. protecting the confidentiality of medical
records)
13
As policies and procedures change, the health plan must periodically update the provider
manuals. The most frequent users are the provider’s staff who are responsible for the
administrative tasks associated with providing healthcare.
The provider manual is useful for more than just the provider orientation. It demonstrates
the health plan’s compliance with accrediting agency standards concerning provider
performance and communication between the health plan and provider. These standards
may include requirements for network access, communication of QM activities, and
contractual requirement documentation.
While the provider relations staff is primarily responsible for provider education, all
health plan departments may directly or indirectly support the provider network by
providing specific information or services (i.e. the authorization of service, referral to
a specialist, verification of eligibility, or claims updates).
Health plans must educate all personnel to treat providers as both business partners
and customers. The provider is a business partner because, without the provider, the
healthcare services guaranteed by the health plan cannot be delivered. The provider
is a customer because one of the health plan’s primary responsibilities is to support
the provider’s delivery of healthcare services to members.
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Provider Initiatives
Before a provider signs a contract with a health plan, the provider should be familiar with the
key elements of a health plan’s administrative, operational, and medical management
processes. Once under contract, the provider must take the additional steps necessary to
become familiar with all obligations and procedures included in the contract. If the provider’s
systems and office staff do not render adequate healthcare services, member dissatisfaction
may affect the health plan’s ability to satisfy, retain, and expand its membership. Eventually,
inadequate care will lead to the dissolution of the contractual relationship between the health
plan and the provider.
Because providers typically contract with more than one health plan, providers and their staff
must make a conscious effort to understand the requirements and follow the routine processes
established by each health plan. Health plan provider manuals and regular training sessions
conducted by the health plan can help the provider reduce or avoid confusion about the
administrative functions related to patient care. Providers may need to enhance the
automation of their office systems in order to comply with health plan program requirements.
Example: A provider upgrades their computers or obtains new software to produce the UM
and QM reports required by the health plan.
When a provider organization contracts with multiple health plans, the provider organization
must coordinate the various health plans’ requirements and present them to the network
providers as an understandable and consistent administrative program. The provider
organization must also develop the same sort of provider education programs that a health
plan develops. The provider organization’s educational programs must represent the
perspective of all contracted health plans.
Because most health plans follow similar guidelines and procedures, a provider
organization typically writes its provider manual, noting any procedural differences
between the various health plans. Requirements and procedures for authorization of
referrals and services vary greatly among health plans. The provider organization’s
manual also documents its policies and procedures to carry out the functions that are
delegated by a health plan. The health plan generally does not distribute the manual
that the provider organization writes and distributes to individual practitioners
affiliated with the provider organization.
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Training and Ongoing Education for Providers and Staff
Strategies for Provider Retention and Relationship Building
Let’s now turn our attention to the first approach on this list – training and ongoing
education for providers and their staffs.
In addition to keeping providers informed about issues (i.e. changes to existing health
plan programs, regulatory, and accreditation) that may affect the provider and or the
health plan, there are other methods of providing this education and training. These
methods include:
• Physician education about health plans

• Special instructional courses that may offer continuing medical education
(CME) credits
• Provider newsletters
• Periodic meetings for providers
Health plans now use technology as one way to communicate information and to
build rapport with providers.
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Physician Education about Health Plans
Physicians—especially those new to health plans—often lack knowledge of the basic aspects of
managed care. Health plans can prevent this lack of understanding from distorting physicians’
perceptions by providing information on the following various diverse topics:
• Basic economics of healthcare

• Evolution of health plans
• Regulatory and accreditation requirements that affect health plans
• Reimbursement methodologies used by health plans
• Focus on quality in health plans
• Impact of continuous quality improvement programs on provider practices
• Importance of medical management (including utilization management and case
management)
• Use of clinical practice guidelines and pathways
Another topic that should be addressed on a regular basis is the need for documentation
regarding both the care being delivered for QM and the medical necessity of services for UM.
Providers often have additional information regarding patient care that is not clearly
documented in the medical record. This information confirms the need for the proposed care.
Helping the physician to understand the type of information that supports the need for a
service and the importance of documenting that information can reduce:
1. the number of calls the physician gets from the health plan (which is a highly desirable
goal for the provider)
2. the number of potentially contentious issues for the medical director
Physician education can be offered in several ways.
Example: Health plans can address one or more of the issues during their regular interactions
with physicians and staff. Health plans can also present a basic introduction to health plans as
part of CME programs sponsored by hospitals or medical societies. Some medical schools and
residency programs are beginning to incorporate health plan topics into their curricula. This is
an excellent opportunity for medical directors to meet with future network physicians and to
positively impact their view of health plans.
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Continuing Medical Education (CME)
Available from accredited sponsors, ongoing clinical education for physicians most often is
offered in the form of CME programs. Physicians spend a significant amount of time in CME
activities in order to update their knowledge and to meet requirements for licensure (some
states have minimum requirements), professional society membership, or specialty
certification. Many CME programs are patterned after undergraduate medical education with
lectures, audiovisual presentations, and printed materials.
Example: The Connecticut Medical Examining Board requires 50 CME hours every two years
with one credit in each of the following categories for every two-year licensure period:
• Cultural competency
• Domestic violence
• Infectious disease (i.e. AIDS and HIV)
• Risk management
• Sexual assault
• Behavioral health
While the Arizona Medical Board requires 40 hours of MD CME over a two-year licensure
period.
A review of studies on the effectiveness of CME programs in changing physician practice

patterns found that there is a lack of evidence that typical didactic CME programs are effective.
Programs that included interactive techniques (i.e. case discussions, role play, or hands-on
practice) and those that were sequenced with multiple sessions did show a significant impact
on change but, results across multiple studies were not always consistent.4
Regardless of the extent of evidence that is present regarding provider behavior change in
response to CME programs, many health plans sponsor these programs either themselves or by
funding programs at healthcare facilities or academic institutions. Given the lack of alternative
means available to educate physician groups, this is not an unreasonable approach.
Other ways to deliver clinical education for physicians is through clinical practice guidelines and
ongoing medical education programs that address immediate education needs. The use of
opinion leaders is another approach that has gained some support.
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Provider Newsletters
Newsletters are another effective tool that many health plans utilize to keep their providers up
to date. Most health plans use a periodic publication to communicate new programs, update
existing programs, and address specific issues of concern. Newsletters often provide clinical
information (i.e. updates on research outcomes) and explain how this information affects the
delivery of care by plan providers. Newsletters also include information on practice
management and ideas for improving the delivery of services to patients (i.e. a program to
remind patients to get annual immunizations against influenza). To ensure that all providers
have access to the newsletter, many health plans make these available online or through a
provider portal.
Newsletters are also good avenues for reinforcing health plans, regulatory, and accreditation
requirements.
Example: A newsletter can be used to remind providers of a health plan’s member rights and
responsibilities statement, keep them informed about QM activities, or advise them of new
regulatory or accreditation requirements which may affect health plan administrative
procedures.
To ensure that providers are familiar with the information that plan members receive, the
health plan may also include or provide access to a copy of its member newsletter along with
the provider newsletter. Member newsletters usually discuss general healthcare issues, tips,
and specific plan information (i.e. how to access health plan services). Provider newsletters
often address these same issues but from a healthcare professional’s perspective.
Many health plans write different member newsletters for the various populations they
serve. Each newsletter targeting a specific population addresses different health issues and
concerns based on the population’s interests, potential health risks, economic status, and
their stage of life.
Example: A newsletter for Medicare members typically includes information about diseases
and injuries associated with aging and suggestions for remaining physically active and healthy
during retirement. For a population that includes families with young children, newsletter
topics might cover childhood illnesses and parenting skills.
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Periodic Provider Meetings
One of the most effective means of maintaining an informed provider network is to hold
regular meetings for providers and their office staff to interact with key personnel from the
health plan. Provider meetings often include clinical personnel from the health plan and
generally cover clinical issues, provider performance measurement results, and contractual
issues. Meetings for provider staff address operational issues (i.e. claims and encounter
report filing or referral requirements). Health plans may also present general information
about health plans to help educate providers and staff who may not be familiar with
managed healthcare. Provider and staff meetings are also a good forum to solicit ideas for
operational changes or feedback on new programs the health plan may be considering.
Surveys for Providers and Their Staff

Surveys for Providers and Their Staff
Health plans survey contracted providers and their staff to assess their satisfaction with the
health plan from administrative and operational perspectives. Survey results help the health
plan determine answers to the following questions:
• Do providers feel able to provide quality healthcare within the guidelines of the health
plan’s UM and QM programs?
• Do any of the health plan’s departments provide poor service or are they unresponsive
to provider needs?
• Are the health plan’s procedures easy to follow and use?
• Are providers satisfied with feedback received regarding their performance, as
measured by health plan standards?
• How satisfied are providers with the health plan’s provider relations programs, staff,
and communications?
• What comments and suggestions for improvement do providers have for health
plan programs or processes?
Both positive and negative feedback assist the health plan in modifying its programs to better
meet provider needs and improve provider satisfaction with the plan.
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Provider Involvement in Health Plan Management
Provider involvement in the day-to-day operations of the health plan is crucial to developing
and maintaining a health plan.
Contracted providers are a valuable resource to the health plan in many ways. When initiating
efforts to expand or fill gaps in the network, provider relations representatives or the medical
director often seek input from network providers. These providers usually have professional
relationships with non-network providers in the community and can identify and help evaluate
candidates for the network. For example, PCPs can offer information about local specialists and
ancillary providers.
Committee Memberships
Another way in which health plans involve providers in health plan operations is through
committee membership. The health plan’s medical director is involved with the clinical aspects
of the plan’s UM and QM programs. Achieving significant improvement in medical management
often requires clinical expertise beyond the contributions of the medical director and the other
physicians who are employed by the health plan. Health plans frequently solicit network
providers to participate in the medical management of the organization.
QM standards from accrediting agencies require a health plan to establish and maintain specific
medical management committees and to have active provider participation on these
committees. The number, name, and types of medical management committees vary from
health plan to health plan. Health plans generally have committees for UM and QM, and they
may have committees specifically for peer review, credentialing, and evaluation of medical
records.
Because network providers are directly involved in the provision of healthcare daily, they
bring a significant real-world perspective to QM and UM programs. In addition to lending
their clinical expertise, providers who participate in QM and UM committees also serve as a
communications conduit to and from the provider community. Providers who are committee
members can help the health plan educate its network about the principles of QM and UM
and the specific activities and requirements of the health plan’s own QM and UM programs.
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Organizational Committees
Each health plan has a varied number of organizational committees related to quality and
utilization management. These committees have assigned functions and goals that help the
health plan meet its overall objectives for access, quality, and cost-effectiveness. Health plans
frequently include network providers as members on these committees as a means of:
• obtaining additional clinical knowledge

• gaining the perspective of practicing providers for decision making
• lending greater credibility to health plan decisions in the eyes of the provider
community
Quality Management Committee
The quality management committee generally has the responsibility for overseeing the
health plan’s quality improvement activities in both clinical and service areas. This
committee:
• identifies appropriate issues for monitoring

• evaluates the results of quality studies to determine the need and opportunity for
improvement
• develops action plans for improvement
• provides oversight of action plan implementation
• monitors the effectiveness of the action
The QM committee also reviews and updates the health plan’s QM program for approval by
the health plan’s board of directors and recommends policy decisions to the board. Associated
committees and subcommittees may also participate in quality activities. Health plans may
separate the QM committee into two components: a clinical QM committee (composed
primarily of providers) and a corporate QM committee (that does not include contracted
providers). When the QM committee is divided into two, the clinical component often serves
as an advisory board to the corporate committee.
Example: When the clinical QM committee develops action plans that involve increased costs
or policy changes, these action plans are submitted as recommendations to the corporate
committee for its approval or rejection of the plans.
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Utilization Management Committee
The utilization management committee reviews and updates the health plan’s UM
program description and develops utilization review protocols. The UM committee:
• reviews and evaluates referral and utilization patterns

• reviews medical appropriateness for utilization decisions that are under appeal
• provides oversight of inpatient concurrent review
Peer Review Committee
The peer review committee reviews cases identified through utilization review processes,
complaints and grievances, or clinical monitoring activities. This committee formulates,
approves, and monitors corrective action plans for providers as needed. Generally, the
only members of this committee who have voting rights are the providers.
Medical Advisory Committee
The medical advisory committee formulates clinical monitoring activities and develops
clinical, preventive health practice guidelines, and medical care standards. This committee
may have subcommittees that assess new medical technologies or develop the health plan’s
formulary. In some health plans, the QM committee also performs the medical advisory
function.
Credentialing Committee
Subject to approval from the board of directors, the credentialing committee establishes and
updates credentialing processes and criteria. It reviews the credentials of new applicants and
contracted providers during the credentialing and recredentialing processes. Depending on
the authority granted the committee by the board, the credentialing committee may either
make recommendations to the board or make the final decision regarding a provider’s
participation in the network. Some health plans include peer review activities in the duties of
the credentialing committee.
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Committee Overview
The number of providers on a committee varies depending on the nature of the committee, the
size of the network and the health plan, and the availability and interest of the network
providers. The composition of the committee should reflect the composition of the entire
network. Most health plans require that physicians participating in committees be board-
certified. Other types of providers should have appropriate professional licensure or
certification. The UM and peer review committees also draw from network providers for ad hoc
committees when the expertise of a certain specialty is needed to review a utilization or
provider performance question.
One of the main benefits for a provider who participates in a health plan committee is the
opportunity to become more familiar with health plan operations. Such a provider has an
opportunity to help shape the programs and activities of the health plan. To encourage
provider participation on committees, health plans may reimburse providers for the time they
serve on committees. To maintain continuity of provider participation on committees, some
health plans attempt to carry over at least 50% of a committee’s provider members from one
year to another.
Service and Administrative Support to Providers and Staff
To ensure that operational quality occurs in the service and support given to providers, the
most significant way a health plan can ensure provider satisfaction with the plan is to make
time commitment, resources, and energy available to the providers. The health plan’s delivery
of service and support directly shapes the providers’ perception of the health plan and strongly
influences their desire to maintain a relationship with the health plan. If the health plan’s
personnel are responsive to the needs and questions of providers, and operational functions
(i.e. claims payment, referral processing, and eligibility verification) are completed in a timely
and provider-friendly manner, providers are more likely to be satisfied with their health plan
relationships and to communicate that satisfaction to health plan members.
Although the provider relations department is the centralized resource for provider
information, a provider’s routine interaction with the health plan can be more efficient if the
provider has direct access to specific health plan departments.
Example: A provider checking on claims status can accomplish this task more quickly by calling
the claims processing department directly rather than sending the request through a provider
relations representative. Direct access to utilization review expedites the processing of
requests for procedure authorization.
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Provider Satisfaction and Retention
Enhancing Provider Satisfaction and Retention
Health plans can enhance provider satisfaction and retention by providing services and
administrative support in the areas of:
• member eligibility and benefits
• claims (i.e. traditional, electronic, and encounter reports)
Assistance with Utilization Management Issues
Typical UM programs require that providers request authorization before rendering various
services or referring a member for specialty care. Health plans attempt to implement
authorization processes that are simple and unobtrusive. They also make provider relations and
UM staff available to answer provider questions. Two ways in which health plans facilitate the
referral process for PCPs are through:
1. electronic referrals
2. variations of standard referral authorization systems (i.e. direct referral and self-referral
programs)
Electronic Referrals
Just as health plans are adopting electronic processes for claims submission, some health plans
are also creating more automated referral submission processes. An electronic referral system
allows providers to either fax or submit the referral request via e-mail. The UM decision is
returned to the provider in the same manner.
More sophisticated electronic referral systems integrate the authorization process with claims
processing. In these systems, after the service has been rendered and the claim submitted, the
system automatically links the authorization to the claim, further streamlining the health plan’s
operations and reducing the chance for error in provider reimbursement.
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Alternative Referral Programs
Some health plans have responded to demands from both providers and members for greater
freedom to make healthcare referrals by adopting direct referral or self-referral programs.
Under direct referral programs, PCPs can make most referrals to specialists without obtaining
prior authorization.
Self-referral programs allow members to bypass the PCP and see a specialist without a referral
under certain circumstances.
Example: A self-referral program may permit members in an area with a high incidence of skin
cancer to see a dermatologist without a PCP referral. Once the PCP has identified the chronic
condition and made the initial referral to the specialist, some self-referral programs allow
members with chronic conditions (i.e. diabetes) to receive specialist services as needed without
a PCP referral.
Assistance with Member Eligibility and Benefit Issues
Since provider reimbursement for covered healthcare services is dependent upon a

member’s coverage eligibility, the health plan must provide eligibility verification
mechanisms that are accurate, accessible, and available to all providers. While the health
plan may not always receive timely eligibility information from purchasers, the health plan’s
established eligibility verification systems should not create further inaccuracies and delays.
The health plan is responsible for issuing health plan ID cards to all members. Additionally, the
health plan compiles and distributes (or otherwise makes available via a provider portal or
website) eligibility lists to PCPs.
Many health plans have installed automated telephone verification systems that allow a
provider’s staff to verify a member’s eligibility by accessing a daily updated member database.
By following the directions given by the automated phone answering system and entering a
member’s ID number, the provider staff can check on the member’s current eligibility as listed
in the database. Some health plans use ID cards with magnetic coding information that is read
by a card-reader device at the provider site. Through an electronic connection with the health
plan’s eligibility system, the card reader immediately determines the member’s current
eligibility.
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Assistance with Claims
Except for providers who are reimbursed under a capitated or salary arrangement, providers
are paid on some type of a fee-for-service (FFS) basis for covered services. Since FFS
reimbursement arrangements can amount to a significant portion of a provider’s income, a
health plan needs to reimburse the provider in a timely and accurate manner. This
reimbursement should occur within the guidelines of the contracted payment arrangement,
benefit plans, and scope of services.
Fast and accurate claims payments are not entirely the responsibility of the health plan. If
providers submit incomplete or inaccurate claims, delays in processing and payment will result.
Some examples of claims submission and processing mistakes that can harm the timeliness and
accuracy of claims payment are listed in Figure 4.
Figure 4: Common Claim Processing Mistakes
Figure 4
Common Claim Processing Mistakes

Common Claim Processing Mistakes – Common Claims Submission Mistakes -
Health Plans Providers
• “Clean claims” not timely processed. • Claims submitted with incomplete
• Claims under investigation not information (i.e. no member ID
regularly monitored to ensure that number or no diagnosis or
providers submit the information procedure codes).
needed to complete claims • The provider does not reconcile
processing or ensure that an internal claim payment correctly against the
problem, such as an eligibility contractual reimbursement
question, is resolved. agreement and, as a result,
• Clerical errors cause data to be resubmits the claim or improperly
entered incorrectly, resulting in “balance bills” the member.
claims being paid to the wrong • Due to clerical error, unbundling of
provider, under the wrong services, or upcoding, the provider
member’s name, under an incorrect submits the claim with incorrect
diagnosis or procedure code, or the diagnosis or procedure coding.
wrong payment system. • The provider fails to submit
• The health plan fails to provide clear encounter reports to the health plan
communication to the provider to for reporting purposes.
identify the exact reason for • The provider fails to read or respond
problems with claims data. to the health plan’s communication
about claim errors.
• The provider submits the claim to
the wrong health plan.
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If the health plan’s claims department becomes aware of a pattern of incorrect claims
submission by a provider, the department notifies the appropriate provider relations
representative. The representative can show the provider specific examples of the claims
problem to clarify any misunderstanding and then provide additional training as needed.
When the health plan delegates claims processing to a provider organization, there is an
increased possibility of claims errors. If a provider organization that contracts with a health
plan is responsible for processing claims, the provider organization must clearly communicate
to its individual practitioners how to submit claims. Otherwise, providers may submit claims to
the health plan rather than to the provider organization, resulting in confusion and delayed
processing. When the health plan receives a claim that should have been sent to the provider
organization’s claims department, the health plan usually contacts the individual provider
directly about the error. Health plans often indicate this type of error by a message on the
Explanation of Payment or Explanation of Benefits form sent to providers.
If the individual provider persists in sending claims to the health plan, the plan contacts the
provider organization’s provider relations staff; the provider relations staff then contacts the
individual provider to offer additional training.
Use of Electronic Claims Submission
Electronic claims submission allows a provider to submit claims to a health plan through
electronic data interchange (EDI). Electronic Data Interchange (EDI) is the application-to-
application interchange of business data between organizations, which uses a standard data
format.
The Centers for Medicare and Medicaid Services (CMS) championed the electronic
submission of claims as a means of managing healthcare financial data. To comply with
CMS requirements, the private sector has adopted electronic claims submission. The
use of EDI results in more accurate claims adjudication, cost-effective claims
processing, and if there is a problem with the claim, earlier notification to the provider.
When a health plan accepts electronic claims, the health plan’s information systems (IS),
alongside the claims and provider relations staff, works with the provider to set up the
electronic process. The health plan determines the software and hardware requirements and
also provides the necessary training for the provider and office staff to submit claims
electronically. In some instances, the software and hardware are offered at a reduced cost or
no cost to the provider.
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Encounter Reports
When a provider contracts with a health plan under a capitated arrangement, the provider
typically does not file claims for services provided within the scope of capitation. The
provider documents the services delivered as encounter reports and health plans often
require providers to submit these encounter reports to the plan. Health plans need to
encounter data describing diagnoses, tests, treatments, and progress for:
• the plan’s reports to regulatory agencies

• the plan’s reports to purchasers
• ongoing evaluation and adjustment of capitation rates
• UM reporting
• QM activities (i.e. clinical studies or provider performance profiling)
• HEDIS data collection
Some health plans have mechanisms to monitor the submission of encounter data.
Example: A health plan may estimate the expected number of encounters based on the
assigned population and then compare the projected number of encounters to the number of
encounter forms received.
Capitated providers frequently do not understand the purpose of sending encounter data to
the health plan. Some providers feel that not submitting information is one of the benefits of
being paid through capitation. The health plan’s provider relations staff often has the
responsibility of contacting noncompliant providers to remind them to submit encounter data.
Unless providers understand why the health plan needs the information and receive reminders
to send the data, they may fail to submit encounter data. Encounter data submission also a
contractual requirement.5
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Assistance with Other Problems and Questions
For problem resolution, the health plan’s provider relations representatives are the main
contact point for providers and their office staff. While a provider’s office may work directly
with the health plan’s claims, eligibility, or UM departments, a provider’s office directs most
other problems to the provider relations representative.
The provider relations department addresses the following questions and problems:
• Requests for health plan materials (i.e. wellness brochures or benefit information) to
distribute to health plan members
• Requests to transfer members who refuse to comply with treatment plans to
another provider
• Difficulty verifying eligibility information or receiving incorrect eligibility information
• Contractual issues (i.e. questions about reimbursement)
• A PCP’s difficulty in obtaining follow-up reports from a specialist about the diagnosis and
treatment of the PCP’s patients who have been referred to that specialist
• General complaints a provider has regarding the health plan
Role of Technology in Enhancing Provider Relations
Utilizing Available Technology
Health plans often create account-based, password-secured websites so that providers can
access health plan information regarding service authorization, claim status, and member
eligibility.
Some health plans allow providers to use e-mail to transmit authorization requests, encounter
data or claims information. If the health plan receives questions from providers by e-mail, the
plan must ensure that a designated employee reviews and responds to the e-mail
communication in compliance with procedures established for other forms of communication
(i.e. telephone or mail). Responses to e-mail questions should adhere to the plan’s standards
for timeliness and accuracy of information.
Many health plans have established websites specifically for their members and providers.
Websites can be used to create positive publicity for the health plan by communicating
information about health plan products, services, and network providers to their members.
Websites for providers can include healthcare-related information (i.e. recent articles from
medical journals or information about disease management).
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Rural and Telemedicine Providers
Maintaining adequate numbers of providers in rural communities can be particularly

challenging.6 Retention of rural providers begins with the proper recruitment of
individuals with prior exposure to life in a rural area. Exposure can include:
• a rural upbringing
• a residency program located in a rural area
• participation in other rural training programs
This is important because it helps providers to personally understand the needs of

their patients. Health plans have directed resources to communication efforts with
rural providers that consider their geographic locations and attendants to be
challenging (i.e. providing information via webinar, website, or provider portal).
Where distance is a critical factor, telemedicine is the delivery of health care services by health
care professionals using information and communication technologies for the exchange of valid
information. All in the interests of advancing the health of individuals and their communities,
this type of delivery can be used for:
• diagnosis, treatment, and prevention of disease and injuries

• research and evaluation
• the continuing education of health care providers
Telemedicine is a practice that has evolved in response to the difficulties associated with
assuring appropriate network access in rural areas. It has continued to grow in usage and now
appears throughout the practice of medicine, from general practitioners to neurologists, to
psychologists, and beyond. In terms of communication and access, the inclusion of
telemedicine providers in a network may create new problems.
A problem that is often experienced in relation to both telemedicine and rural providers, is the
likelihood that providers are less likely to be concentrated in a regional area. Health plans need
to factor in this likelihood when developing and implementing communication strategies to
reach telemedicine providers.
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Managing Provider Performance
Medical Management and Provider Performance
Medical management is an umbrella term used to describe a variety of utilization

management (UM), quality management (QM), and clinical practice management (CPM)
activities designed to:
• assess a plan’s costs and consumption of resources

• evaluate the care and services provided, or not provided, to plan members
• balance costs and quality to ensure that the plan provides healthcare that meets or
exceeds customer expectations and plan standards
• implement a program of continuous quality improvement based on outcomes
and utilization patterns
To ensure that providers are rendering the appropriate types of treatment in the appropriate
settings for their patients, health plans must evaluate and manage the providers’ utilization
of services.
Overutilization results in excess costs and subjects plan members to unnecessary treatments.
Underutilization deprives members of medically indicated care. The health plan’s goal is to
avoid both situations by encouraging providers to utilize services appropriately.
Health plans must evaluate and manage the performance of individual providers and
implement programs to support continuous quality improvement. In healthcare, continuous
quality improvement (CQI) consists of a structural organizational process for personnel
involved in the planning and execution of a continuous stream of system improvements to
provide quality healthcare that meets or exceeds customer expectations.7 Quality
improvement efforts typically focus on:
1. assessing plan performance to identify the best and worst outcomes and utilization
patterns
2. developing and implementing strategies (i.e. treatment protocols and practice
guidelines) to improve performance
The key to implementing CQI is the quality of the health plan’s providers network.
With increasing competition in the healthcare marketplace, health plans have begun to
recognize the advantage of being able to present evidence to purchasers and consumers
about the quality of the health plan’s offerings. Healthcare purchasers are increasingly
demanding accountability from health plans and health plans have sought accountability
from their network providers. Through quality management processes, a health plan can
ensure (and assure purchasers) that its network is composed of qualified providers who
continue to meet the criteria for network participation and that these providers contribute to
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the overall quality of care and services offered by the health plan. 8
Measuring and Evaluating Provider Performance
Although some health plans also assess a provider’s practice patterns before formalizing an
initial contract, credentialing typically does not provide quantifiable information about
provider performance. The recredentialing process, which plans conduct at regular intervals
after signing the initial contract, offers an opportunity for the health plan to evaluate the
provider’s current performance.
Performance measurements provide a health plan with quantifiable information about the
care and service that a provider delivers to the health plan’s members. Performance
evaluation allows the health plan to generate a meaningful, valid, and accurate picture of the
providers’ performance quality by comparing measured results against established
performance standards.
Performance standards define the level of performance that the provider must reach to
meet plan objectives. This level may be either a minimum level of service and care, an
average level of performance, or a best practice.
Internal standards are developed inside the health plan and are based on the health plan’s
historic performance levels. For example, a utilization standard based on the average utilization
of all providers in the network would be classified as an internal standard.
External standards are based on outside information (i.e. published industrywide averages or
the best practices of recognized industry leaders).
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Performance Measures
Performance Measures
Performance measures can be either quantitative or behavioral. Quantitative measures

evaluate how quickly, how often, and how accurately services are delivered. Behavioral
measures, or qualitative measures, evaluate a provider’s interactions with plan members.
Behavioral measures are not associated with numbers or statistics, but with the provider’s
ability to effectively communicate and make patients feel that they are receiving the
service and care they deserve. Figure 5 provides some examples of measures health plans
use to evaluate provider performance.
Figure 5: Sample Performance Measures for Network Providers
Figure 5
Sample Performance Measures for Network Providers

Performance Area Measured By
Service • Lead time for appointments for non-
emergency care
• Turnaround time for laboratory results
Preventive Care/Wellness • Number of hospital admissions for patients

with chronic illnesses
• Frequency of annual mammograms for
women in a specific age group
Quality of Care • Hospital admissions rate

• Success rate for specific surgical
procedure(s)
Utilization • Number and type of diagnostic tests

ordered
• Number of referrals to specialists or
ancillary service providers
Performance measures typically focus on four areas:
• Structure
• Process
• Outcomes
• Patient satisfaction
34
Structural Measures
Structural measures address a provider’s capacity, systems, and processes to

provide high-quality healthcare.9 Aspects of a provider’s practice that are
appropriate for structural measurements include the provider’s:
• compliance with specific regulatory or accreditation requirements (i.e.

licensing and medical record-keeping practices)
• use of electronic medical records or medication order entry systems
• ratio of providers to patients
• conformity to standards for prescribing controlled substances
• procedures for controlling infection
• procedures for ensuring patient access to care
Structural measures are relatively easy to use because of their objectivity. These measures can
be standardized for comparisons among individual providers.
Structural Measures Case Study
During its recredentialing of Dr. Nicole Enberg, Canyon Health Plan developed a report that
helped the health plan determine how well she met Canyon's standards. The report
included cumulative performance data for Dr. Enberg and encompassed all measurable
aspects of her performance. This report included the following information:
• The number of hospital admissions Dr. Enberg had

• The number of referrals she made outside of Canyon's provider network during a
specified period
Canyon also used process measures, structural measures, and outcome measures to
evaluate Dr. Enberg's performance.
When it evaluated whether Dr. Enberg conformed to standards for prescribing controlled
substances, Canyon used a structural measure to evaluate Dr. Enberg’s performance.
35
Process Measures
Through an evaluation of the healthcare services offered by a provider to the health

plan and its members, process measures indicate what a provider does to maintain
or improve health.10 Process measures apply to areas such as the availability and use
of preventive health screenings (i.e. mammograms) or childhood immunizations.
Health plans often compile summary statistics about the types of services a provider
offers or how often the provider performs a given procedure from claims and
encounter data. This data is then compared to the number of members who are
patients of the provider to determine if the services are appropriate to the
membership.
Health plans may require that providers submit regular encounter reports on certain
types of services to verify that they are being rendered appropriately.
Encounter data is not always accurate or complete.
Example: A patient who obtains services at a location other than the

physician’s office (i.e. flu shots or immunizations received at a health clinic)
may be receiving appropriate care, even though information about that care is
not included in the physician’s medical records. Incorrect diagnostic or
treatment codes can also affect the value of encounter data.
Process Measures Case Study
• The number of hospital admissions Dr. Enberg had

• The number of referrals she made outside of Canyon's provider network during a
specified period
When it evaluated whether Dr. Enberg’s young patients receive appropriate immunizations at
the right ages, Canyon used a process measure to evaluate Dr. Enberg’s performance.
36
Outcomes Measures
Outcomes measures focus on the direct results of a process. Outcomes measures evaluate a
patient’s condition after a clinical treatment.
Example: The five-year patient survival rate following a specific treatment plan for an illness
or a patient population. Others include the percentage of patients who died as a result of
surgery (surgical mortality rates) or the rate of surgical complications or hospital-acquired
infections.11
Health plans can obtain initial information about a procedure or treatment plan by
examining claims and encounter data. A review of patient medical records provides
additional information about specific condition types and about the patient’s progress
throughout the treatment. The health plan can then compare a provider’s performance to
established measure standards.
In many cases, outcomes standards are expressed as functional scales comparing the
patient’s condition before and after treatment. For example:
• Did the patient get better or worse?

• Did functional levels increase or decrease?
• Did the treatment resolve an acute illness?
• Was the treatment successful in managing the associated complications of a
chronic illness?
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Outcomes Research
Additional standards are established through outcomes research. Outcomes research

documents the effectiveness of various treatment plans and identify which treatment plans
produce the most desirable outcomes. Once effective treatment practices are identified, they
can replace less effective treatment practices through the development of clinical pathways,
clinical practice guidelines, and disease management strategies. These preferred practices are
used for benchmarking in outcomes measurement.
Because most health plans lack the resources to conduct extensive outcomes research most
plans use information from external sources. One such source is the Agency for Healthcare
Research and Quality (AHRQ), a U.S. Public Health Services agency that supplies research
results designed to improve the quality of healthcare while reducing costs. AHRQ funds
research activities to identify clinical interventions that result in successful outcomes in
typical practice settings. The group’s research findings serve as the basis for quality
improvement, cost-effectiveness, and technology assessment initiatives within healthcare
institutions.
Several other public and private companies also supply outcomes research information
applicable to healthcare. Many health plans even use Internet-based benchmarking software
that allows them to retrieve outcomes data from other organizations.
Health plans are in a unique position to implement outcomes measures because they have
access to data that encompass entire episodes of care.
Example: A PCP refers a patient to a specialist who, after examining the patient, recommends
surgery at a local hospital. Following surgery, the patient undergoes two months of physical
therapy. Each of the individual providers involved in the patient’s care—the PCP, the
specialist, the hospital, and the physical therapist—has data about only one segment of that
care. The health plan has data about the entire treatment program. This ability to capture
data about patient care from beginning to end gives health plans a significant advantage over
other healthcare providers when it comes to measuring and managing quality.
38
Outcomes Measure Case Study
• the number of hospital admissions Dr. Enberg had

• the number of referrals she made outside of Canyon's provider network during a
specified period
When it evaluated whether the condition of one of Dr. Enberg’s patients improved after the
patient received medical treatment from Dr. Enberg, Canyon used an outcome measure to
evaluate her performance.
39
Importance of Case Mix (Severity) Adjustment
When evaluating a provider's success in standard fulfillment, the health plan must make case
mix (severity) adjustments for any unusual factors that may exist in the provider's patient
population or in a patient. Case mix adjustments allow for a more equitable comparison of
data between providers for both inpatient and outpatient care.
Example: Knowing that Provider A's patients die sooner than Provider B's patients is of little
value; unless it is also known that Provider A's patients are sicker to begin with.
Performance results for a PCP whose patients suffer from a greater number of chronic
conditions (i.e. diabetes or asthma) cannot be equitably compared to results for a PCP who
has a typically healthy patient base unless case mix adjustments are made. Case mix
adjustments are important in measuring a specialist's performance. Because specialists treat
patients with existing medical conditions referred by PCPs, a specialist’s patient base is
fundamentally different from the general patient population. Within specialties, some
specialists may have specific qualifications to treat very high-risk patients or to perform
particularly complicated surgical procedures.
Example: A perinatologist is more likely to provide care for high-risk pregnancies than a
general obstetrician.
Case mix adjustments help maintain the statistical integrity of outcomes measurement by
providing a means of comparing providers to similar providers delivering similar services to
similar patients. They also help reduce the number of providers who might otherwise be
considered outliers. An outlier is a provider who is using medical resources at a much higher
or lower rate or in a manner noticeably different from his or her peers. Case mix adjustments
can explain some, or all, of the variation in a provider’s practice patterns.
40
Case Mix (Severity) Case Study
Dr. Bonnie Lau, Dr. Erik Gustafson, and Dr. Robert Fletcher are pediatricians who participate in
the same provider network within a large metropolitan area. Dr. Lau’s office is located within
the inner city and is convenient to the city’s bus lines. Drs. Gustafson and Fletcher practice in
an affluent, suburban area of the city.
Because of the concentration of the city’s low-income population in the inner-city area, Dr.
Lau’s patient base includes a relatively high number of children from low-income families,
who traditionally have more health problems and require more frequent services than
children from middle to high income families. If Dr. Lau’s clinical practices are compared
without adjustment to those of Drs. Gustafson and Fletcher, Dr. Lau will most likely appear to
be an outlier because of the higher utilization of services per patient. As a result, Dr. Lau’s
practice pattern will be subject to scrutiny by the health plan and could result in corrective
action by the health plan.
On the other hand, if Dr. Lau’s practice patterns are compared with those of pediatricians who
practice in the inner city, she is likely to be within the health plan’s utilization parameters.
Patient Satisfaction Measures
Many health plans include patient satisfaction with the provider’s delivery of medical services
in performance measures. Patient satisfaction measures are behavioral measures and
evaluate everything from the friendliness of the provider’s staff to the patient’s perception of
how well the provider addressed a medical problem.
As customers of the health plan, members offer critical feedback to the health plan about
their experiences related to healthcare services received and interactions with providers.
This information is used to validate the quality of service delivered by the providers and the
plan and to assist in identifying and prioritizing areas needing improvement within the
health plan’s delivery processes.
Member feedback is available from several sources, including:
• member satisfaction surveys

• access to care surveys
• data about member complaints and grievances
• member requests to change PCPs
41
Member Satisfaction Surveys
Member satisfaction surveys help a health plan gauge whether the care and services
rendered by its providers are consistently being delivered in a manner that meets member
expectations. Surveys conducted at, or shortly after, the point of service solicit the following
specific information regarding a member’s reaction to services received during a specific
encounter:
• Wait times at the provider’s office or clinic

• Interactions and communications with providers and their staff
• Effect of utilization management procedures on member satisfaction
• Coordination of care
• Satisfaction with treatment plans and related outcomes
• Perceived value of services—the scope of benefits and services provided
• Effectiveness of explanations and education
Other surveys conducted on an annual basis (or at some other predetermined interval)
solicit more general information about the member’s overall satisfaction with the plan’s
services. A health plan can also collect more generalized feedback through focus groups or
health status surveys.
One example of a periodic survey that is used throughout the industry is the Consumer
Assessment of Health Plans (CAHPS) member satisfaction survey developed by AHRQ.12
Member satisfaction surveys are useful in evaluating provider performance because they
may yield information not evident in profiling. Because the request for feedback is initiated
by the health plan, member satisfaction surveys reflect a broader range of the health plan’s
member base than complaint and grievance data and create the opportunity to collect both
positive and negative feedback. Although members may be quick to complain when they
perceive a problem, they may not always initiate contact to express satisfaction with their
healthcare provider. Well-designed, statistically validated surveys and consistent collection
methods can yield valid and reliable data and be directed at specific subsets of the health
plan’s membership (i.e. new mothers or elderly members).
42
HEDIS
To allow for comparison between providers, a health plan must use standardized survey
tools that provide consistent information about each provider. In addition to providing data
for measuring provider performance and fueling the health plan’s quality improvement
programs, survey data helps health plans meet accreditation requirements.
The National Committee for Quality Assurance (NCQA) has developed a performance
measurement tool, HEDIS, which requires health plans to survey a sample of members to
assess their health status and to measure patient satisfaction with the delivery of care.
NCQA uses the CAHPS HEDIS survey, which is a combination of the original HEDIS member
satisfaction survey and the CAHPS survey, to measure consumer satisfaction. HEDIS also
includes a survey that is designed to collect information from parents about their
experience with their children’s healthcare.13
Although the HEDIS surveys are convenient and practical, a health plan may choose to
conduct additional surveys to obtain more specific member feedback regarding the
performance of network providers.
One issue a health plan must address when conducting member satisfaction surveys is
whether the name of the provider or the person completing the survey is required.
Although making anonymous surveys may result in more candid answers, asking for
provider names yields information that can be used to create provider profiles or can be
included in the provider’s recredentialing file.
Access to Care Surveys
To determine the extent of compliance with access standards adopted by the health plan, the
results of these surveys are compared at both the provider and health plan levels.
Health plans also survey patients who did not access services during a specific time period,
(i.e. a calendar year) and patients for whom services were authorized but not used. Lack of
use may indicate that members simply did not require medical services throughout the year.
However, lack of use may also indicate access problems with specific providers or an
inadequate number of PCPs in the member’s immediate vicinity. These surveys may also find
that some members do not seek routine care because they are dissatisfied with their PCP or
the health plan’s physicians.
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Complaints and Grievances
A complaint is defined as any problem that a plan member brings to the attention of the plan.
A grievance is a formal complaint that demands formal resolution by the health plan.
Complaints, grievances, and requests for change of PCP provide feedback regarding services
that are not delivered. Filing a complaint or grievance is an obvious indication that the
member is dissatisfied with an aspect of his or her healthcare. It is also important to
determine why a member changes PCPs. This decision may be a matter of poor “fit” between
member and provider, the member’s relocation to another geographic area, or some other
unrelated reason. It may also be the result of dissatisfaction with the quality of the provider.
Feedback, both positive and negative, can be used to measure and profile provider
performance.
Of course, no single measure is adequate to evaluate the performance of a provider. The

provider may meet one or more of the measures but still fail to satisfy a patient’s
expectations. A patient’s outcome may be positive even if the provider deviated from clinical
practice guidelines or negative even when the provider rendered the best possible
treatment. Although health plans are increasingly focused on transparency and use of
standardized performance metrics and outcomes reports that are easily accessible to all
players in the health care process, performance measurement remains a complex process that
varies greatly from one health plan to another.14
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Using the Results of Performance Measurement and Evaluation
Health plans utilize results from performance measurements and evaluations to provide
feedback to individual providers and to develop health plan-wide quality-improvement
activities.
One common form of performance feedback is provider profiling. A provider profile

includes cumulative performance data for an individual provider and can encompass all
measurable aspects of the provider’s performance- from compliance with the health plan’s
operational policies and procedures to participation in the health plan’s quality and
utilization management activities. A provider profile focuses on patterns of an individual
provider’s care rather than on the provider’s specific clinical decisions and expresses those
patterns as a measure of resource use or quality during a defined period and for a defined
population.
Example: A provider profile for a PCP might include an assessment of the average wait time
to schedule routine physical examinations, the number of hospital admissions, the number
of referrals out of network, the extent of compliance with practice guidelines, or the level of
member satisfaction with the provider’s service.
Because they provide information about providers’ actual performance, provider profiles are
a valuable tool for conducting periodic performance reviews and for recredentialing
providers. Provider profiles are also useful in comparing a provider’s performance with that
of his or her peers, identifying practice patterns that deviate from the norm and guiding
quality improvement efforts.
Health plans can also use provider profiles to identify high-value providers. High-value
providers are providers who give quality medical care in a cost-effective manner. These
high-value providers can help set the performance standards that are critical to a health
plan’s success.
The major limitation of individual provider profiling is that health plans typically have access
only to information about the provider’s activities with health plan members. The need to
comply with industry and regulatory standards related to patient confidentiality and
competition makes it difficult for a health plan to evaluate the provider’s performance
throughout his or her entire practice.
Using the appropriate measures to assess different aspects of a provider’s performance

should reveal an overall picture of the provider’s quality. With this overall picture in mind, the
health plan can begin to manage provider performance. It is important that the health plan
focuses on patterns of performance rather than on individual instances because patterns help
identify areas where improvement is necessary.
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Modifying Provider Behavior
The health plan’s medical director plays a key role in managing provider performance by
providing leadership and credibility to all areas of medical management, including quality
management, utilization management, network management, and medical policy. The health
plan’s medical director also plays a key role in modifying physician behavior. When a physician
is identified as having a potential utilization or quality problem, during recredentialing or
during the normal course of quality improvement activities, pertinent medical records and
documentation are reviewed by the health plan’s peer review or other appropriate
committees. The medical director often participates as a member of these committees. The
medical director then contacts the physician to discuss potential and documented problems,
with the intention of changing the physician’s behavior.
Physicians are key partners of health plans and influence members’ attitudes toward health
plans. During regular office visits, physicians communicate face-to-face with plan members
to direct the members’ care and to influence the members’ attitudes toward their own
health. Physicians are key customers of health plans as well. With the growth of health plans
over the past decade, physicians have become more dependent on health plans for their
patients, and continued participation in one or more health plans is often critical for the
survival of their practice. Physicians also rely on the health plan to help them succeed in a
health plan environment and meet the standards that the health plan sets.
To meet the needs of the health plan and its members, health plans need physicians with
high-quality, cost-effective practice patterns. However, provider availability in a market,
customer expectations, and regulatory and access requirements often make it necessary for
health plans to contract with physicians who meet the plans’ minimum standards rather than
optimal standards. Occasionally, an individual physician’s practice patterns may fall outside
established norms. Unacceptable practice patterns may relate to overutilization or
underutilization of services, poor clinical quality, poor service quality, or inappropriate
physician behavior. Some examples of unacceptable practice patterns are listed in Figure 6. All
unacceptable practice patterns must be addressed.
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Figure 6: Unacceptable Provider Practice Patterns
Figure 6
Unacceptable Provider Practice Patterns – Common Examples

Underutilization Overutilization Clinical Quality Service Quality Physician
Behavior
Low High hospital High rate of Long wait to Abrupt
immunization admission wound see physician treatment of
rates rates infections patients
Rude office
Low PCP visit High specialist Not staff Abusive
rates referral rates responding to language with
abnormal test Not timely health plan
Not prescribing High rates of results answering staff
ACE inhibitors MRIs phones
for patients Prescribing Failing to
with congestive drugs to return heath
heart failure patient with plan medical
(CHF) known allergy director’s calls
In extreme cases, it may be necessary for the health plan to terminate its contract with a
provider. Removal of a physician from the network can cause significant disruption for the
physician’s practice, for the members who go to that physician, and for the health plan-
especially if the physician is in an area with limited access to similar providers. In the best
interest of all affected parties, the health plan should attempt to modify unacceptable
practice patterns and to work with physicians to achieve desired quality, satisfaction, and
cost goals.
The specific approach a health plan takes to modify physician behavior depends on the
physician and the nature of the problem that must be addressed. Basic to all approaches is a
need to:
(1) overcome physician resistance to change

(2) address physicians’ needs
47
Overcoming Resistance to Change
The field of medicine is constantly evolving, and the practice of medicine requires a
continuous reevaluation of practice patterns based on new evidence. For a variety
of reasons, physicians are often resistant to change. The primary reasons for this
resistance include:
• a perceived threat to physician autonomy

• a perceived conflict between the physician’s role as caregiver and his or her
role as an agent of the health plan
• a negative perception of managed care and the ACA
Overcoming Resistance: Physician Autonomy
The nature of the medical school selection process and the medical training experience
emphasizes the need for self-confidence, decisiveness, willingness to accept responsibility and
exercise authority, and the belief that what you are doing is right. While these characteristics
are often admirable and necessary to someone who must make life and death decisions on a
regular basis, they do not necessarily predispose an individual to be open to change.
The medical training process also emphasizes progressive autonomy, from the
medical student who is closely supervised by residents and attending physicians, to
the resident who gains progressively more authority, to the attending physician who,
until the advent of health plans, was essentially free of supervision. Health plans’
introduction of medical management into healthcare delivery was perceived as a
threat to the physician’s control.
At one time, it was not uncommon for HMOs to require preauthorization of referrals
to specialists and many of the services provided by specialists. Many plans still
attempt to manage utilization by setting benefit differentials based on whether
members use network or non-network providers.15 More restrictive plans also require
prior authorization for high-cost or high-volume services and or place significant
restrictions on prescription drug access through the plan’s formulary. Although the
trend among health plans has been to allow easier access to specialists and to be
more selective in applying authorization requirements, the perceived threat remains.
Example: In a recent study, researchers discovered that a significant opportunity

exists to improve physician satisfaction with health plans, specifically within the area
of pharmacy and formulary management.16
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Overcoming Resistance: Caregiver and Agent Conflict
Many physicians also perceive an ethical conflict between their role as the individual
patient’s caregiver and their role as an agent of the health plan in determining what is
medically necessary and covered. As caregivers, physicians feel responsible for providing
whatever services they or their patients believe are needed, without concern for cost or the
true medical necessity of the service.
For some physicians, the fact that a health plan is financially liable for only those services
that meet the terms of the benefit contract can be problematic. These physicians see the
health plan’s position as creating a conflict between what patients need and what patients
can have, even though patients can have any care desired if they pay for it themselves. This
perceived conflict applies not only to care the plan deems to be medically unnecessary, but
also to care that is not covered because of benefit limitations and exclusions. The perception
of conflicting roles stems from a lack of understanding by some physicians of the contractual
nature of the coverage provided by the health plan. Although this conflict is not as common
as physicians seem to believe, the perception of such conflicts must be addressed when
working to modify physician behavior.
Overcoming Resistance: Attitude Toward Managed Health Plans-ACA
Following the passage of the Affordable Care Act (ACA), physicians have experienced an
uptick in non-clinical work and paperwork, and their reimbursements have been negatively
impacted.17 This, in turn, has affected their perception of managed care plans, health plans,
and associated requirements. The health plan medical director and network management
staff must overcome negative attitudes and other barriers to change their day-to-day
interactions with physicians and their approach to performance issues that require resolution.
Addressing Physicians’ Needs
As highly intelligent individuals with strong scientific backgrounds, physicians generally will
respond to information that is presented in a positive and collegial manner and that is
supported by evidence. Physicians may not respond to recommendations that they feel are
demeaning or imply that their judgment is wrong. Health plan personnel must learn to
communicate effectively and must use tools that provide support for their messages in
order to be able to modify physicians’ behavior.
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Addressing Physicians’ Needs: Communication
The key to all interactions between the health plan and its providers is effective
communication. This should take place on a regular basis through formal communications (i.e.
provider manuals, newsletters, mailings, websites or provider portals, and e-mails) and through
personal (i.e. in person, phone) contact with network management and medical management
staff, including the medical director. It is important for provider communications to be:
• focused on provider issues

It is important for the health plan to differentiate communications intended for the
office staff (i.e. notice of new billing requirements) from information intended for
physicians (i.e. new clinical guidelines or quality initiatives).
• up-to-date and accurate
All physicians receive a provider manual when they join the network. The provider
manual is often included as part of the provider contract. However, physicians do
not always receive or do not insert, updates. The health plan should document that
physicians receive updates and make sure that both physicians and their office staff
understand the importance of keeping and using these updates.
• two-way exchanges
The health plan must be willing to ask physicians for their ideas, to listen to
physician concerns, and to respond to these ideas and concerns. It is also essential
(and necessary for accreditation) that practicing network physicians have input
into health plan programs (i.e. utilization management, quality management, and
credentialing of new providers). Physician participation not only ensures
appropriate clinical input into the programs but also helps to validate them in the
eyes of the medical community and to establish the contributing physicians as
advocates for the programs. Soliciting input from physicians helps to reinforce the
message that the health plan values its providers.
• personalized
Dealing with sensitive issues is much easier when a good relationship has already
been established. It is more difficult when the parties are strangers, or one has a
negative perception of the other, as providers often do of unfamiliar health plan
personnel. Medical directors and other health plan personnel should seek
opportunities to meet with network physicians whenever possible, especially
outside of their health plan roles. Attendance at medical society, hospital,
community functions, and continuing medical education activities builds
relationships and enhances the medical director’s clinical and personal reputation in
the community.
It is also important to remember that rewards are often more effective in modifying behavior
than sanctions. The use of positive feedback and communication about good performance can
be a powerful tool for change. The mailing of a thank-you note from the medical director to a
physician whose performance has exceeded service standards is a simple way to apply this
idea.
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When a potentially sensitive issue does arise, it is often helpful to approach the physician with
a question rather than a conclusion. Many health plan decisions are based on limited reviews
of a specific case or issue. The provider often has more information or has a reason that is not
readily apparent for an action or decision. Even if the action appears to be unacceptable, the
provider deserves the opportunity to explain his or her perspective.
The medical director can most effectively interact with the physician by explaining what
information the plan has and then asking the physician to clarify why he or she chose the
action or made the decision. This approach gives the physician the opportunity to supply
additional information, to explain the reasoning behind the decision, or to acknowledge that
an action might not have been the most appropriate. Allowing providers to evaluate and
criticize their own actions is nonthreatening and allows for a meeting of the minds rather than
contention. This would seem to indicate that neither party is always right and that there is
clearly a need for additional factfinding and collegial discussion.
Addressing Physicians’ Needs: Provider Services
As with communication, the key to effective provider services is for the health plan
to develop a personal relationship with the office staff and with the providers. It is
also important for the health plan to address the concerns shared by physicians and
their staff. The health plan is not likely to be able to supply everything the physician
wants, but it can provide clear answers regarding what will be done and why the
other requests cannot be met. The network management staff must be perceived by
the physician and office staff as a valuable resource and an advocate in their
dealings with the health plan.
One of the major concerns of physicians and staff is the impact that health plan policies and
procedures have on physician practices. According to a recent study, “[p]roviders bristled at
externally-imposed process-oriented requirements that dictated their user experience without
a corresponding change in reimbursement policies or clinical best practices.”18 Efforts by a
plan to reduce administrative requirements and eliminate unnecessary paperwork provide
some relief and are recognized by physicians as an indication that the plan has heard their
concerns and cares about them. These efforts make future requests or recommendations by
the health plan less onerous.
When administrative paperwork is necessary, it is important for the health plan to

communicate to physicians and their staff what function paperwork serves and what benefit
it may offer the provider. Policies and procedures must be kept clear and simple to avoid
unnecessary duplication of work by the office staff. Changes to policies, especially those
requiring changes in the activities of the physician office, should be communicated clearly
and well in advance of their effective date, whenever possible.
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Addressing Physicians’ Needs: Clinical Practice Guidelines
Many practicing physicians trained at a time when there was less understanding and
emphasis on the cost and quality of care. Many of their practice patterns were established
during their training or early in their careers and were based on the practices of their
teachers or senior members of their departments. Information about appropriate care
was not based on documented scientific evidence; information was based on “expert”
opinion, personal experience, and anecdotal evidence. In many instances, scientific
evidence about appropriate care was not available. Efforts to measure quality typically
focused on structure, process, and short-term results rather than on long-term outcomes
and patient satisfaction.
Over the last two decades, interest in evidence-based medicine and the use of outcomes
studies to better document the true impact of the healthcare services being delivered have
grown. Interest in the development of clinical practice guidelines and clinical pathways has
also increased. For physicians, one of the most positive aspects of health plans has been the
expanded use of clinical practice guidelines and disease management protocols to promote
and improve preventive healthcare.
Clinical practice guidelines and pathways have been developed by a wide variety of entities,
including government agencies, national organizations, and national medical societies. The
following are examples of such entities:
• Agency for Healthcare Research and Quality

• American Diabetes Association
• National Asthma Education Program
• American College of Obstetrics and Gynecology
Clinical practice guidelines have also been developed on the local level by hospitals,
provider groups, and health plans. Health plans can adopt existing guidelines or modify
established guidelines to meet their specific needs. When no authoritative guidelines exist,
health plans can develop their own using evidence-based recommendations from network
physicians and internal staff.
In all cases, health plans must make certain that they use guidelines that are clinically sound
and appropriately validated. Although many externally developed guidelines are based on
solid scientific evidence, others, even when published in the peer-reviewed medical
literature, do not meet established methodological standards. To avoid potential problems,
all clinical practice guidelines should be reviewed by network physicians and approved by
the plan’s quality management committee before implementation.
The distribution of clinical practice guidelines to physicians and members has had a positive
impact on both clinical care and on the perception of health plans working to improve
member health. Unfortunately, as has been demonstrated by a variety of measures,
52
distribution does not ensure application.
Example: HEDIS includes measures of compliance with clinical practice guidelines (i.e. the
amount of beta-blockers prescriptions that are prescribed after heart attacks). National
results on these measures vary, but many fall below the norm.
Most physicians intuitively understand the importance of evidence-based information, but

they do not change their practice patterns in response to it. A major challenge for the
health plan is to convince physicians to adopt evidence-based approaches to healthcare.
Unfortunately, it is not yet clear what types of clinical education are most effective in
changing provider behavior.
Addressing Physicians’ Needs: Opinion Leaders
Opinion leaders are respected providers in the local community who are willing to evaluate
and adopt new ideas before the majority does. The majority of the medical community will
increase their acceptance and adoption of appropriate guidelines (or practices) if it is
supported by identified local opinion leaders. Opinion leaders can also be utilized to present
CME programs or to validate the information presented. This is a relatively new concept in
clinical education that warrants consideration by the health plan.19
Performance Profiles
Many health plans have taken the business adage, “You can only manage what you measure,”
to heart and have invested in a variety of data management systems to help them analyze and
report on physician performance. Although most certified physicians nationwide are subject to
profiling, physicians do not always consider the data that health plans provide as useful.
Whether profiles are likely to influence provider behavior depends on such factors as physician
acceptance of the validity of data and internal and external standards, appropriate use of
profiling information, and the usefulness of profiling data.
53
Encouraging Provider Acceptance
Physicians are often skeptical of data provided by an organization that they inherently
distrust. Health plans can reduce this distrust and improve acceptance by providing data
that is:
• accurate
Most of the data used for provider profiles are derived from either authorization
data (which are entered by the health plan staff) or claims data (which are
submitted by physicians). Both sources are only as good as the people doing the
coding and data entry. Each of these data sources provides a wealth of information,
which can help physicians improve the efficiency and effectiveness of their practice.
The health plan must be prepared to provide information regarding the nature of
the data and its strengths and limitations.
• sensitive to differences in patient populations
It is common for physicians to perceive that they treat a sicker population than their
peers (or whomever they are being compared to). A comparison of data about one
physician with data about other physicians is generally more acceptable if it is case
mix (severity) adjusted. The use of sophisticated profiling systems that make
adjustments based on diagnoses, the severity of the condition, and presence of
other illnesses, rather than rudimentary systems that make adjustments only for
age and sex, will improve the validity and acceptance of comparative data even
more.
• statistically significant
Physicians typically learn basic statistics as part of their education and often
question the statistical significance of any variance. It is important to limit analysis
to practices that have a large enough volume of patients and to focus on variances
that are large enough that they are likely to be significant. Whenever possible, the
variance should be calculated in terms of statistical deviation from the mean. For
most physicians, a value two standard deviations from the mean is recognized as a
statistically significant variance.
54
Using Profiles Appropriately
Providers often see profiling as a double-edged sword. On one hand, profiling can be used as a
positive tool to help physicians improve their practice. On the other hand, it can be used to
impose economic sanctions against poor providers. Despite their fears, physicians are not likely
to be disciplined today based on profiling. One approach to gaining acceptance of profiling
data is to acknowledge that the data is not perfect and to use profiling to help identify areas
to evaluate further. Health plans today largely use profiling as a means of identifying
physicians whose practice patterns differ in some manner from those of their peers. Data are
often compared to data about other similar physicians in the network or to some regional or
national norm. Most provider profiles start with high-level data that look at performance
across the entire population. It is important to acknowledge that a statistical variance in such
data is just that and does not imply good or bad medical practice. Almost any variance may be
medically appropriate given some unusual clinical circumstance. Once a variance has been
identified, analysis of more specific data or review of medical records will help to identify the
reasons for the variance and whether there is a true deviation from accepted patterns of care.
55
Making Profiling Data Useful
Provider profiles should provide physicians with the information they can use to improve
their practices. When an unacceptable pattern of care is identified, the plan should use the
information to help the physician identify ways to improve. Even if the pattern represents a
substantial risk to the members and requires immediate suspension of a physician from the
network, the goal should be to help physicians address their shortcomings so that they may
continue to practice safely and effectively.
All too often, a physician receives a profile in the mail and has no idea what it measures or
how to use it. The initial profile should either be delivered in person by the medical director
or network management staff or should be accompanied by a detailed explanation along with
the telephone number or e-mail address of a contact person for questions or further
discussion. If the data provided are high level, additional detail should be available for areas
with substantial variance. Additional detail might include a further breakdown of the data
into smaller categories or patient-specific information to allow a review of medical records.
The medical director, or other staff familiar with the profiles and with data analysis, should
be available to discuss the results with any interested physician. The key is to help physicians
obtain information that allows them to identify what specific practice they need to change
and to assist them to identify ways to implement that change.
56
Pharmacy Reports Example
Pharmacy reports provide a good example of how different levels of data provide different
opportunities. A health plan may include some measure of pharmacy utilization as part of a
provider profile. This often is a high-level measure (i.e. total pharmacy dollars or dollars per
member per month). Knowing that pharmacy costs are high tells the physician to look at
prescribing patterns, but it does not indicate specifically where problems exist. By contrast,
data on rates of use of generics or the use of nonformulary drugs focus on more specific
issues in the prescribing pattern and allow the physician to review practices in these areas.
Similarly, data on the top 10 drugs prescribed by volume or total cost focus attention on the
utilization of specific drugs.
The more specific the information provided, the more easily the physician can implement the
changes.
Example: A list of the most common brand-name drugs used when a generic is available or of
non-formulary drugs and their formulary alternatives provides specific examples of changes in
prescribing patterns that the physician can make. A list of members receiving a brand-name
drug when a generic is available or of those who received non-formulary drugs provides specific
patients to whom the physician can apply the change. The health plan must make sure that the
data provided allow the physician to identify what change needs to be made and, if possible,
provide opportunities to implement that change.
57
Incentives
Financial Incentives
Financial incentives may be based on a wide variety of performance measures, including cost
and utilization measures, service measures, quality measures, and satisfaction measures.
According to some reports, there is limited evidence that many quality measures, including
those tied to incentives (and those promoted by insurers and governments) lead to improved
health outcomes, although they are widely used.20 Whether financial incentive programs are
effective or ineffective in motivating physicians to change depends on the following factors:
• Physician perception that the incentive is fair

Capitation must be clearly defined in terms of what services are or are not included;
incentives or withholds should not be perceived by the physician as punitive; and risk
arrangements should not place the physician or practice in financial jeopardy. The
overall reimbursement plan must be understandable so that physicians can identify
what impact their actions will have on their reimbursement.
• Appropriateness of the incentive
A major concern of physicians, patients, employers, and regulators is that an incentive
plan might reward physicians for not providing medically necessary services or punish
physicians for providing medically necessary care. When designing incentive programs,
plans must be extremely careful not only to make certain that there are no
inappropriate incentives but also to avoid any appearance that there might be such
incentives. It is essential for plans that do provide incentives tied to utilization to
carefully monitor physician practices for both overutilization and underutilization.
• Alignment of incentives
Ultimately, financial incentive programs should be designed to align the incentives
of the plan with those of physicians. Such programs provide financial (or other)
rewards for the physicians when the health plan performs well either financially or
in terms of quality of care and member satisfaction.
In addition to direct financial incentives, health plans can also use indirect financial incentives
to influence providers. The development of a network-within-a-network rewards high-quality,
cost-effective physicians by including them in the more selective network, which provides
them with access to additional patients and, consequently, with more income.
This issue affects physicians nationwide, including those in rural areas. In May 2012, the
South Dakota Department of Health’s Office of Rural Health conducted a survey of
Recruitment and Retention among physicians in the rural community, wherein physicians
were asked to rank incentives and the most important reasons influencing their decision to
remain practicing in their community. The results showed that competitive salary was the
most important issue in retention, even though having a family-oriented setting,
educational facilities for children, financial incentives like bonuses and sick leave, and
employment opportunities for partners were also of great concern.21
58
Another example of an indirect financial incentive is the sharing of performance data with
employers or members or, in the case of specialists, with referring physicians. Although this
incentive does not limit or expand physicians’ access to additional patients, it does enhance
the reputations of those physicians who have performed well and should result in their
seeing more patients.
Non-Financial Incentives
While the use of financial incentives has been part of the reimbursement methodology of
health plans for many years, plans have more recently begun to explore nonfinancial
rewards. Nonfinancial incentives may include providing services for a physician’s practice,
inviting the physician or staff to attend an educational or a social function sponsored by the
plan, or paying the tuition for the physician or staff to attend an outside educational
program.
Plans may also reduce administrative requirements for physicians with good practice patterns.
Example: For practices that meet certain standards, the plan may allow a direct referral to
specialists or not require precertification for procedures. This approach reduces the
administrative work for the practice and improves office staff morale. It may also reduce
practice overhead (an indirect financial incentive).
Other actions that may be perceived as rewards include providing clinical practice guidelines,
practice management tools, medical record forms, or solutions to common problems for the
practice. While provider support services may be offered on an ongoing basis, it can also be
beneficial to tie them to specific performance measures. An invitation to the physician or
office staff to participate on plan committees or on panels at plan presentations may also be
perceived as a reward since it allows physicians and staff to learn about the health plan and to
provide input into health plan operations. It also provides them (and their patients and peers)
with an indication of the plan’s respect. Such incentives also serve the needs of the plan.
59
Resolving Unacceptable Physician Practice Patterns
Although most physicians consistently practice within acceptable standards of care, there are
occasions when unacceptable practice patterns occur. In some cases, unacceptable practice
may entail a single incident involving an otherwise high-quality physician. In other cases,
unacceptable practice may involve a series of events indicating a physician who does not meet
acceptable standards. An unacceptable practice may involve overutilization or underutilization
of services, poor clinical quality, poor service quality, or inappropriate provider behavior.
Regardless of the pattern or the type of issue, the approach to the physician is similar and
involves identification, evaluation, and management of potential quality issues.
The one exception to this approach is an event that indicates the potential for harm to
future patients. Such events require immediate suspension of the physician from the
network until the issue has been fully investigated and resolved. Suspension is a very
serious step that should not be taken lightly.
Identification of Potential Quality Issues
Unacceptable actions or practice patterns are identified by plans in various ways. Often a
plan member will call member services to complain about a physician. Common complaints
include:
• lack of courtesy on the part of the office staff or physician

• lack of availability of the physician to see the patient
• prolonged waits in the physician’s office
• poor communication by the physician
• disagreement with the diagnosis and treatment
• lack of treatment
Quality issues may also be identified by health plan staff reviewing care in the hospital,
pre-certifying outpatient care, or working with members in case management. These issues
may include:
• abusive behavior toward the health plan staff on the part of the physician or office
staff
• medical errors or complications of care
• delays in care
• unnecessary or inappropriate care
Provider profiles may also reveal patterns of care that fall outside the acceptable standard.
Once a potential quality issue is identified, it must be thoroughly investigated, evaluated,

and managed.
60
Issue Investigation, Evaluation, and Management
The member complaint or health plan staff report is thoroughly documented and all relevant
records, including hospital or office medical records, are obtained. Profiling data are analyzed
to identify specific unacceptable behaviors rather than just a statistical variance. Some health
plans contact the physician during this process to obtain his or her perspective, while other
health plans wait until they have completed their initial investigation before contacting
physicians.
Once all the relevant information has been gathered, the quality management staff reviews it
and, if it involves clinical issues, submits the information for review by a medical director or
other physicians. Many plans use a numerical severity score to rate a quality issue. This score
may be based on the extent of the breach of the accepted standard of care (ranging from a
minor misunderstanding to a flagrant violation of basic standards of care) or on the impact of
the breach on the member (ranging from no negative impact to loss of limb or death). Severity
scores allow the plan to track the severity of breaches for any given physician and the overall
pattern for the plan. Severity scores also help the plan determine whether immediate
suspension from the network due to potential risk to future patients should be considered.
At this point, the plan medical director may contact the physician (if he or she has not
previously been contacted) to discuss the case. Depending on the nature of the issue, this
contact may be made by mail, over the telephone, or in person. This discussion should allow
the physician to present his or her side of the story and should involve an effort to reach an
agreement about what took place and what corrective actions, if any, are needed. Whenever
possible, discussions should be kept collegial and should be approached as an opportunity to
work with the network physician to improve the quality of care for plan members. The use of
questions (as discussed earlier), rather than accusations, may help to avoid conflict. All
interactions should be thoroughly documented.
Often, health plan reviewers determine that there was no unacceptable action and the case
is closed. Sometimes, the health plan lacks adequate evidence to determine if the single
event represents a quality issue, but the plan makes note of the event and documents its
intent to track and trend any future events to see if there is a pattern of unacceptable
actions. When a true quality issue is identified, the plan must decide how to proceed with
further investigation and corrective action.
Most health plans have a quality management committee or other peer review committee that
is responsible for evaluating quality issues. Potential quality cases may be presented to the
quality management committee before contacting the physician or after the physician has
responded. The committee members evaluate the information provided and make the final
determination on whether the physician’s behavior represents a true quality issue. If
necessary, the committee may request review by an outside provider in the same specialty. If a
quality issue is identified, the committee then recommends further action, up to removal from
the network. The committee also reviews and approves any proposed corrective action plan
61
and monitors its successful completion.
Once it has been determined that a true quality of care issue exists, the plan must work
with the physician to keep similar issues from recurring. Most health plans require the
physician to develop a corrective action plan that addresses the specific breach. The
corrective action plan includes specific actions that will be taken and a timeframe for
completion of those actions. Although the health plan medical director should work with
the physician to develop an acceptable corrective action plan, preferably the physician
takes responsibility for actual plan development as the physician will have more invested in
making it work. Once the peer review committee approves the plan, the plan is
implemented, and its progress is periodically monitored. Documentation of plan
completion is presented to the quality management committee for approval.
Disciplinary Action
Despite efforts to resolve issues collegially with network physicians, there may be times when
disciplinary actions are necessary.
Example: Disciplinary action may be necessary for inappropriate behavior on the part of the
physician, refusal to cooperate with a corrective action plan, or a pattern of actions that
indicate that the physician is not willing or able to change.
Formal disciplinary actions should be undertaken only when other approaches have failed.
The documentation of formal disciplinary actions should be included in the physician’s
credentialing file so that it may be considered during the recredentialing process.
Disciplinary action can take several forms. A verbal reprimand may be the first step taken.
Reprimands should be thoroughly documented, including the action that led to the
reprimand, how it was communicated to the physician, and what the consequences will
be if there is no change. A more formal approach is a disciplinary letter documenting all
relevant information. Following either a verbal reprimand or a disciplinary letter, the
physician may be required to make an appointment with the medical director to discuss
the issue. This allows time for reflection before the actual meeting. If formal discipline is
not effective, or if it is not considered adequate by the health plan’s peer review
committee, the plan may proceed with formal sanctions (i.e. not allowing the physician to
accept new patients or referrals, or termination). Health plan sanctions are typically
based on quality issues or on the physician’s failure to comply with plan policies. The plan
may also sanction or terminate physicians based on actions taken by outside agencies
(i.e. state medical boards or CMS). External sanctions may be based on issues (i.e. fraud,
inappropriate actions with patients, or serious breaches of the accepted standards of
care). Plans must investigate such sanctions and take appropriate action.
62
Health Care Quality Improvement Act
Under the terms of the Health Care Quality Improvement Act (HCQIA), all sanctions that
restrict a physician’s ability to practice or result in termination must be reported to the
National Practitioner Data Bank (NPDB). Health plans that terminate a physician from the
network must also satisfy other regulatory requirements. One of the most important of
these is due process, as outlined by the HCQIA. The requirements for due process, which
are described in the lessons focused on contracting, apply to all terminations based on
quality issues. Many states have passed laws that require some form of due process for
terminations that are not based on quality issues as well.22
The HCQIA also includes guidelines for the use of peer review. HCQIA requires peer review
for services delivered to Medicare and Medicaid recipients enrolled in health plans. For
services delivered to commercial plan members, physician participation in the peer review
process is determined by the health plan or by state regulations. Health plans encourage
participation in peer review by supporting full disclosure and fair evaluation and by
guaranteeing protection for participants from lawsuits and protection for documents
generated during peer review from legal discovery. These guarantees are critical to the
success of the peer review process. Accordingly, both Congress and state legislatures have
enacted laws to ensure the confidentiality of medical peer review records, although the level
of protection available varies across jurisdictions and circumstances.23
Physicians may also voluntarily withdraw from practice for a variety of reasons. One common
reason for physicians to be sanctioned or to withdraw from practice is recognition by a
physician or others that the physician’s practice is impaired by alcohol or substance abuse or
by psychiatric illness. Although health plans cannot allow physicians to participate in the
network while they are being sanctioned or during an absence from practice, many plans will
consider allowing physicians to rejoin the network if they successfully participate in a
recognized assistance program for impaired physicians.
63
Assistance Programs for Impaired Physicians
Physicians are no more immune to alcoholism, chemical dependency, or psychiatric disorders

than are members of the general population. When a physician suffers from an addiction or
psychiatric disorder, his or her ability to practice medicine safely is impaired, and the
physician must be viewed as a potential threat to patients. Health plans must be prepared to
take appropriate action when they have impaired physicians among their employees or
contracted providers.
Health plans often become aware of impaired physicians through member complaints, reports
by coworkers, or observations made by health plan staff during an office site visit. When a
health plan learns of a possibly impaired physician, the plan can contact physician-specific
health programs run by the state or the state’s medical society in order to help the impaired
physician return to a healthy personal and professional life.24
Unless the physician has committed a negligent act, which affects the quality of patient care
or causes a serious incident, and which may result in disciplinary action by the state licensure
board, the impairment is not reported to the National Practitioner Data Bank. The situation
usually remains confidential under the protection of medical peer review.
Many impaired physicians successfully complete treatment programs and can maintain their
medical licenses and continue in practice. Components of an assistance program for impaired
physicians include:
• identification of the suspected impaired physician

• verification of the source of the impairment report
• evaluation and assessment of the identified physician to verify impairment
• intervention with the impaired physician
• referral of the impaired physician to a treatment program
• monitoring the treatment and rehabilitation
• post-treatment monitoring and support of the rehabilitated physician
• prevention and education services
Some health plans take a proactive approach to treating impairment and inform providers
through provider communications about impairment programs designed specifically for
physicians and other healthcare professionals. Health plans may also communicate the
appropriate process for a physician or another individual to report a suspected impaired
physician to the appropriate authorities.
64
Lesson Summary
Once a provider network is in place, the health plan must manage the network on
an ongoing basis. To ensure that it continues to offer plan members appropriate
access to medical services, the health plan must regularly monitor the environment
and its patient population, identify changes that have occurred, and adjust the size
and composition of the network to accommodate those changes.
The health plan must take steps to retain network providers by increasing their
satisfaction with the plan and increasing their involvement in plan management.
To ensure that plan members receive quality medical care, the health plan must
also manage the performance of individual network providers. By effectively
managing its provider network, the health plan can present evidence to its
purchasers and plan members that it offers a quality product.
65
Suggested Additional Reading
Natasha Parekh, MD, et al., Physician Satisfaction with Health Plans: Results From a National
Survey, The American Journal of Managed Care (July 2019).
Barry G. Saver, et al., Care that matters: Quality Measurement and Health Care, PLoS Med.
2015 Nov; 12(11).
SARAH H. SCHOLLE, SARAH L. SAMPSEL, NATALIE E.P. DAVIS, & EDWARD L. SCHOR, EXPANDING THE SCOPE AND
FLEXIBILITY OF MEASUREMENT APPROACHES, ISSUE BRIEF: QUALITY OF CHILD HEALTH CARE (NCQA, 2009).
Matthew B. Frank, et al., The Impact of a Tiered Network on Hospital Choice, Health Services
Research, vol. 50(5), October 2015; available online at
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4600365/ (accessed August 2019)
Sandee LaMotte, What Doctors Think About the Affordable Care Act, CNN (Jan. 17, 2017),
https://www.cnn.com/2017/01/13/health/obamacare-doctors-opinions-aca/index.html.
Beth Israel Deaconess and John Halamka, The HITECH Era in Retrospect, N Engl J Med 2017;
377:907-909; available at https://www.nejm.org/doi/full/10.1056/NEJMp1709851 (accessed
August 2019).
66
1
Sara R. Collilns, Herman K. Bhupal, & Michelle M. Doty, Health Insurance Coverage Eight Years After the ACA, THE
COMMONWEALTH FUND (Feb. 7, 2019), https://www.commonwealthfund.org/publications/issue-
briefs/2019/feb/health-insurance-coverage-eight-years-after-aca.
2
Vera Gruessner, Value-Based Care Payments May Reach 60% in Next Five Years, HEALTHPAYER INTELLIGENCE (June 14,
2016), https://healthpayerintelligence.com/news/value-based-care-payments-may-reach-60-in-next-five-years.
3
Natasha Parekh, MD, et al., Physician Satisfaction With Health Plans: Results From a National Survey, The
American Journal of Managed Care (July 2019).
4
SS Marinopoulos, et al, Effectiveness of continuing medical education, Evid Rep Technol Asses (Full Rep), 2007
Jan; (149): 1-69; Kamran Ahmed, et al., The effectiveness of continuing medical education for specialist
recertification, Canadian Urological Association Journal, 2013 Jul-Aug; 7(7-8): 266-272.
5
The Integrated Healthcare Association (among others) has recognized the importance of domplete, timely and
accurate encounter data to risk-adjusting provider payments to account for health differences in patient
populations enrolled in managed care. See https://www.iha.org/our-work/acceleration/encounter-data (accessed
August 2019).
6
Recruitment and Retention for Rural Health Facilities, RHIhub (May 9, 2018),
https://www.ruralhealthinfo.org/topics/rural-health-recruitment-retention.
7
See LAWRENCE RUSSELL ROBINSON, TRAUMA REHABILITATION 275 (Lippincott Williams & Wilkins, 2006).
8
Various organizations offer standards for implementing CQI programs. For example, the National Commission on
Correctional Healthcare offers such standards to ensure that a correctional facility uses a structured process to find
areas in the health care delivery system that need improvement, and that when such areas are found, staff
develop and implement strategies for improvement. See https://www.ncchc.org/spotlight-on-the-standards-24-1
9
Agency for Healthcare Research and Quality, Types of Health Care Quality Measures,
https://www.ahrq.gov/talkingquality/measures/types.html (accessed August 2019)
10
Id.
11
Id.
12
https://www.ahrq.gov/cahps/surveys-guidance/index.html
13
SARAH H. SCHOLLE, SARAH L. SAMPSEL, NATALIE E.P. DAVIS, & EDWARD L. SCHOR, EXPANDING THE SCOPE AND FLEXIBILITY OF
MEASUREMENT APPROACHES, ISSUE BRIEF: QUALITY OF CHILD HEALTH CARE (NCQA, 2009).
14
Martin Sipkoff, “Can Transparency Save Healthcare,” Managed Care Magazine, March 2004.
15
Matthew B. Frank, et al., The Impact of a Tiered Network on Hospital Choice, Health Services Research, vol. 50(5),
October 2015; available online at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4600365/ (accessed August
2019)
16
Natasha Parekh, MD, et al., Physician Satisfaction With Health Plans: Results From a National Survey, The
American Journal of Managed Care (July 2019).
17
Sandee LaMotte, What Doctors Think About the Affordable Care Act, CNN (Jan. 17, 2017),
https://www.cnn.com/2017/01/13/health/obamacare-doctors-opinions-aca/index.html.
18
Beth Israel Deaconess and John Halamka, The HITECH Era in Retrospect, N Engl J Med 2017; 377:907-909;
available at https://www.nejm.org/doi/full/10.1056/NEJMp1709851 (accessed August 2019).
DOI: 10.1056/NEJMp1709851https://www.kff.org/health-costs/poll-finding/survey-of-physicians-and-nurses/.
19
Christopher R. Carpenter & Jonathan Sherbino. How does an "opinion leader" influence my practice?, CJEM vol.
12,5 (2010): 431-4.
20
Barry G. Saver, et al., Care that matters: Quality Measurement and Health Care, PLoS Med. 2015 Nov; 12(11).
21
https://doh.sd.gov/providers/assets/Recruitment-Retention-Survey-2012.pdf
22
NY Pub. Health Law §4406-D.
23
The Illinois Medical Studies Act, 735 ILCS 5/8-2101, et seq., confers a privilege to peer review and quality control
committees to ensure that any information generated by those committees remains privileged. Over the past two
decades, however, Illinois courts have gradually eroded the once broad privilege with judicially recognized
exceptions.
67
24
Brett Andrew Johnson, Dealing with the Impaired Physician, American Family Physician, Nov. 1, 2009 ;
80(9):1007-1008; available at https://www.aafp.org/afp/2009/1101/p1007.html# (accessed August 2019)
68
AHM 530: Pharmacy Network Management
Pharmacy Network Management

Introduction
This module focuses on pharmacy networks and its related considerations.
• Describe the advantages early pharmacy networks had over direct pay and cost-
sharing pharmacy systems
• Identify the features that distinguish pharmacy networks from other health plan
networks
• Describe the impact of pharmacy benefits management in managed care
• Describe the options available for delivering pharmacy services
• Identify the methods that health plans/Pharmacy Benefit Managers (PBMs) use to
reimburse network pharmacies
• Understand the impacts of coverage expansions under the Medicare Part D

prescription drug benefit, the Medicaid prescription drug benefit, and the
Affordable Care Act (ACA) on pharmacy network management
• Understand how drug pricing and pharmacy reimbursement work under the
prescription drug benefit components of Medicare, Medicaid, and private health
plans
1
Pharmacy Networks
Pharmacy Networks
A pharmacy network is a group of pharmacies that have contracted with a health plan or a
pharmacy benefit manager (PBM) to provide covered products and services to members.
Pharmacy Benefit Managers (PBMs) administer prescription drug plans for millions of
Americans who have health insurance from a variety of sponsors including:
• commercial health plans
• self-insured employer plans
• union plans
• medicare Part D plans
• federal Employees Health Benefits Program (FEHBP)
• state government employee plans
• managed Medicaid plans
Pharmacy networks were not formally organized until around the mid-1960s. Since then,
they have become an integral part of the managed healthcare system.
History and Development of Pharmacy Networks
Before the advent of prescription drug programs in the late 1950s and early 1960s,
pharmacy benefits were delivered through open, direct contact between patients and
pharmacies. Patients needed written authorization from a licensed physician to obtain
prescription drugs, but there were no restrictions on which drugs the physician could
prescribe or which pharmacy the patient could use.
The payment was also direct. The patient either paid the pharmacy in full or shared
expenses with an insurer under a major medical insurance policy. Prescription prices were
determined by the pharmacy and were typically based on the cost of ingredients plus a
percent mark-up that reflected the pharmacy’s desired gross profit margin.
2
Early Pharmacy Networks
In the late 1950s and early 1960s, third-party prescription programs began to emerge. A
third-party prescription program is a program in which prescription expenses are paid at
least in part by someone other than the patient. Most early third-party prescription
programs were sponsored by labor unions and provided benefits to union members through
designated pharmacies. Governments, insurance companies, and employers later began
offering similar programs. Because they were designed to serve specific groups, the
networks associated with these programs were organized locally and often consisted of a
single pharmacy that served a limited geographical area. The agreements between plan
sponsors and network pharmacies were loosely structured, with little, if any,
standardization. Payment to pharmacies was typically based on usual, customary, and
reasonable (UCR) charges rather than on any structured reimbursement schedule. In the
context of pharmacy benefits, UCR charges were typically the amount pharmacies charged
cash-paying customers for prescription drugs. These charges were determined by the
pharmacy and varied widely from region to region.
The National Auto Prescription Drug Program
The first formally organized pharmacy network appeared in 1967 when the United Auto
Workers (UAW) union negotiated a pre-paid prescription drug program for the automobile
industry. The National Auto Prescription Drug Program went into effect in October of 1969.
It offered benefits to program members who used approved pharmacy networks to obtain
legend drugs (drugs that require a written prescription from a licensed physician).
Legend drugs, also called prescription drugs, are drugs that are approved by the U.S. Food
and Drug Administration (FDA) and required by federal or state law to be dispensed to the
public only when it is prescribed by a licensed physician or another licensed provider. In the
U.S., a legend drug can be a controlled substance (narcotic) or a non-narcotic drug
authorized by veterinarians, dentists, optometrists, and medical practitioners.
Example: Morphine is a legend drug that is Schedule II, a classification for narcotics and
stimulants with a high potential for abuse. Basic-level registered nurses, medical assistants,
clinical nurse specialists, nurse anesthetists, nurse midwives, emergency medical
technicians, psychologists, and social workers do not have the authority to prescribe legend
drugs.
Terms of The National Auto Prescription Drug Program
Under the terms of the program, plan members could obtain any legend drug from any
participating pharmacy by presenting a plastic ID card and making a small copayment. The
pharmacy would fill the prescription and then bill the plan directly for reimbursement. Plan
members could also obtain prescription drugs from non-network pharmacies, but they were
required to pay the pharmacy in full and file a claim with the plan for reimbursement.
Claims administrators typically charged plan members a penalty—often as much as 25% of
the cost of the prescription— for out-of-network purchases.
3
Third-Party Administrators
The networks that provided program benefits were organized regionally by the Blue
Cross and Blue Shield plans that underwrote the program. Blue Cross and Blue Shield
plans that had automobile manufacturing plants in their operating areas developed their
networks. If the health plan was not located in the same area as the manufacturing plant,
the health plan contracted with third-party administrators (TPAs) to develop networks.
A Third-Party Administrator (TPA) for employee health benefits is a person or

organization that performs administrative services (i.e. claim processing, adjudication,
record-keeping), usually on behalf of an employer that self-insures health benefits. Most
TPAs operate as an entity independent from the health insurance carrier and the insured
(employees or plan participants). Most states have a TPA licensing requirement, and
several more have similar minimum requirements.
Requirements for participation in the network were simple. Pharmacies wishing to

contract with the National Auto Prescription Drug Program, either directly or through a
claim’s processor, had to be registered in the state and agree to the reimbursement
formula specified in the agreement. Although pharmacy participation in the UAW’s
program was limited, the National Auto Prescription Drug Program served as a model for
most of the early pharmacy programs and for the health plans that appeared later.
Advantages of Early Pharmacy Networks
Pharmacy networks offered the following advantages over direct pay and cost-sharing
pharmacy systems:
• Increased patient access to pharmacy services. The cost-sharing requirements of

direct pay systems and major medical insurance policies created barriers to
patient care. Depending on the cost of drugs and the amount of deductible or
coinsurance requirements, these barriers could be substantial. Pharmacy
networks allowed plan members to purchase prescription drugs for a small
copayment. By reducing out-of-pocket costs for patients, pharmacy networks
eliminated the price barriers created by direct pay and cost-sharing systems.
• Increased administrative efficiency. Contracting with pharmacy networks allowed

TPAs to develop economies of scale and system capabilities that were not available
to individual plan sponsors. This advantage was especially important for
administrative tasks such as claims processing. TPAs found that reimbursing a
single pharmacy for prescriptions for a block of patients was more cost-effective
than reimbursing that same block of patients individually.
• Better data for monitoring and managing the benefit. Participating pharmacies
were required to maintain records of all pharmacy transactions. These records
contained information about prescription drugs, plan members, physician
prescribing patterns, and utilization that administrators could use to assess and
control plan performance.
• Standardized claims processing. Early prescription card programs took the first step
toward standardized claims processing by requiring network pharmacies to submit
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claims on designated forms. Unfortunately, each plan had its own form, and it was
necessary for pharmacies that participated in more than one network to maintain
and use separate forms for each plan. This was addressed in 1976 when the Drug Ad
Hoc Committee, which later became the National Council for Prescription Drug
Programs (NCPDP), created the Universal Claim Form for pharmacy (UCF). The
NCPDP later developed similar standards for electronic claims processing. 1
Historical Changes to Pharmacy Networks
Early pharmacy networks were typically open panels, in which any pharmacy that satisfied
registration and reimbursement requirements could participate. These networks expanded
patient access to pharmacy benefits, but they did very little to control costs. In a typical
fee-for-service (FFS) prescription program, a payer (typically a government agency or
employer) contracted with a TPA, which in turn contracted with various pharmacy
networks to provide services to plan members. This relationship is illustrated in Figure A.
Fee-for-service (FFS) is a payment model where healthcare services are unbundled and
paid for separately.
Figure A: Traditional Fee-for-Service Prescription Indemnity Program
TPAs could exert some control over participating pharmacies and plan members by:
• establishing dispensing fees
• encouraging the use of generic drugs
• requiring patient cost-sharing
Administrators, however, had no control over drug costs or prescriber habits, and cost
increases were typically passed on to payers in the form of increased insurance premiums.
In the early years of pharmacy benefit programs, cost increases were often dramatic.
Applying managed care strategies to pharmacy network development offered plans a way
of controlling those costs.
5
Open and Closed Pharmacy Networks
A first step in the cost management process was to establish closed pharmacy networks
rather than open pharmacy networks.
Open pharmacy networks are, as the name suggests, open to virtually all
pharmacies. Closed pharmacy networks, by contrast, limit participation to a
specified group of pharmacies. By directing patients to specified pharmacies, closed
networks offered significant cost savings and greater control over pharmacy benefits
than was possible with open networks. Closed networks kept costs down for payers
by reducing contracting and administrative costs. Closed networks also gave TPAs
greater leverage in negotiating with pharmacies, by allowing them to trade business
volume for price discounts. They also gave administrators greater control over
pharmacy performance and made implementing additional cost-management
programs easier.
Pharmacy networks have continued to evolve in structure over time, as the

application of managed care principles has become more prevalent and changes to
the legal/regulatory landscape have occurred.
Prescription Drug Benefits and Managed Care

Modern Prescription Drug Benefits and Managed Care
Managed care refers to an organized health care delivery system designed to improve the
quality and accessibility of health care, while simultaneously being cognizant of costs.
Participants in managed care in the prescription drug benefits context include:
• health plan members
• healthcare professionals (prescribers, pharmacists, nurses, and others)
• pharmacies
• plan sponsors/payers (i.e. health plans, employers, government organizations, and

others)
• pharmacy Benefit Managers (PBMs)
• disease State Management (DSM) entities
• consultants
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Disease State Management (DSM)
Disease State Management (DSM) is an integrated, systems approach to healthcare

designed to influence the progression of disease within selected patient populations. A
detailed analysis of a patient population’s medical needs and the resources it consumes is
performed to design, implement and direct the delivery of care. Conditions that lend
themselves to DSM generally are chronic conditions that require drug rather than surgical
intervention, where there is general agreement on how to manage a condition but
practices among individual doctors may vary. Pharmacists have an important role to play
in DSM, including by issuing clear treatment guidelines and assuring that the most effective
drugs are used.
Example: One study examined the impact of following guidelines for treating community-
acquired pneumonia in 2,323 patients at 61 hospitals. Poorer patient outcomes were
found when the initial antibiotic prescribed or when the first dose of antibiotic was given
more than eight hours after admission. 2
Managed Care Strategies

Managed Care Strategies - Benefit Design
Application of managed care principles in delivering prescription drug benefits has

numerous goals, including disease prevention, focus on wellness/improved quality of life
for patients, improved outcomes, improved quality and accessibility of health care and
drug therapy, as well as controlling and containing costs.
A key driver of cost containment in this area is benefit design. Some of the more common
aspects of benefit design applicable in this context include:
• cost sharing
• formulary management
• prescribing generic drugs (where available)
• therapeutic substitution
• use of mail order programs
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Cost Sharing
Cost sharing strategies may vary by plan, but generally include the following:
• co-payments: a fixed charge paid by health plan members for each medication
purchased
• co-insurance: an established percentage of the allowed drug cost that is the plan
member’s responsibility
• tiers: structured cost sharing based on the type of drug dispensed
Example: A health plan might implement a two-tiered structure, with different co-payment
charges for drugs on the first tier (generic) and the second tier (brand). A three-tiered
structure might provide for different co-payment charges for drugs on the first tier
(generic), second tier (preferred brand), and third tier (non-preferred brand).
Formulary Management
A health plan formulary is the list of approved medications available through the plan,
designed to encourage use of safe, efficacious, and cost-effective agents.
In most health plans, the formulary is developed by a pharmacy and therapeutics (P&T)
committee, composed of pharmacists and physicians from various medical specialties. The
committee reviews new and existing medications and selects drugs to be included in the
health plan's formulary based on safety and how well they work.
A plan’s formulary may be constructed as open, meaning that most medications are
covered (although a different cost share amount may be assigned, such as for a preferred
brand vs. a non-preferred brand). It may also be constructed as closed, meaning that
certain medications or classes of medication may be excluded from coverage.
Generic Drugs
Another strategy to consider as part of benefit design is mandatory use of generic drugs -
where available. Where this strategy is employed, a generic drug must be dispensed for
the plan to cover payment unless other factors apply.
State laws and Medicaid insurance plans generally mandate generic substitution when there
is a US Food and Drug Administration (FDA)-approved generic, unless the physician
specifically checks the “dispense as written” box.
Example: If a physician prescribes a brand-name statin drug used to treat high cholesterol
and triglyceride levels, pharmacists generally can automatically substitute the FDA-approved
generic version.
Therapeutic Substitution
A related benefit design consideration involves use of therapeutic substitution. This occurs
when the medication prescribed to a plan member is switched by a pharmacist to a drug
with different active ingredients. Therapeutic substitution differs from when a brand name
drug is switched to a generic.
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Generic Substitution
Generic substitution means a brand name drug is switched to a generic with the same active
ingredients and is approved by the United States Food and Drug Administration (FDA) as an
equivalent drug, often at a substantial cost savings. For therapeutic substitution, medicines
in the same class of drugs, intended to treat the same condition, may have different active
ingredients and work in different ways. This means that they can have different side effects,
dosages, and potential risks for the patient.
Generic substitution can become more complicated when a prescription names a brand-
name drug for which there is no FDA-approved generic, but an approved generic version of
another drug within the same class exists. State laws vary on whether pharmacists can
substitute within therapeutic classes but generally require specific protocols and explicit
requests for physician approval.
Mail Order Programs
Another strategy to consider in the benefit design phase involves use of mail-order delivery
of drugs. This is a program that either requires or strongly encourages, maintenance drugs
to be filled through a mail-order pharmacy, often in exchange for a greater plan discount or
other financial incentive to plan members.
Maintenance drugs are medications prescribed for chronic, long‐term conditions that are
taken on a regular, recurring basis. Examples of chronic conditions that may require
maintenance drugs include high blood pressure, high cholesterol, and diabetes.
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Utilization Management
Utilization management (UM) is another critical component of managed care design.

When it comes to pharmaceuticals, UM might involve strategies such as prior
authorization, step-therapy, and or quantity limits.
Prior authorization is the process of requiring written approval from the health plan for
certain services or products prior to delivery. This means that before the plan will cover a
particular drug, a member’s doctor or prescriber must first demonstrate that the drug is
medically necessary for the member’s treatment and or that the member has met the prior
authorization requirements for the drug. Plans may require prior authorization to be sure
that drugs are prescribed and used correctly. This process is most often accomplished
through the submission of a designated form.
Step therapy is a type of prior authorization that involves utilizing the most cost-
effective drug therapy for a medical condition before progressing or “stepping up” to
more costly or risky therapies. This might mean trying a similar, more affordable generic
drug instead of a more expensive, brand-name medication. If a member has already
tried the more affordable drug and found it ineffective, or if the prescriber believes that
it is medically necessary for the member to be on a more expensive or different drug, he
or she can contact the plan to request an exception (which, if approved, will result in
coverage for the more expensive drug).
Example: Larry Levine is a member of Novellus Health Plan. He has been suffering from
severe allergy problems. In his case, step therapy might involve first trying an over-the-
counter medication to control his symptoms. If that does not work, Larry might move to a
Tier 1 medicine covered by the Plan. If that approach likewise is unsuccessful, Plan
administrators would review whether Larry has met step therapy requirements before
helping to pay for a Tier 2 or Tier 3 medication.
For safety and cost reasons, health plans also may set quantity limits on the number of
drugs they cover over a certain period.
Example: Larry Levine, a member of Novellus Health Plan, has been prescribed a medication to take
two tablets per day, or 60 tablets per month. Because Novellus has a quantity limit of 30 tablets per
month for that medication, Larry’s doctor or prescriber will need to work with the Plan to obtain
authorization for a higher quantity.
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Health Plan Pharmacy Networks

Key Features and Differences of Health Plan Pharmacy Networks
In terms of structure and operation, pharmacy networks are like other provider networks.
Like other provider networks, a pharmacy network must:
• be large enough to provide easy access to plan members within its geographical area
of operation
• be small enough to be manageable and to offer an attractive volume of plan

members to network providers
• provide plan members with comprehensive, quality services
• achieve maximum health outcomes for plan members at the lowest cost
Pharmacy networks differ from other provider networks, however, in certain key respects:
• pharmacy networks are designed primarily to deliver products with the expectation
that quality services are also delivered
• reimbursement methods vary for pharmacy networks compared to other provider

networks
• information management requirements/systems also vary in the development and

maintenance of health plan pharmacy networks
Difference #1: Products and Services vs. Services
As noted, one key difference between pharmacy networks and other provider networks is
that pharmacy panels are designed primarily to deliver tangible healthcare products to
health plan members, but they also deliver services. Unlike surgical procedures or diagnostic
techniques, medications have a concrete market value. In the minds of some payers,
prescription drugs are like commodities and should be purchased at the lowest possible
price and distributed through the lowest-cost provider.
This cost-conscious attitude has given health plans some economic leverage when
negotiating contracts with drug manufacturers in an environment of spiraling drug prices.
Health plans have no direct control over pharmaceutical products, but they do have control
over the market for those products – namely, health plan enrollees. Health plans have been
able to offer access to a large patient base in exchange for price discounts and rebates from
manufacturers. Health plans also have leverage over pharmacies as distributors of
pharmaceutical products. To maintain their customer bases, pharmacies must be willing to
accept the terms of network contracts offered by health plans.
Other types of prescription drug distributors, including chain pharmacies, mail-order drug
services, pharmacies located at employers’ workplaces, and online pharmacies, also
compete for the health plan patient base. In some locations, physicians dispense their own
prescription drugs, without the use of pharmacies.
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To compete effectively against these lower cost distributors, pharmacies must now do
more than simply sell prescription drugs. They must also provide services.
Pharmacies provide services by working with physicians, nurses, and other healthcare
providers to incorporate medications into a patient’s healthcare plan and take
responsibility for the outcomes of drug therapy. This process, which is referred to as
pharmaceutical care, is designed to achieve both therapeutic outcomes and quality of
life outcomes.
Therapeutic Outcomes
Therapeutic outcomes are measures of a drug’s effectiveness in treating disease and are
achieved by incorporating medications into patient care. Therapeutic outcomes include:
• curing the patient’s disease
• preventing or slowing the progression of disease
• eliminating or reducing the patient’s symptoms
• preventing a disease or symptom
• diagnosing a disease
• avoiding drug-related problems
Quality of Life Outcomes
Quality of life outcomes involve improving the patient’s physical, social, and emotional
well-being as observed by both the healthcare team and the patient. Improvement in
quality of life represents the outcome of the care process and indicates the success of
interventions.
Difference #2: Pharmacy Reimbursement Methods
Health plans cover pharmaceuticals under the medical benefit (i.e. drugs administered
in a medical office, clinic setting, or home health setting) and the pharmacy benefit (i.e.
drugs dispensed by a retail, mail order, or specialty pharmacy). Drugs covered under
either component of a health plan typically have differing payment methods and use
different pricing benchmarks.
Commonly utilized drug payment benchmarks include:3
• Average Wholesale Price (AWP): This represents the average price that wholesale
suppliers or manufacturers charge pharmacies for drugs. AWP is related to wholesale
acquisition cost (WAC), which is an estimate of the manufacturer's list price for a drug
to wholesalers or direct purchasers. Historically, the relationship of AWP to WAC has
been most commonly (though not always) characterized by one of the following
equations: AWP = 1.20 x WAC, or AWP = 1.25 x WAC for branded pharmaceuticals. WAC
does not reflect actual wholesale acquisition cost, however, because it does not include
discounts and price concessions offered by manufacturers.
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• Average Sales Price (ASP): As a result of the 2003 Medicare Prescription Drug,
Improvement, and Modernization Act (MMA), ASP replaced AWP as the basis for
payment for most drugs covered under Medicare’s medical benefit – Medicare Part B –
as of January 1, 2005. Unlike AWP, ASP is based on manufacturer-reported actual selling
price data and includes most rebates, volume discounts, and other price concessions
offered by manufacturers.
• Average Manufacturer Price (AMP): Congress created AMP as part of the Omnibus
Budget Reconciliation Act (OBRA 1990) to calculate rebates to be paid by manufacturers
to states for drugs dispensed to their Medicaid beneficiaries. AMP was defined as the
price available to retailers and reflected discounts and other price concessions afforded
to those entities.
• Federal Upper Limit (FUL): The FUL, is the maximum amount of pharmacy
reimbursement for product costs for certain generic and multiple-source drugs that the
federal government will recognize in calculating federal matching funds for payment to
state Medicaid programs. In other words, Federal Medicaid matching funds to states
are limited to payments that do not exceed the FUL in the aggregate for multiple-source
drugs, plus a dispensing fee set by each state. A multiple-source drug is a drug that is
available from a brand name manufacturer and several generic manufacturers. The FUL
formula was revised as part of the Affordable Care Act (ACA). The FUL list is created and
maintained by the Centers for Medicare and Medicaid Services (CMS) for use by states in
their Medicaid Pharmacy programs, but it is also publicly available for use by any entity.4
• Maximum Allowable Cost (MAC): MAC is typically a reimbursement per individual

multiple-source drug, strength, and dosage form. “MAC List” refers to a payer or PBM-
generated list of products that includes the upper limit or maximum amount that a plan
will pay for generic drugs and brand name drugs that have generic versions available (i.e.
multi-source brands). While defined in FUL for Medicaid, there is no standard private
sector definition, methodology, or market application for MAC.
• Wholesale Acquisition Cost (WAC): WAC is an estimate of the manufacturer’s list price
for a drug to wholesalers or other direct purchasers, not including discounts or rebates.
Pharmacy Reimbursement
As a general matter, pharmacy reimbursement depends on what medications are dispensed

and what type of health plan is involved:
• Private payers
• Medicare
• Medicaid
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Private Payers
Private health plans and PBMs negotiate drug payment rates and dispensing fees with
pharmacy providers. Historically, drug payment rates have been based on the average
wholesale price (AWP) or wholesale acquisition cost (WAC) and include maximum allowable
cost (MAC) pricing for most generic drugs. Dispensing fees are negotiated as well, typically
based on a percentage off the usual dispensing fee charge (i.e. a 40% discount).
The standard pharmacy reimbursement formula for private payers is as follows:
• Negotiated rate: this consists of the drug ingredient cost, dispensing fee, and sales
tax
o Ingredient cost: this is based on the AWP or WAC, discounted by a specified

percentage, or MAC set by the plan sponsors
o Dispensing fees: this compensates the pharmacy for processing the

prescription and covers expenses such as overhead, stocking, and storing
medications
Service Costs
The dispensing fee component of the reimbursement formula consists of the pharmacy’s
service costs. Service costs are those costs associated with dispensing prescription drugs,
exclusive of ingredient costs and profit, and include operating expenses assigned specifically
to the prescription department.
Service costs consist of two components: costs for services associated with dispensing
prescription drugs and costs for cognitive services. Dispensing services include making
generic substitutions, switching prescriptions to preferred drugs, or providing patient
monitoring and education. These services are typically specified by the health plan.
Cognitive services, or professional services, are services identified by the pharmacist as
being medically necessary for the patient and include:
• counseling patients about prescriptions and drug therapy
• reviewing drug profiles to prevent or monitor adverse drug interactions
• implementing quality improvement programs
• documenting pharmaceutical care in patient records
• monitoring program compliance.
Fees can be uniform—for example, the same specified amount added to each prescription—
or variable, based on specified criteria such as brand versus generic or the cost of the
medication.
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Rebate and Discount Programs
Pharmacies may also receive payment through rebates and discount programs.
• Manufacturers negotiate with payers (Medicaid, Medicare, private health plans, and or
PBMs) to pay rebates after a medication has been dispensed
• Patient discounts or coupons for medications are sometimes provided for high dollar or
specialty medications
Medicare
On January 1, 2006, following passage of the Medicare Modernization Act (MMA), Medicare
began to pay for outpatient drugs dispensed at the pharmacy under Part D. Part D benefits
are provided through standalone prescription drug plans (PDPs) or Medicare Advantage
prescription drug plans that are integrated with a medical plan (MA-PDs). These plans
typically are offered by PBMs and commercial health plans.
Subject to legislated mandates and CMS guidelines, each PDP and MA-PD sets its own
premiums, benefit structures, drug formularies, pharmacy networks, and terms of payment.
Thus, unlike Medicare Parts A, B, and C, where a standard payment formula typically exists,
drug payment to pharmacies and member cost sharing varies by individual plan under Part
D.
PDPs and MA-PDs may negotiate discounts and or rebates with drug manufacturers.
Medicaid
Every state Medicaid program includes an outpatient prescription drug benefit or pharmacy
benefit. Under fee-for-service Medicaid, most states pay pharmacies directly for drugs
dispensed to Medicaid beneficiaries, using a rate based on AWP or WAC for brand drugs and
MAC (based on federal and state upper limits) for multiple-source brand and generic drugs,
while several states have implemented AAC-based reimbursement.
If the beneficiary is enrolled in a Medicaid managed care plan, the state may pay the plan to
cover pharmacy benefits for beneficiaries or may “carve out” pharmacy benefits and pay for
it directly under fee-for-service administered by the state. Under managed Medicaid
without the carve out, each Medicaid-only managed care organization (MCO) negotiates
with drug manufacturers for rebates and discounts and manages its drug formulary and
network. Under the carve out, the state pays pharmacies for prescription drugs directly and
manages a statewide formulary that may include a preferred drug list (PDL) and
supplemental rebates as well as rebates mandated by federal statute. Beneficiaries eligible
for both Medicaid and Medicare (“dual eligibles”) receive prescription drug benefits through
the Medicare Part D prescription drug benefit.
Every state Medicaid program, either directly or through MCOs, also pays for drugs utilized
under the medical benefit (i.e. in a doctor’s office or clinic). Drugs covered under the
medical benefit are typically paid for differently than drugs covered under the pharmacy
benefit, using formulas that vary by state that are based on AWP, WAC, or ASP.
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Difference #3: Information Management Requirements/Systems
Pharmacies can obtain information about benefits, copayments, and member eligibility
from a health plan’s database, link it with their drug and utilization information, and
then send a completed claim to the health plan for reimbursement.
Point-of-service systems provide comprehensive online communication with health

plans’ and other providers’ databases and allow pharmacies to manage their
prescription departments and their patients’ needs.
Point-of-service capabilities are possible, in large part, because of the standardized formats
provided by the National Council of Prescription Drug Programs (NCPDP). The NCPDP’s
Telecommunication Standard Format provides standards needed for the exchange of
electronic prescription drug claims. Other standards, such as those for communicating
online drug use evaluation information, facilitate the exchange of pharmaceutical care
information, including documentation of drug problems, pharmaceutical care interventions,
and outcomes.
Benefits of Point-of-Service Systems
Point-of-service systems allow pharmacies to perform a variety of tasks quickly, accurately,

and economically. Point-of-service systems verify patient eligibility for prescription drug
coverage and determine copayment, deductible, and coinsurance requirements, point-of-
service systems allow pharmacies to:
• determine formulary compliance
• determine drug therapy restrictions
• determine preauthorization requirements
• conduct prospective drug utilization review
• submit and process prescription drug claim information
• adjudicate claims in “real time”1
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Benefits of Filing Prescriptions Online

Point-of-service technology also made it possible for physicians to forgo traditional paper
“scripts” in favor of sending prescriptions electronically to pharmacies. Electronic
prescriptions save both time and money. Prescription software can check prescribed
medications for generic equivalents and formulary compliance, issue alerts for
noncompliance, offer therapeutic alternatives, and generate drug-change requests. It can
even alert the physician when patients fail to pick up their prescriptions. Filing prescriptions
online also:
• eliminates the danger of forged prescriptions
• reduces hospital admissions that result from pharmacists misreading doctors’

handwriting
• provides accurate records of patient medications
• allows physicians to check prescribed medications against patients’ medical

histories to prevent allergic reactions or possible drug interactions
Electronic transmission of prescriptions, however, may have drawbacks. Some pharmacists

contend that electronic prescriptions represent unnecessary duplication of effort because
pharmacists are already performing the tasks that are included in prescription software
programs—either because of regulatory requirements or as part of their pharmaceutical
care efforts.
Pharmacy Network Structure & Delivery of Pharmacy Services

Pharmacy Network Structure
The structure of pharmacy networks is tied closely to health plan requirements, such as
access (the distance members must travel to reach of network pharmacy) and density
(the number of pharmacies available to a member within the access requirement).
Pharmacy networks can be open, which means they include all pharmacies within a
geographical area, or closed, which means the plan’s prescription drug benefit is only
available at designated pharmacies. In the former (open) pharmacy context, plan
members’ co-payments and out-of-pocket costs are the same regardless of which
pharmacy in the network dispenses the prescription.
A key component of most pharmacy networks is retail pharmacies, a category that

includes both chain retail pharmacy outlets (i.e. CVS, Rite Aid, and Walgreens) and
independent retail pharmacies. An advantage of including retail pharmacies in the
network is that there are often multiple outlets available to provide services near plan
members.
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A health plan’s pharmacy network also may include mail-order pharmacies, which may
be accessible online. Obtaining prescriptions through the mail may offer members a
convenient and cost-effective way to obtain drugs they take regularly and need to take
long term (i.e. maintenance drugs). The ability to obtain a larger quantity of drugs, often
possible through mail-order pharmacies, than might otherwise be available for
dispensing through a retail pharmacy may reduce costs/co-payments for plan members.
A health plan may also elect to include specialty pharmacies as part of the network.
Specialty pharmacies focus on high cost, high touch medication therapy for patients with
complex disease states. Medications in specialty pharmacies range from oral to cutting
edge injectable and biologic products. The disease states treated range from cancer,
multiple sclerosis and rheumatoid arthritis to rare genetic conditions.5
Narrow Pharmacy Networks
A type of pharmacy network designation that has emerged in recent years is the narrow
pharmacy network. With narrow networks, plan members receive financial incentives
to use particular pharmacies that offer lower costs and or give health plans more
control. Pharmacies that participate in narrow networks may accept reduced
reimbursement rates in exchange for boosting store traffic. There are different types of
narrow networks, including:
• preferred pharmacy network(s)
• specialty pharmacy network(s)
• limited pharmacy network(s)
• performance-based pharmacy network(s)
Preferred Pharmacy Network
In this type of structure, plan members can choose any pharmacy within the plan’s
network but pay a lower out-of-pocket cost when filling prescriptions from preferred
pharmacies and a higher out-of-pocket cost when filling prescriptions from a non-
preferred pharmacy.
Example: Louise Jordan’s health plan includes preferred pharmacies within the network.
If Louise fills her prescription at a preferred pharmacy, she will not have any copay
requirement. If she fills her prescription at a non-preferred pharmacy within the plan’s
network, she will have a $5 copay.
Specialty Pharmacy Network6
A specialty pharmacy network is a form of a preferred pharmacy network. This model is

used to deliver high-quality, accessible pharmacy services. By contracting with select
pharmacies, health plans, PBMs, and other payers can ensure consistent care
management and access to specialty medications while promoting affordability in the
specialty drug marketplace. For a specialty pharmacy to be included in a specialty
pharmacy network, the pharmacy must agree to meet criteria to ensure that patients
safely and appropriately use their medications, that payer benefit designs are
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supported, and that desired clinical outcomes are achieved.
Specialty drugs are high-cost prescription medications used in the treatment of cancer
and chronic diseases such as rheumatoid arthritis, and multiple sclerosis. Medicare
defines specialty tier drugs as those costing more than $670 per month (2019). Specialty
drug coverage depends on where an individual receives the drug. If it self-administered
at home either by taking a pill or self-injecting, it is usually covered through the
individual’s prescription drug plan. If it is administered at a doctor’s office or outpatient
clinic, the costs are more likely to be covered through the medical benefits portion of
the individual’s coverage.
The cost of specialty drugs has received increased scrutiny as prices have risen and these
drugs, despite being taken by a small number of people, represent a substantial portion
of Medicare Part D expenditures. Costs have risen from an estimated 6-7 percent in
2010 to over 20 percent in 2019. Moreover, despite the many benefits offered by
Medicare Part D, many enrollees still face high out-of-pocket costs when taking these
medications. 7
Limited Pharmacy Network
In this model, plan members may only use the specific pharmacies included in the plan’s
network. This model gives payers the greatest amount of economic control, as they
typically will include only pharmacies with the lowest costs and highest service levels.
Performance-Based Pharmacy Network
These networks include incentives for pharmacies that demonstrate improvement in

medication adherence for certain chronic conditions and increased engagement with
plan members. They aim to strike a balance between cost and safety and can
incorporate pay-for-performance models, shared savings models, and/or risk-bearing
models based on patient outcomes.
Customized networks are networks designed to meet the needs of a specific population.
Most often, these networks take the form of company pharmacies that are owned by
large employers and operated at workplace sites. Because of the large number of
employees, company pharmacies can negotiate favorable price discounts from
manufacturers. Company pharmacies provide convenient access for employees. However,
the use of company pharmacies is typically limited to those companies whose employee
base is large enough to warrant the expense of setting up the network and whose
facilities are large enough to accommodate in-house operations. According to industry
guidelines, a company pharmacy requires 4,000 to 6,000 employees, a daily volume of at
least 150 prescriptions, and a minimum of 500 square feet of operating space. 23
Integrated pharmacy networks include community pharmacies combined with mail-

order pharmacies. In this type of network structure, community pharmacies offer access
to acute medications and focus on the initiation of maintenance medications until
patients become stable on a dosage regimen. Mail-order pharmacies are needed to
realize maximum savings on maintenance medications, to reduce plan members’ drug
costs.
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Criteria for Selecting Pharmacy Providers
Health plans follow the same guidelines when establishing a pharmacy network that they
follow when designing the pharmacy benefit. Their purpose is to create a network that
promotes quality, accessibility, efficiency, and member satisfaction. Using these
requirements as a base, health plans can develop specific criteria for network participation,
including requirements for providers to:
• be properly licensed and satisfy state-mandated requirements related to space,

equipment, reference books, and appropriately trained and credentialed personnel
• conform to dispensing standards for prescriptions and controlled substances
• adhere to auditing and reporting procedures
• establish procedures for handling customer complaints
• contribute to patient drug therapy through interventions such as DUR and disease
management
• provide patient counseling and education
• establish quality management programs
• provide service at a location and time that is convenient to plan members
• maintain adequate inventory for appropriate levels of drug availability
• have adequate online capabilities to process claims in real time
• be able to access and contribute to the health plan’s plan, patient, and provider
database
• satisfy customers’ expectations regarding technical competence and adequacy of

explanations.
20
Managed Care Implementation and Pharmacy Networks

The Role of Pharmacy Benefit Managers
It is impossible to discuss health care delivery generally, and delivery of prescription drug
benefits specifically, without focusing on the key role of pharmacy benefit managers
(PBMs). Historically, PBMs acted as “middlemen” by processing prescription drug claims—
for a small fee per claim—for insurance companies and plan sponsors (i.e. private
employers).8 Pharmacy benefits management is an outgrowth of the third-party
administration of prescription drug programs but as we will see PBMs now do so much
more.
Unlike TPAs, which focus on providing administrative services such as contract

negotiations and claims processing, pharmacy benefit managers (PBMs) attempt to
control costs by intervening in the way prescription drugs are priced, prescribed,
dispensed, and used. To be included in the network, a pharmacy must ensure that
patients use their medication appropriately and that clinical outcomes are achieved.9
Pharmacy Benefit Managers Expansion
The role of PBMs in healthcare delivery has increased dramatically in recent years due to
several factors, including coverage expansions under the Medicare Part D prescription
drug benefit, the Medicaid prescription drug benefit, and the Affordable Care Act (ACA).
Major increases in drug spending have motivated commercial health plans and self-insured
employers to outsource the management of their spending on outpatient prescription
drugs, in whole or in part.10
Medicare Part D
Medicare Part D prescription drug benefit, also called the Medicare prescription drug
benefit, is an optional US federal government program to help Medicare beneficiaries pay
for self-administered prescription drugs through prescription drug insurance premiums.
Medicare Part D was created as part of the Medicare Modernization Act of 2003 and went
into effect on January 1, 2006.
For more information about the Medicare program and Medicare Part D please review
Appendix A in the Module downloads.
Medicaid
Medicaid is a joint federal-state program that provides health benefits, including pharmacy
benefits, to millions of Americans with low income. States typically use two types of
payment systems to provide those benefits: fee-for-service and managed care. Under the
fee-for-service system, states reimburse health care providers for each of the services they
deliver to beneficiaries. By contrast, under Medicaid managed care, states pay a fixed per
capita fee, or capitation payment, to private health insurance plans or to provider groups,
known as managed care organizations (MCOs), that provide services to enrollees.
For more information about the Medicare program and Medicare Part D please review
Appendix A in the Module downloads.
21
Affordable Care Act
The ACA was enacted in March 2010, with three primary goals:
• Make affordable health insurance available to more people. The law provides
consumers with subsidies that lower costs for households with incomes between
100% and 400% of the federal poverty level.
• Expand the Medicaid program to cover all adults with income below 138% of the
federal poverty level. (As of 2019, not all states have expanded their Medicaid
programs.)
• Support innovative medical care delivery methods designed to lower the costs of
health care generally.11
The ACA focuses on five areas of pharmacy involvement: delivery systems reform, payment
reform and quality, comparative effectiveness research, workforce issues, and the 340B
Drug Pricing Program.12
Created in 1992, the 340B Drug Pricing Program (sometimes referred to as the Drug
Discount Program) is a US federal government program that requires drug manufacturers to
provide outpatient drugs to eligible health care organizations and covered entities at
significantly reduced prices.
Today, PBMs have leveraged their position to impact almost every aspect of the
prescription drug marketplace. They help to develop formularies, contract with
pharmacies, negotiating discounts and rebates with drug manufacturers, and process and
pay prescription drug claims. PBMs strive to maintain or reduce health plan pharmacy
expenditures while concurrently trying to improve health outcomes. PBMs operate within
integrated healthcare systems (i.e. Kaiser Permanente or Veterans Health Administration);
as part of retail pharmacies (CVS, Rite Aid, and Walgreens), and as part of health insurers. 13
As of this writing, the top three PBMs in the country currently manage drug benefits for
approximately 95% of the US population. 14
22
How Are PBMs Compensated?
PBMs are compensated through administrative fees negotiated with plans, as well as
through rebates and the so-called “pharmacy spread.”
Administrative fees involve PBM charges to plan sponsors and manufacturers. In the case
of health plans, these fees/charges are negotiated and included in the PBM contract.
A rebate is a discount on a medication that a drug manufacturer provides to a PBM in

return for the PBM covering the manufacturer’s drug product. Since PBMs are often
involved in making the formularies that the plan sponsor will cover, they can negotiate
better prices for certain drugs (often branded) when there are other, less expensive
equivalent drugs that might be used. A portion of these rebates are shared with the plan
sponsor. These rebates and the lack of transparency around them and other aspects of the
pricing process have become matters of controversy in recent years.
The pharmacy spread is a PBM practice where the network pharmacy is reimbursed one
price, and the plan sponsor is charged a higher price for the same drug, with the PBM
keeping the difference (also known as a “clawback”).
Recent Controversies
PBMs have come under criticism from policymakers about rebates. Simply put, critics say
that rebates received by PBMs have failed to be passed through to individual consumers.
They have been cited by critics as a reason for rising drug costs and lack of transparency in
the pricing of prescription drugs. Defenders of PBMs have pointed to their role in achieving
lower drug costs through their ability to negotiate discounts from manufacturers – who
have in some cases arbitrarily raised prices by thousands of dollars. 15
23
Drug Distribution Model
Most drug manufacturers ship drugs directly to wholesalers or distributors, who then
distribute the drugs to end customers (i.e. retail pharmacies, hospitals, physician’s offices
or clinics). Manufacturers enter into various forms of contracting arrangements, including
discounts and rebates, with all the entities within the drug supply chain.
Health plans and PBMs also negotiate with manufacturers for discounts and rebates,
principally for single-source branded drugs in specific therapeutic categories purchased for
plan enrollees, based on volume, market share, and formulary placement.
Pharmacies receive payment from the health plan or PBM for the drugs dispensed to the
plan members based on a reimbursement formula agreed to by the payer/PBM and
pharmacy. Physicians and other providers also negotiate with plans for payments for drugs
administered directly to plan members.
At the pharmacy or other points of sale locations, beneficiaries with health insurance that
includes prescription benefit coverage will typically pay a cost-share (i.e. copayment or
coinsurance) to the pharmacy for the drug, in accordance with the terms of the health
plan’s benefit design. If the plan is administered by a PBM, the PBM bills the member’s
health plan or another payer an amount based on the payment formula stipulated in its
provider service agreement, minus the beneficiary cost-share amount collected by the
pharmacy.
Why Select a PBM?
As discussed, the trend in recent years has been to carve out pharmacy benefits
management (in whole or in part) to specialized PBM companies. Several factors have
contributed to the increased use of PBMs. The three most important of these are:
• cost advantages
• access advantages
• quality advantages
24
Cost Advantages
Cost Advantages
Claims processing is a major part of PBM operations. It is not unusual for PBMs to process
as many as 1 million claims transactions per day. This high volume of claims processing
gives PBMs an economy of scale—and therefore cost savings—that are not available to
individual health plans. While claims processing may be the most obvious cost advantage,
Health plans that work in tandem with PBMs help to control costs in several other ways
including their ability to exercise influence over:
• manufacturers
• prescribers
• pharmacies
Influence over Manufacturers
One of the most pressing problems facing health plans has been the rising cost of
prescription drugs. One way, health plans, and PBMs address the problem of rising costs is
by establishing and managing formularies.
Drugs and treatment protocols included in the formulary are considered preferred therapy
for a given managed population. A health plan with an open formulary covers drugs that are
on the preferred list as well as drugs that are not on the preferred list. A health plan with a
closed formulary covers only drugs that are on the preferred list. Health plans continually
update their formularies to ensure that the medications included represent the current
clinical judgement of providers and experts in the diagnosis and treatment of disease.
Most formularies encourage the use of generic and therapeutic substitutions to ensure that
patients receive is cost-effective as well as safe and appropriate. In some formularies, such
substitutions are required. In order to compete against lower-cost producers for a place on
the formulary, drug manufacturers have also lowered the price of brand name drugs.
Formularies also offer other benefits. For example, managed drug therapy contributes to
better disease management, fewer physician visits, fewer laboratory tests, fewer emergency
room visits, and less complicated, shorter hospital care.
25
Influence over Prescribers
In most cases, physicians are accountable for the coordination of patients’ healthcare
services, including pharmacy services. Much of this accountability is established through
case management and utilization management requirements and reinforced by financial
incentives. PBMs exert additional influence over physicians by using the following tools:
• Drug utilization review
• Authorization requirements
• Second opinions
• Education requirements
• Peer review
• Penalties for violation of prescription policies
Influence over Pharmacies
By developing and managing preferred networks, health plans and PBMs exert direct
control over community-based pharmacies. PBMs determine which products and services
pharmacies deliver to plan members and how they will be reimbursed. The more
restricted the network becomes, the more control the health plan or PBM has. For
example, contracting with a single chain of pharmacies rather than with individual
pharmacies reduces the PBM’s contracting, claims to process, and administrative costs
and increases its ability to monitor and manage pharmacy performance. The overall high-
volume and low-cost operations of chain pharmacies may also make them more willing
than independent pharmacies to accept lower reimbursement or to share operating
costs.16
Non-Community Based Distribution Systems
Non-community-based distribution systems such as mail-order services also increase

competitive pressures on traditional pharmacies. High-volume and low-cost delivery
capabilities allow mail-order companies to offer health plans and PBMs deep discounts on
prescription drug prices. Mail-order and online distribution have also proved to be cost-
effective for long-term therapy associated with chronic conditions and for distribution to
patients, such as retirees and disabled patients, who have difficulty traveling to pharmacies
to have prescriptions filled. Faced with the prospect of losing clientele to these alternative
providers, pharmacies are accepting the reimbursement offered by health plans and PBMs
and emphasizing the value of services they provide.
Independent pharmacies can deflect some of this competitive pressure by joining forces to
create a pharmacy service administration organization. A pharmacy service administration
organization (PSAO) is an organized network of independent pharmacies created to market
competitive drug programs to health plans. A PSAO gives its members volume-buying power
and helps with claims processing and reimbursement
26
Access Advantages
PBMs offer access advantages on two fronts: access to pharmacies and access to
pharmaceutical products and services. A health plan contracting directly with pharmacies
represents a single patient base. While that base may be large, it is only part of the total
market in any given geographical area. PBMs, on the other hand, typically represent
several health plans and other self-funded employer-sponsored plans and can use this
expanded patient base to draw pharmacies into the network.
Most PBMs also offer a complete package of pharmacy services, including drug formulary
management, programs for generic and therapeutic substitutions, drug utilization review
programs, and mail-order prescription delivery systems. These services, designed initially
to reduce costs by improving the health plan’s ability to monitor and control utilization,
have an added benefit: they expand patient access to pharmaceutical products and
services.
Quality Advantages
Today’s PBMs add a quality dimension to the services they provide. Industry studies show
that although the primary appeal of PBMs is their ability to control costs by managing drug
pricing and drug use, increasing numbers of employers and health plans are turning to
PBMs because of their ability to promote safe and effective drug use, contribute to disease
management, and improve patient and provider education and compliance.
PBMs can also improve the quality of care delivered to plan members through their
ability to influence which drugs are prescribed and which are proving most effective in
treatment. This is accomplished by PBM participation in outcomes and
pharmacoeconomic research, the development of disease management and practice
guidelines. PBMs have also undertaken drug utilization review (DUR) programs, patient
monitoring, academic detailing— that is, one-on-one visits to physicians to discuss
prescribing patterns and formulary compliance. PBMs now play an active role in clinical
and drug use decisions thus adding to their contributions to the quality of healthcare
received by health plan members. Moreover, PBMs promote safer drug use by making
sure pharmacists are aware of possible drug interactions even if a consumer uses
multiple pharmacies.17
Guidelines for Selecting a PBM
PBMs have a significant impact in determining total drug costs for insurers, shaping
patients’ access to medications, and determining how much pharmacies are paid. PBM
selection is thus critically important. For many health plans, selection of a PBM is based
on the PBM’s response to questions related to the following topics:
Contract arrangements
Does the PBM require fee-for-service reimbursement, or is it willing to contract on a

risk-sharing basis?
27
Network development
Is the network open or closed? Does the network include mail-order services? How are
participating pharmacies selected?
Network reimbursement
How does the PBM reimburse network pharmacies? Is reimbursement available for non-
network purchases? If so, how is this reimbursement handled? Does the PBM reimburse
pharmacies for cognitive (professional expertise) as well as dispensing services?
Formulary development
What incentives do pharmacies have to dispense generic products? Do pharmacies have

the authority to make generic or therapeutic substitutions or to recommend prescription
changes? Is the formulary open or closed?
Drug pricing
What system does the PBM use to reimburse participating pharmacies for drug costs? Do
pharmacies share risks for the costs of drugs dispensed? If so, who is responsible for
establishing a risk-sharing program and for selecting, pricing, and assuring the quality of
the drugs under the program?
Online capabilities
Does the PBM operate a comprehensive point-of-service system? How does the PBM handle
utilization review and authorization? Does the system link the PBM to individual pharmacies
and other providers in the health plan?
Quality management
How does the PBM measure, monitor, and manage the quality of services provided by
network pharmacies? What quality indicators does the PBM evaluate?
Customer satisfaction
How does the PBM measure, monitor, and manage the quality of services provided by
network pharmacies? What quality indicators does the PBM evaluate?
PBM ownership
Is the PBM controlled by a pharmaceutical manufacturer through an ownership agreement

or other strategic alliance? Are manufacturer discounts limited to specific drugs because of
contract requirements?
28
Lesson Summary
Pharmacy benefit networks were not formally organized until the mid-1960s. Before that
time, pharmacy benefits were delivered through open and direct contact between patients
and pharmacies – including direct payment by patients. The patient either paid the
pharmacy in full or shared expenses with an insurer under a major medical insurance
policy.
Early pharmacy networks were open panel offering health plan members wide flexibility
and freedom of choice but little in the way of cost savings. Development of closed
pharmacy panels offered health plans and their members cost savings, greater
administrative control, and the potential to introduce quality measures.
The structure and operation of pharmacy networks are like other provider networks in that
they must be large enough to provide easy access and yet small enough to be manageable.
They must provide members with comprehensive quality services and achieve maximum
health outcomes at reasonable costs. Pharmacy networks, however, differ from other
provider networks in three keys ways. First, pharmacy networks deliver products as well as
services. Second, they are reimbursement in different ways. Lastly, pharmacy networks
require specialized information management systems.
Pharmacy networks may be structured to included retail pharmacies (including chains),

mail-order pharmacies, and specialty pharmacies to handle high-cost drugs for patients
dealing with complex health issues. In recent years, narrow pharmacy networks have
emerged to lower health care costs. Furthermore, different types of narrow networks have
come to be recognized including preferred pharmacy networks, specialty pharmacy
networks, limited pharmacy networks, and performance-based pharmacy networks.
Like other types of networks, health plans develop criteria for selecting pharmacy providers
to be part of their networks. These criteria include requirements for providers to be
properly licensed, conforming to dispensing standards for prescriptions and controlled
substances, and the ability to provide patient counseling and education. Selection criteria
also include the ability to establish quality management programs and the ability to access
and contribute information to the health plan’s database.
It is impossible to discuss the delivery of prescription drug benefits without considering the
key role played by pharmacy benefit managers (PBMs). While their historical roots may be
traced back to a middleman who processed claims, the have long evolved into playing a far
larger role. Today, PBMs impact almost every aspect and the prescription drug
marketplace. They help to develop formularies, contract with pharmacies, negotiate
discounts and rebates with drug manufacturers. Health plans increasingly rely on PBMs
because they offer cost, access, and quality advantages. PBMs due to their reliance on
rebates and spreads have come under criticism from other quarters of the healthcare
industry – most notably large pharmaceutical companies. Their role, however, while likely
to further evolve is unlikely to diminish in the foreseeable future.
Health plans no longer simply administer the delivery of pharmacy benefits from payers,
through pharmacy networks, to patients. Instead, health plans and their pharmacy networks
influence large swaths of the pharmacy benefits process.
29
Notes:
1
https://ncpdp.org/About-Us/History-and-Impact
2
Disease state management: an integrated approach to providing care, The Pharmaceutical Journal, 18 May
2002; see also Greer, Nancy, et al., Pharmacist-led chronic disease management, Annals of Internal Medicine,
April 26, 2016 (available at https://annals.org/aim/article-abstract/2517407).
3
Academy of Managed Care Pharmacy Guide to Pharmaceutical Payment Methods (2013).
4
Pharmacy Pricing, Federal Upper Limits, Medicaid.gov, available at
https://www.medicaid.gov/medicaid/prescription-drugs/pharmacy-pricing/index.html
5
https://www.pharmacist.com/specialty-pharmacy
6
Specialty Drug Definition, Health Insurnce.org Glossary, available at
https://www.healthinsurance.org/glossary/specialty-drug/
7
Juliette Cubanski, Wyatt Koma, and Tricia Neuman, The Out-of-Pocket Cost Burden for Specialty Drugs in
Medicare Part D in 2019, Kaiser Family Foundation (KFF) Issue Brief, Feb. 2019, available at
https://www.kff.org/medicare/issue-brief/the-out-of-pocket-cost-burden-for-specialty-drugs-in-medicare-
part-d-in-2019/
8
National Community Pharmacists Association. Pharmacy benefit managers (PBMs) 101. Available at:
http://www.ncpa.co/pdf/leg/nov12/pbm_one_pager.pdf
9
“What is a Speciality Pharmacy Network.” https://www.pcmanet.org/pcma-cardstack/what-is-a-specialty-
pharmacy-network/; https://cvshealth.com/newsroom/press-releases/cvs-health-introduces-new-pbm-
performance-based-pharmacy-network-focused
10
Concerns regarding the pharmacy benefit management industry. Applied Policy, November 2016. Available
at: http://www.ncpa.co/pdf/applied-policy-issue-brief.pdf
11
https://www.healthcare.gov/glossary/affordable-care-act/
12
Holahan J, Buettgens M, Carroll C, Dorn S., The Cost and Coverage Implications of the ACA Medicaid
Expansion: National and State-by-State Analysis. Washington, DC: Henry J. Kaiser Family Foundation; 2012.
13
Feldman, Brian S., Big pharmacies are dismantling the industry that keeps US drug costs even sort-of under
control, Quartz, March 17, 2016; available at https://qz.com/636823/big-pharmacies-are-dismantling-the-
industry-that-keeps-us-drug-costs-even-sort-of-under-control/ (accessed July 2019).
14
Hoffman-Eubanks, Brittany, The Role of Pharmacy Benefit Managers in American Health Care: Pharmacy
Concerns and Perspectives: Part 1, Pharmacy Times, November 14, 2017; available at
https://www.pharmacytimes.com/news/the-role-of-pharmacy-benefit-mangers-in-american-health-care-
pharmacy-concerns-and-perspectives-part-1 (accessed July 2019)
15
Elizabeth Seeley, Aaron S. Kesselheim, Pharmacy Benefit Managers: Practices, Controversies, and What Lies
Ahead, The Commonwealth Fund, Issue Brief, March 2019, available at
https://www.commonwealthfund.org/publications/issue-briefs/2019/mar/pharmacy-benefit-managers-
practices-controversies-what-lies-ahead
16
“Narrow Networks Changing Pharmacies.” https://join.healthmart.com/business-and-operations/narrow-
networks-changing-pharmacy/; http://www.amcp.org/WorkArea/DownloadAsset.aspx?id=18742
17
“Pharmacy Networks.” https://www.pcmanet.org/policy-issues/pharmacy-networks/;
https://www.pdmi.com/pharmacy-network-capabilities.htm
30
AHM 530: Provider Networks for Workers’ Compensation
Provider Networks for Workers’ Compensation

Introduction
This module explores how the application of managed care principles, such as provider
networks, can improve the quality and cost-effectiveness of medical services delivered as
part of a workers’ compensation program. Legal considerations relating to the use of
managed care in workers’ compensation, including issues that affect the selection of
providers for a network, compensation options, and other tools that may be used to manage
provider performance in the workers’ compensation area will also be discussed.
• Explain the reasons that managed care can benefit workers’ compensation programs
• Describe how the selection process for workers’ compensation providers differs from
types of networks
• Describe some of the nonfinancial tools that a health plan can use to manage the
performance of its workers’ compensation providers
Workers’ Compensation
Workers’ Compensation
Workers’ compensation, often referred to as “workers’ comp,” is a state-

mandated insurance program designed to cover both medical expenses
associated with workplace injuries and associated lost wages.
State-based workers’ comp programs provide critical support to workers who are
injured or made sick on the job. Workers’ comp insurance is used to finance
health care delivery and benefits for these workers.
Goals of Workers’ Compensation
In order to control the expense of reimbursing workers for lost wages, the
primary goal for medical services provided under workers’ comp programs is to
return the employee to work as soon as possible. With emphasis placed on a
quick recovery, workers’ comp providers may be less concerned about
overutilization and strict definitions of medical necessity than other providers.
Use of managed care in workers’ comp programs also aims to control costs – both
medical costs and the costs of lost wages. A workers’ comp plan may need to
adjust its goals for healthcare delivery to manage both classes of benefits. Part of
the adjustment process is tailoring the management of the provider network to
emphasize rapid recovery as well as appropriate care and cost-effectiveness.
An equally important goal of using managed care in this context is providing
better care delivery for patients. It is important to remember that beyond
1
controlling costs, managed care also seeks to contribute to the availability of

high-quality medical care by physicians experienced in treating occupational
injuries.
Categories of Workers’ Compensation Benefits – Overview1
The limits and duration of workers’ comp benefit can vary by jurisdiction. However, each state
provides the same three classes of benefits:
• Medical benefits
• Disability benefits/indemnity (i.e. lost wages)
• Death benefits
Medical benefits generally are unlimited, with no co-pay or deductible for the employee.
Payments are made to the point that the injured employee is “cured” and/or given maximum
relief so that the employee can return to work. Bills for services provided go directly to the
workers’ comp insurance carrier, and payment is made directly to the healthcare provider. The
employee’s only responsibility is to follow and cooperate with the treatment plan.
Sources of Workers’ Compensation Insurance 2
Non-federal employers can pay for workers’ comp by purchasing insurance from a private
insurance carrier, a state workers’ comp insurance plan (called a “state fund”), or by self -
insuring.
This module focuses on the use of private insurance.
Workers’ comp insurance is available for purchase on the private market in all but the
following four states:
• North Dakota
• Ohio
• Wyoming
• Washington
For these states, workers’ comp insurance must be purchased exclusively through the state
workers’ comp fund.
Workers’ comp policies provided by private insurers operate similarly to automobile or

homeowner’s insurance. Employers purchase insurance for a premium, which varies
according to expected risk. Available policies may be structured either to:
1. Require the insurer to pay all workers’ comp benefits

2. Include a deductible, which requires the employer to reimburse the insurer for
benefits paid up to the specified deductible amount
2
In return for accepting a policy with a deductible, the employer generally pays a lower
premium. Deductibles may be written into an insurance policy on a per-injury basis, an
aggregate-benefit basis, or a combination of both.
Opportunities for Managed Care in Workers’ Compensation
Due to the underlying differences between workers’ comp and health plans, workers’ comp
plans historically lagged in the adoption of managed care techniques when compared to most
public and private health care plans. Managed care techniques were developed with the
objective of achieving positive health outcomes at the lowest cost. For workers’ comp,
managed care must address a different objective: restoring a worker to health and
productivity at the lowest cost.3
Today, workers’ comp plans increasingly involve the use of managed care, with attendant
advantages in terms of reducing the cost and improving the quality of the care provided.
Studies generally show that where managed care techniques have been applied to workers’
comp, these objectives have been achieved. 4
Although they constitute a relatively small percentage of all healthcare costs overall, workers’
comp healthcare costs still amount to billions of dollars a year in expenses for employers. In
recent years, medical costs have grown as a percentage of overall workers’ comp costs, and
these percentages are only projected to increase further in the coming years. The following
chart illustrates this trend:
Medical Indemnity
1992 48% 52%

2012 62% 38%
2020* 70% 30%
As this data illustrates, medical care as a proportion of workers’ comp benefits has been
growing with intensity over the past three decades, constituting 48 percent of total average
claims costs in 1992, more than 62 percent of total average claims costs in 2012, and
(*projected) 70 percent of developed claims costs in coming years. 5
Indemnity
Indemnity is a promise that one party will make good on any loss, damage, or liability incurred
by another. In the context of workers’ comp, indemnity refers to earnings lost as a result of a
work-related illness or injury, as opposed to medical bills. Workers' comp indemnity attempts
to compensate the employee for lost wages and make the employee financially whole.
3
Three Issues that Increase Costs
There are several issues that contribute to increased costs in workers’ comp:
1. Lack of control over providers

2. Potential for fraud and abuse
3. Duplication of expenses
Issue #1: Lack of Control Over Providers
Various Managed Care Strategies
Case management (CM) is a collaborative process that consists of:
• assessment
• planning
• facilitation
• care coordination
• evaluation
• advocacy
Through communication and available resources to promote patient safety, quality of care, and
or cost-effective outcomes, this collaborative process assesses the options and services
necessary to meet an individual, and or a family’s, comprehensive health needs.6
Example: Coordinating care through a worker’s recovery from a serious accident.
Quality Management (QM) aims to ensure excellence in the provision of healthcare services to
patients. Health care providers, organizations, and administrators apply QM applications to
identify ways to improve internal processes, which in turn will produce higher quality outcomes
for patients.
Utilization Management (UM), sometimes called utilization review, is the evaluation of the
medical necessity, appropriateness, and efficiency of the use of health care services,
procedures, and facilities under the provisions of the applicable health benefits plan. UM may
assess the medical provider’s proposed or delivered treatment plan, the duration of care, scope
of services, specific injury, and other claim or patient factors to measure the effectiveness of
the medical services. The review may be prospective, concurrent with care, or retrospective. 7
4
Lack of Control Over Providers
The level of provider control can contribute to the overall cost of medical care in the
workers’ comp area. For example, when fee-for-service (FFS) provider compensation is
used, providers have an economic incentive to maximize the number and intensity of
services provided.
Other factors that can affect the cost of care may include: the absence of mechanisms to
monitor the quality and appropriateness of the care given to workers’ comp recipients and
the ability of workers’ comp claimants (employees who suffer work-related illnesses or
injuries) to have free choice of providers—with little, if any, incentive to choose cost-
effective providers.
Managed care strategies employed with success in traditional group health plans, such as
alternative compensation schedules, provider networks, case management, quality
management, and utilization management, can help control these cost factors by ensuring
that the services provided under workers’ comp insurance plans are appropriate and cost-
effective.
Issue #2: Potential for Fraud and Abuse
Issue #2: Potential for Fraud and Abuse
It is also important to understand the potential for fraud and abuse in workers’ comp. Unlike
group health insurance, workers’ comp coverage includes no patient deductibles, coinsurance,
or benefit limits. Workers’ comp coverage is also available to all employees, regardless of their
eligibility for health insurance coverage. In addition, workers’ comp coverage provides
reimbursement for lost wages, a benefit that is not available through group health plans. These
features may tempt employees to represent illnesses or injuries that are not work-related or
that are not covered by group health plans as work-related, in order to receive medical benefits
and reimbursement of lost wages through workers’ comp. This practice is referred to as cost
shifting.
Case Study: Cost Shifting
John is a plumber at DrainCo., whose primary duty is repairing broken sinks. He hurt his back
repairing the sink in his own house one day, and he wanted to take some time off from work to
recover without missing out on his wages. He decided that it would be easy to convince
DrainCo. that his injury happened on the job, because he is not supervised during house calls,
and repairing sinks is what he does every day. When he reports the injury to DrainCo. and
requests workers’ comp, he has decided to partake in cost shifting, as his injury was not work-
related, even though he was repairing a sink.
Providers can also abuse workers’ comp programs through provider self-referral, which occurs
when a provider refers claimants to healthcare facilities, such as ancillary services facilities, in
which the provider has a financial interest.
5
Case Study: Self-Referral
Dr. Jones is an orthopedist at Ortho1, who also maintains a financial interest in a separate
physical therapy practice, called PTBest. Every time a patient is seen at Ortho1 or PTBest, Dr.
Jones makes a profit. Samantha is employed by the local grocery store as a manager. When
Samantha trips over some spilled produce at work, she is referred to Dr. Jones’s Ortho1
practice to assess her resultant back injury. Dr. Jones assesses the back injury and determines
the best course of action is to refer Samantha to physical therapy. Dr. Jones can refer
Samantha to any physical therapy provider within her network, but he notices that PTBest is
one of twenty such in-network providers. Dr. Jones determines that the top-notch providers
at PTBest are likely Samantha’s best option, and he refers her to them. Even though Dr. Jones
was not acting solely in his interest, he still has engaged in provider self-referral.
Laws Related to Improper Referrals
There are several federal laws that prohibit and impose penalties in connection with
remuneration related to improper referrals. These include:
• Anti-Kickback Statute
• Physician Self-Referral Law (also known as the Stark Act)
• False Claims Act
Anti-Kickback Statute
The Anti-Kickback Statute (AKS) is a criminal law that broadly applies and prohibits the
knowing and willful payment of remuneration to induce or reward patient referrals or the
generation of business involving any item or service payable by the Federal health care
programs. “Remuneration” can be anything of value, including cash, below market value rent,
or relief from financial obligations. Penalties can include fines, potential jail time, and
exclusion from participation in Federal health care programs.
Safe Harbors are statutory exceptions that protect from civil and criminal liabilities. Certain
payment and business practices that include personal services and rental agreements,
investments in ambulatory surgical centers, and payments to bona fide employees may be
considered Safe Harbors.
Physician Self-Referral Law
The Physician Self-Referral Law, also known as the Stark Law, prohibits physicians from
referring patients to receive “designated health services” payable by Medicare or Medicaid
from entities with which the physician or an immediate family member has a financial
relationship unless an exception applies. Immediate family members of the physician are
defined as spouse, natural or adoptive parents, children, siblings, step-siblings, in-laws,
grandparents, and grandchildren.
“Designated health services” include the following:
• Clinical laboratory services

• Physical therapy, occupational therapy, and outpatient speech-language pathology
services
• Radiology and other imaging services
6
• Radiation therapy services and supplies

• DME and supplies
• Parenteral and enteral nutrients, equipment, and supplies
• Prosthetics, orthotics, and prosthetic devices and supplies
• Home health services
• Outpatient prescription drugs
• Inpatient and outpatient hospital services7
The Stark Law is what is known as a “strict liability statute,” so proof of specific intent to
violate the law is not required. Penalties for physicians who violate the Stark Law include
fines as well as exclusion from participation in Federal health care programs. Exceptions may
be available, but all have detailed criteria that must be met.
Potential Impact of Self-Referral Laws
While the movement towards Accountable Care Organizations (ACOs) and integrated
healthcare have not led to a loosening of self-referral rules, some related impacts have been
noted.
For example, by allowing hospitals to pay for referrals within the bounds of health care self-
referral laws, some industry commentators have postulated that higher utilization and
patient volume from hospital acquisitions of physician groups may increase health spending.
This increase in health spending is attributed to the greater flexibility that the AKS and Stark
Law provides. The AKS and Stark Laws allows hospitals to compensate employed, as opposed
to contracted, physicians. Thus, hospitals can pay employed physicians productivity bonuses
for services personally performed by the physician, which would not be permitted for non-
employed physicians (i.e., independent contractors). Hospitals also can more readily require
their employed physicians to refer patients to the hospital or to other integrated providers
than they can require of independent physicians.
False Claims Act
Under the False Claims Act, it is illegal for a provider to submit claims to Medicare or
Medicaid known by the provider to be false or fraudulent. 8 Each item or service billed to
Medicare or Medicaid is considered a claim, and for each false or fraudulent claim, the
provider may receive fines of up to three times the programs’ loss, plus $11,000. 9
The fact that a claim is in violation of the Stark law, or that it results from a kickback, may
render the claim false or fraudulent, creating liability under the civil False Claims Act along
with the Anti-Kickback Statute and Stark law.9
Case management and utilization review can help plans detect and prevent cost shifting and
false or fraudulent billing. The credentialing carried out by plans can curb self-referral by
identifying facilities in which providers have a financial interest.
7
Issue #3: Duplication of Expenses
Issue #3: Duplication of Expenses10
Sometimes workers’ comp programs are administered separately from group healthcare plans,
even though functions such as record-keeping, claims, and customer service are similar for
both. As a result, resources are often used to provide duplicate functions. Administrative
duplication is further increased if the employer offers separate disability benefits. Additional
resources are required to keep work-related illness or injury separate from non-work-related
conditions.
Managing workers’ comp benefits and medical benefits under one plan, rather than separating
benefits into different plans, reduces administrative expenses. It also reduces the need to
distinguish between work-related illnesses and injuries and non-work-related conditions. In an
integrated system, the cause is irrelevant. The focus is on returning all employees to work as
quickly as possible. Health plans can offer this integration through a concept known as twenty-
four (24)-hour coverage.
Case Study: Duplication of Expenses
Ms. Smith was working within the scope of her employment when she slipped and hurt her
back. She will need medication and physical therapy to fully heal, but there is no permanent,
debilitating injury. Because she was injured on the job, she is entitled to workers’ comp. Ms.
Smith also has medical coverage from her employer-sponsored health plan, along with
disability income coverage through her work. How will she be treated?
• Within a 24-hour coverage scheme, Ms. Smith will receive coverage for both work-
related and non-occupational health care from the same provider
• This means that Ms. Smith can go to her primary physician, under her employer-
sponsored plan, to receive proper care and treatment for her injury. She will not have
to go through extra “administrative red tape” and will be back at work in a matter of
weeks
• This results in administrative cost savings, along with reduced litigation over workers’
comp claims
24-Hour Coverage
If managed workers’ comp offers the potential to improve quality and reduce costs, then many
believe that 24-hour coverage offers even greater potential. Twenty-four-hour coverage,
sometimes called comprehensive medical event management, is the integration of workers’
comp coverage—both the medical and the disability components—with non-workers’ comp
healthcare and disability coverage.
In 24-hour coverage, all an employee's health needs- whether work-related or non-

occupational-are covered by a single health care provider. Thus, coverage exists around the
clock
8
Twenty-four-hour coverage offers several cost and quality advantages. Health plans offering
24-hour coverage can realize efficiencies and cut overall costs by combining administrative
services. They can also improve the quality of care members receive by maintaining
comprehensive information about patient care from all sources in one location. Providers
can use this information to coordinate services and ensure that patients receive
appropriate care. Health plans can gain control over utilization and can avoid unnecessary
costs. Members benefit from the convenience and simplicity of combined operations. They
have the same point of entry to the healthcare system (they call the same number or
contact the same person) whether their condition is job-related or not.
Double Dipping
Twenty-four-hour coverage minimizes the occurrence and effects of cost shifting. It can also
help the health plan to identify and avoid other forms of fraud. For example, UM and QM
programs that monitor the treatment delivered to plan members from all sources can help
prevent a practice sometimes called double-dipping, in which patients claim benefits for the
same healthcare services both from workers’ comp and from their group health coverage.
State laws vary on twenty-four-hour coverage and not all carriers offer both employer-
sponsored group coverage and workers’ comp. California stands out as one state which has
taken the lead and been a strong proponent of the integration of 24-hour health care
coverage with its workers’ comp system.
Workers’ Compensation Provider Networks

Developing and Managing Workers’ Compensation Provider Networks
Many workers’ comp network characteristics are similar to other provider network
characteristics. Like other provider networks, workers’ comp provider networks consist of
carefully selected, appropriately credentialed medical professionals who provide their
services to claimants at a discounted cost.
The network is designed to ensure quality and reduce medical costs. Providers who
participate in the network agree to accept the reimbursement specified by the health plan,
cooperate with the health plan’s quality initiatives, and participate in the health plan’s UM
efforts in return for increased patient volume. However, a managed comp network must
comply with certain legal requirements specific to workers’ comp. In addition, it must satisfy
a unique set of patient and sponsor needs and expectations.
Legal Considerations for Workers’ Compensation Provider Networks
Each of the 50 states and the District of Columbia has its own workers’ comp program. 11
Employers in all states, except Texas, are required to provide workers’ comp coverage for
their private-sector employees, with limited exceptions for small employers and workers in
specific classifications, such as agricultural or domestic employees.
State laws mandate the type of coverage that must be provided and the circumstances under
which benefits are payable. If an employee seeks treatment for a work-related illness or
injury, an employer cannot deny liability, even if it is not at fault. In return for this coverage,
employees are bound by the exclusive remedy doctrine, which requires them to accept
9
workers’ comp benefits as their only compensation in cases of work-related injury or illness.
Employees cannot sue their employers for additional amounts, except in certain extreme
situations.
Laws governing workers’ comp differ from state to state, including as to who can provide
insurance, which injuries or illnesses are compensable, and the level of benefits provided.
These variables can create complexity for organizations offering workers’ comp coverage in
multiple states. However, certain requirements are uniform in all states. For example,
workers’ comp generally is first-dollar coverage, meaning that employees cannot be required
to contribute to the costs of their care through deductibles, coinsurance, copayments, or
disability waiting periods.
First-Dollar Coverage
Workers’ comp insurance tends to be written on a “first-dollar coverage” basis, which means
there is no deductible or another self-insurance component to the coverage. This means that
when a claim is filed in connection with a work-related injury, the insurance carrier will pay
the claim without the employee first having to pay a portion of expenses to trigger coverage
under the workers’ comp plan.
Example: Many of us are familiar with the use of deductibles in the automobile insurance
context, where a policy may require the policyholder to pay a specified amount (for example,
$500) out of pocket before contributing to automobile damage claims. In the case of minor
damage, like replacing a cracked taillight, the entire cost may fall within the deductible. This
type of structure is generally not a feature of workers’ comp insurance.
Last-Dollar Coverage
Health plans may not place limits on the benefits they will pay for a given claim, this is also
known as last-dollar coverage. In addition to first-dollar coverage, workers' comp can be
written on last-dollar coverage. From the health plan’s point of view, one major disadvantage
of first-dollar and last-dollar coverage is that employees are insulated from the cost of the
healthcare they receive and have little incentive to seek cost-effective care.
Other Consistent Features Across the States
Other consistent features of workers’ comp coverage across the states include: 12
• Lost-time compensation may be subject to a waiting period, typically three to seven

days, that may be retroactively waived if the disability involves hospitalization or a
longer duration of work absence
• Wage-replacement rates vary by state but are, on average, about two-thirds of a
worker’s pre-injury gross wage
• Lost-time compensation is tax-exempt and typically restricted by
minimums/maximums established under state law
• Most states permit deductible policies in workers’ comp insurance, but state
regulations vary regarding specifics, such as the maximum deductible allowed and the
minimum premium volume eligible for a deductible policy
10
Basic medical benefits are treated the same in every state, with all statutes requiring medical
costs, surgical fees, nursing care expense, and medication costs necessary to “effect a cure
and give relief” to be fully paid by the workers’ comp insurer. 13 Additional medical benefits
also are available across the states but may differ based on jurisdiction. For example, every
state provides some form of rehabilitation benefit, but the extent/amount of the benefit
available may vary by state.13
Provider Choice
States differ regarding how provider choice is addressed. Twenty-one states require the
employee to use the physician picked by the employer from among a list of authorized
physicians, while the remaining 29 states and the District of Columbia allow the employee to
choose the physician (with some requiring periodic consultation with an insurer-selected
physician). But 19 of the “employee-choice” states limit the employee’s options to physicians
within a managed-care type network.13
When the employee has the option to choose a non-network provider, all the health plan
can do is encourage the employee to choose a network provider. In this situation, employee
satisfaction with the network is of extreme importance. An employee with the option of
choosing a non-network provider from the onset may be more likely to choose a network
provider if he or she knows of other employees who have been satisfied with the network.
An employee who is required to use a network provider during the initial part of his or her
treatment is more likely to stay with that provider after the initial period if he or she is
highly satisfied with the care received from the provider.
Idaho, South Carolina, and Vermont are examples of states that allow the employer to
choose the physician in the workers’ comp context, while Delaware, Virginia, and Wisconsin
are examples of states where the employee has the right to choose his or her own
physician.14
Case Study: Provider Choice
State regulations on provider choice may impact care, or quality of care, given to individuals
entitled to workers’ comp. Take, for instance, Ms. Adams and Ms. Bart, each of whom
injured her right leg at work. Ms. Adams lives in State A, where her employer chooses the
physician, while Ms. Bart lives in State B, in which the employee is given the choice of
physician. Ms. Bart may be more likely to see an out-of-network provider initially because
she has more freedom to choose one.
Provider Requirements for a Workers' Compensation
Provider Requirements for a Workers' Comp Network
For a health plan, supplying a network of providers to furnish healthcare to workers’ comp
beneficiaries is not simply a matter of reapplying a network that has already been cr eated for
a group health plan. Some providers who are suitable for the health plan’s other networks
may not offer the specialized services required to treat workers’ comp patients. Others may
not understand the clinical practice guidelines for occupational illnesses or injuries. As a
result, the composition of a workers’ comp network is different from the composition of other
11
networks. The providers in a workers’ comp network will also need a different set of
experiences and skills and a different approach to practicing medicine than providers in other
networks.
Examples of Clinical Guidelines
Some examples of clinical guidelines focused on occupational injury or illness in the context of
rotator cuff injuries include the following:
• Diagnosis of rotator cuff syndrome requires a thorough history-taking, which should

include the following factors and consideration of their implications: age, occupation
and sports participation, medical history, mechanism of injury, pain symptoms,
weakness and/or loss of range of motion (body function impairments), activity
limitations, and social situation.
• Assessment of rotator cuff syndrome requires physical examination which should
include direct observation of the shoulder and scapula, assessment of active and
passive range of motion, resisted (isometric) strength testing, and evaluation of the
cervical and thoracic spine (as indicated).15
Case Study: Provider Requirements
Dr. Margolis spent 10 years in the U.S. Army treating musculoskeletal injuries, including those
sustained in combat/active fire situations, before establishing himself in private practice.
About 70 percent of war rounds are musculoskeletal injuries, with about 7 percent of those
with major extremity wounds also sustaining a loss of limbs. Dr. Margolis’ experience in the
Army is readily transferrable to treating traumatic musculoskeletal injuries in the workplace,
such as where an employee’s leg is injured during a car crash while making a delivery. 16 By
contrast, Dr. Glassman’s experience as a pediatrician has not provided her with specific
experience that is relevant to the treatment of musculoskeletal injuries in the workplace.
Future of Primary Care
Except for specialty networks, most provider networks emphasize primary care (subject to
primary care availability, which is leading to some changes in the way that provider
networks are structured).
According to data published by the AAMC (Association of American Medical Colleges), the
United States could see a shortage of up to 120,000 physicians by 2030, impacting patient
care across the nation. Primary care is still a focus of most provider networks, given the
realities of treatment for most patients, but new structures have emerged to allow for
timely access to quality care in the face of this reality. An ongoing trend involves the use of
“narrow networks,” which include a lower number of overall providers. The use of
“telemedicine,” which involves the remote diagnosis and treatment of patients through
telecommunications technology, is another growing trend employed in building and
maintaining a provider network.
A smaller number of specialists generally are available on referral from the primary care
provider. The predominant types of treatment delivered to workers’ comp beneficiaries
differ significantly from the types of treatment most often furnished to other health plan
members. In workers’ comp, musculoskeletal injuries, such as sprains, strains, inflammation,
12
contusions, cuts, punctures, and fractures, account for almost three-quarters of medical
expenses, compared to about 10% of medical expenses in other member populations. Minor
injuries also account for about 20% of workers’ comp claims but only 1% of other groups’
medical expenses.17 These conditions often require the immediate attention of medical
specialists such as orthopedic physicians or emergency physicians.
The extended rehabilitation associated with workplace injuries and illnesses also requires
the services of physical and occupational therapists and chiropractors. To meet these
patient needs, a network serving workers’ comp patients typically includes a higher
concentration of specialists than do other networks.
Nature of Work
The nature of the work done by the covered employee group also influences the
composition of the network. Workers in certain industries may be prone to certain types of
illness or injury. For example, coal miners and textile workers are more likely to suffer lung
ailments than are most other types of workers, so their managed comp networks need to
include an adequate number of pulmonologists.
In addition to basic credentials, health plans typically have additional training and experience
requirements for their workers’ comp providers. Health plans often look for the following
credentials in providers for workers’ comp networks:
• Training or certification in occupational medicine

• A minimum number of years of experience in occupational medicine
• A minimum percentage of the provider’s practice devoted to occupational
medicine
Example: The right specialist does not necessarily need to be local. Access to telemedicine
allows providers to give fast, personalized, and efficient treatment from anywhere.
Telemedicine was the subject of a standalone panel at the 2019 Workers’ Compensation
Research Institute’s Annual Issues and Research Conference, demonstrating its increasing
relevance in the context of developing an adequate workers’ comp provider network.
Workers’ Compensation Philosophy

Philosophy
Workers’ comp provides three distinct types of benefits:

1. Medical: this includes medical expenses resulting directly from the relevant injury
2. Indemnity: this includes wage loss resulting directly from the relevant injury
3. Death benefit: this includes expenses associated with a death resulting from a work-
related injury or illness. A typical death benefit would include coverage of funeral and
burial expenses or provision of financial support for the deceased’s family. In fact,
workers’ comp policies are usually required to include coverage for funeral and burial
costs
With workers’ comp, employers are interested in minimizing the total costs of work-related
injuries and illness, which are the sum of the medical and indemnity components of workers’
13
comp. The introduction of managed care techniques has allowed workers’ comp plans over
the years to better control and even reduce medical costs. The costs associated with lost
wages, because they are driven by external environmental factors, are more difficult to
control. Therefore, the goal of most workers’ comp treatment decisions is to reduce disability
costs by returning employees to restored health and work as quickly as possible.
The Appropriate Philosophy
When building a network for workers’ comp, a health plan looks for providers who
understand that the approach to treating workers’ comp beneficiaries should focus on rapid
recovery rather than cost. This approach contrasts with the approach generally taken by
other health plan providers, who base their treatment selection on medical necessity and the
cost-effectiveness of the appropriate treatment options.
To achieve faster recoveries, workers’ comp providers often administer intensive, high-cost
care early in the treatment of the employee.
Example: Suppose that a health plan member suffering from back pain visits a physician. If
the treatment is covered by a standard health plan (not workers’ comp), the physician would
begin with conservative approaches to easing the back pain, such as bed rest, medication, or
physical therapy. If these approaches are not successful, the physician might later
recommend a brief course of physical therapy. After exhausting more conservative
approaches, the physician might order a costly diagnostic test, such as magnetic resonanc e
imaging (MRI), in order to determine the cause of the pain and develop the next phase of
treatment. Depending on the severity of the injury, the process can be quite lengthy.
On the other hand, if the treatment is covered by workers’ comp and the employee is missing
work because of the back pain, the physician would likely send the employee for an MRI
during the first stages of treatment. The physician can then select a treatment appropriate to
the cause and, hopefully, make sure that the employee returns to work quickly. Studies show
that more costs generally are allocated for radiology and physical therapy in the first three
months following an injury when the payment is through workers’ comp, as opposed to an
ordinary group health plan.18 The higher up-front cost associated with this more aggressive
approach is likely to be offset by savings in lost wages.
Workers’ Compensation and Disability

Integrated Disability Management
Because returning employees to work is so critical in workers’ comp, providers need to

have experience and expertise in determining whether employees are disabled from the
standpoint of being able to perform their work duties. In many situations, providers must
also be able to decide whether an employee who is not ready to return to his or her original
job can instead return to light duty. Light duty is work that is less physically demanding
than the employee’s original job. Many occupational medicine providers also have
expertise in determining disability status.
Health plans and many employers have begun to address disability issues by implementing
integrated disability management (IDM) programs that include guidelines on the expected
duration of various types of disabilities, clinical practice guidelines, return-to-work protocols,
14
and guidelines for reducing the number of work-place accidents. Most employers, health
plans, and providers rely on disability duration guidelines to estimate how long an employee
will be absent from work. Integrated disability management programs require the
participation and cooperation of all the network’s providers.
Case Study: Integrated Disability Management
Ms. Carson is employed as the sole administrative assistant at TelCo, Inc., and a substantial
portion of her duties involve word processing and work on a computer. After years on the job,
Ms. Carson develops carpal tunnel syndrome, a condition that causes numbness, tingling and
other symptoms in the hand and arm due to compression of nerves in the carpal tunnel, a
narrow passageway on the palm side of the wrist. TelCo, Inc. has implemented an IDM
program, which states in relevant part that the duration of disability for carpal tunnel syndrome
should be approximately 7 weeks. Because this injury Bill directly affects Ms. Carson’s ability to
perform a major part of her job (word processing), the protocol requires her to return to work
on light duty until she has made a full recovery. TelCo., Inc. will likely hire a temporary
employee to assist with Ms. Carson’s workload throughout her planned recovery so that the
company can continue to function without overburdening Ms. Carson.
Interaction with Social Security Disability Benefits
Employees can file a claim for workers' comp and Social Security Disability (SSDI) benefits
simultaneously, but there are some important caveats.
First, workers’ comp and SSDI benefits are separate programs with different qualifications.
While workers’ comp programs vary from state to state, this kind of insurance generally is
designed to deliver temporary care, whereas SSDI benefits are more focused on long -term
care.19 Thus, generally, an employee will be approved for SSDI benefits only if his or her
impairment is severe and is expected to last a year or more, preventing the employee from
doing any kind of substantial work. The health care provider’s treatment plan for such an
employee obviously would differ from the kind of plan used where an employee’s injury can
be treated relatively quickly, to permit the employee to return expeditiously to the
workforce.
Further, while it is true that an individual can receive both workers’ comp and SSDI benefits
at the same time, claiming workers’ comp may reduce SSDI benefits. This is because the total
income received from workers compensation and SSDI cannot be more than 80% of the
employee’s previous income.
Reporting and Communication Capabilities
Providers with occupational medicine backgrounds should have experience generating the
reports that are required for workers’ comp. The state, the health plan, and the employer must
be kept apprised of the employee’s treatment and progress toward returning to work. Often
these reports must be in a specified format.
When deciding whether to include a provider in a workers’ comp network, a health plan must
consider whether the provider has the knowledge and information system capability to create
15
the necessary reports. The health plan must also consider the provider’s skills at
communicating the employee’s status to the various interested parties. These parties may
include the employee, the employee’s supervisor and other representatives of the employer,
such as an occupational health nurse or disability case manager, representatives of the health
plan, and state authorities.
Required Reports
Physicians are required to complete various reports while treating a patient who has sustained
injuries on the job and is receiving workers’ comp benefits. One of these forms is the Progress
Report.
16
Workers’ Compensation: Compensation Systems

Compensating Providers
Like other health plans, workers’ comp plans may use alternatives to the fee-for-service
compensation system to help control costs and to increase quality. Such compensation
systems include:
• Fee schedules: lists the maximum amounts that providers may provide for specific
healthcare services
• Discounted fee-for-service (DFFS): provider accepts a discount from his or her usual
rates or the state fee schedule
• Risk-sharing bonuses: provider is rewarded with additional funds (a bonus) based on
productivity
o Capitation payments are payments agreed upon by a health insurance
company and a medical provider. The payments are fixed and made on a pre-
arranged monthly basis to a physician, clinic, or hospital, per patient enrolled in
a health plan. The payments are made regardless of whether the patient
sought care
• Case rates: a form of risk-sharing, and are fixed, flat amounts arranged before an injury
arises
• Bonuses based on achieving certain outcomes
Fee Schedules and Discounted Fee-for-Service
Many states have tried to curb rising workers’ comp healthcare costs by instituting fee
schedules. Each fee schedule lists the maximum amounts that providers may charge for
specific healthcare services rendered under the state’s workers’ comp program.
Many health plans reimburse workers’ comp providers according to state workers’ comp fee
schedules or state schedules for Medicare and Medicaid. Fee schedules allow health plans to
regulate increases in medical care by limiting how much medical fees may increase each year.
They also ensure that the fees paid to various providers for workers’ comp benefits are
consistent.
As of 2007, all but eight (8) states had instituted fee schedules.
Other health plans may use discounted fee-for-service (DFFS) arrangements. Under a DFFS
agreement, the provider accepts a discount from his or her usual rates or the state fee
schedule. In return for this discount, the provider gains a potential increase in patient volume
from participation in the health plan’s workers’ comp network. The health plan may also pay
the provider a bonus if the provider meets certain cost-reduction goals for workers’ comp
cases.
17
Sample Fee Schedule: Medicaid
Review the following Sample Fee Schedule for Medicaid it provides the Procedure Code,
Description, and Medicaid Fee.
18
Risk-Sharing Arrangements
Some health plans use a modified form of capitation or some other risk-sharing
arrangement to compensate workers’ comp network providers. Case rates is one form of
risk-sharing compensation arrangement used under workers’ comp. For example, with case
rates, a provider would receive the same fee for each instance of carpal tunnel syndrome
treated.
In some cases, health plans capitate occupational health provider groups or clinics.
However, certain features of workers’ comp coverage tend to make capitation rates
difficult to establish:
• Difficulty in establishing actuarially sound capitation formulas
The variation in claims experience among different industries and occupational groups is
much greater in workers’ comp than in group health, making it difficult to determine
meaningful utilization averages.
• Exposure to higher levels of risk
Because of the long “tail” on workers’ comp claims, a workers’ comp claim can result in
treatment that continues for many years. 20 Workers’ comp provides benefits for a covered
medical condition for as long as the condition requires treatment. An employee who
changes jobs during treatment may be entitled to continued benefits even though he or
she is no longer an active employee or a member of the original employer’s group
healthcare plan. This contrasts sharply with the risks associated with treating isolated
disease episodes.
Because of these factors, capitation and other risk-sharing arrangements are used far less
frequently in managed workers’ comp than in other types of health plans.
Case Study: Capitation in Workers’ Comp and Elsewhere
Fred, the owner of a large furniture company, is in the market for a workers’ comp plan for his
employees in case anybody is hurt on the job. His broker provides him with a choice of plans
using either case rates or capitation. His personal insurance uses capitation, which is
convenient for him, as he frequently requires health care. This way, whether he visits a
medical provider once, twice, or seven times within a month, he is paying the same rate.
However, for someone who rarely needs to see a medical provider, Fred’s capitation payments
could be considered high.
Fred is aware that a workers’ comp plan using case rates for compensation would have a flat,
fixed rate for each different type of injury, only payable after an injury arises. Fred feels
confident that employee injury will be an infrequent problem, based on workplace history and
his knowledge and experience in the industry. Even though his personal insurance uses
capitation, he decides that using case rates would be a better choice for the workers’ comp
plan, because payment would only be required once there is an injury, as opposed to
19
periodically, and there would be a set, agreed upon amount, with no need to negotiate each
time an employee requires workers’ comp.
Outcomes Bonuses
Some health plans give providers bonuses for achieving certain outcomes. For example, a
provider might receive an outcomes bonus if a specified percentage of injured workers
return to work in advance of or by their predetermined target dates. Target dates are set
according to established guidelines for the expected duration of different disabilities.
Tools to Manage Workers’ Comp Provider Performance

Tools to Manage Workers’ Comp Provider Performance
Although not all network management principles are applicable for use with workers’ comp
networks, some health plan concepts offer a clear potential to reduce costs and improve
quality. The tools that may be applied to workers’ comp networks include the following:
1. Case management
2. Clinical practice guidelines
3. Utilization review
4. Prevention programs
Case Management
Case managers for workers’ comp are generally registered nurses or physicians with
experience in occupational medicine or disability management. The case manager
coordinates the care furnished to the employee by various types of providers. The case
manager can improve the quality of care and facilitate the return-to-work process by
ensuring that the care provided is appropriate and by verifying that the care conforms to
available guidelines. The case manager can also reduce the overall costs of care by making
sure that the different providers furnish services that are complementary and non-
duplicative. The case manager can also discourage unnecessary care.
Clinical Practice Guidelines
Clinical practice guidelines are gaining increasing prominence in workers’ comp. Many states
have instituted or are creating mandatory workers’ comp guidelines. Workers’ comp plans
may also create or adopt their own guidelines, which help to ensure that employees receive
appropriate, evidence-based treatment and they discourage under- and overutilization.
Example: The American Academy of Orthopedic Surgeons (AAOS) has adopted clinical
practice guidelines in the area of diagnosis and treatment of carpal tunnel syndrome, which
is another type of injury that frequently appears in the workplace.
By way of example, one of the “Observation” clinical practice guidelines i n this area is as
follows: “Strong evidence supports Thenar atrophy is strongly associated with ruling-in
carpal tunnel syndrome, but purely associated with ruling-out carpal tunnel syndrome.”
20
A clinical practice guideline in this area relating to “Physical Signs” is as follows: “Strong
evidence supports not using the Phalen Test, Tinel Sign, Flick Sign, or Upper limb
neurodynamic/nerve tension test (UNLT) criterion A/B as independent physical examination
maneuvers to diagnose carpal tunnel syndrome, because alone, each has a poor or weak
association with ruling-in or ruling-out carpal tunnel syndrome.”
Utilization Review (UR)
Utilization review is another tool that can be used in a workers’ comp setting to ensure that
employees are receiving quality, appropriate care and to identify instances of
overutilization. Health plans use utilization review results to educate providers concerning
improvements they can make in their practice patterns.
Preventive Care Initiatives
Like other health plan products, workers’ comp plans promote good health through
preventive care initiatives. Workers’ comp prevention initiatives often include these
following components:
• analysis of the work site for safety or health hazards

• injury-prevention programs
• programs to increase employee awareness of safety and health issues 21
Impact of the Affordable Care Act on Workers’ Compensation
Impact of the Affordable Care Act on Workers’ Compensation
The Patient Protection and Affordable Care Act of 2010 (also known as the Affordable Care
Act (ACA), Healthcare Reform, or Obamacare) has had a major impact on the health insurance
landscape. A recent study suggests that ACA’s coverage expansions may serve to broadly lower
costs in the workers’ comp system.
In a study conducted by the University of Pennsylvania and RAND, the following parameters
and results were examined:
• Study parameters: researchers examined ACA’s young adult dependent coverage

expansion to measure the effect of health coverage expansions on workers’ comp claim
frequency and severity.
• Study results: using millions of hospital records drawn from four large states –
California, Florida, New Jersey, and New York – with distinct workers’ comp systems,
researchers found that a 10-percentage point reduction in uninsurance rates in the
target population was associated with a 6% to 9% drop in workers’ comp bills. This
decrease was driven by harder-to-verify conditions, like strains and sprains, as well as
more expensive workers’ comp claims.
21
Notes:
1 Christopher J. Boggs, Benefits Provided Under Workers’ Compensation Laws, Insurance Journal, March 23, 2015,
at 1-2; accessible at https://www.insurancejournal.com/blogs/acade my-journal/2015/03/23/360655.htm
(accessed May 2019).
2 Workers’ Compensation: Benefits, Coverage and Costs, October 2017, National Academy of Social Insurance,
Washington, DC, at 7.
3 Pamela B. Peele and David J. Tollerud, Managed Care in Workers’ Compensation Plans, Annu. Rev. Pub. Health,
2001, 22:1-13, at 1.
4 Edward J. Bernacki, MD, MPH & Shan P. Tsai, PhD, “Ten Years’ Experience Using an Integrated Workers’
Compensation Management System to Control Workers’ Compensation Costs,” 45 -5 J. O CCUPATIONAL & ENVTL . MED.
508, 2003,
https://journals.lww.com/joem/Abstract/2003/05000/Ten_Years__Experience_Using_an_Integrated_Workers_.11
.aspx; Case study: how Macy’s saved on workers’ compensation costs, 2018 Kaiser Permanente; available at
https://www.google.com/search?q=how+macy's+saved+on+workers+compensation+costs&rls=com.microsoft:en -
US:IE-Address&ie=UTF-8&oe=UTF-8&sourceid=ie7&rlz=1I7GUEA_enUS629&gws_rd=ssl (accessed May 2019).
5 Workers’ Compensation Managed Care: What Risk Managers Really Need to Know, January 2014, Lockton
Companies; available at https://www.lockton.com/whitepapers/Rosenblum_ Managed_Care_Jan14_Final.pdf

(accessed May 2019).
6 What is a Case Manager?, Case Management Society of America (2017), https://www.cmsa.org/who-we-
are/what-is-a-case-manager/.
7 Jackie Payne, Back to the Basics: Cost Control and the Role of Precertification and Utilization Review in Workers’
Compensation, MPower (Jun. 11, 2018), https://www.mpower.mitchell.com/precertification-utilization-review-

workers-compensation/.
8 See FALSE CLAIMS A CT, 31 U.S.C. §§ 3729-3733 (2006).
9 A Roadmap for New Physicians: Fraud & Abuse Laws, O FFICE OF INSPECTOR GENERAL , U.S. DEP ’T OF HEALTH & HUMAN
SERVS. (visited July 2019), https://oig.hhs.gov/compliance/physician-education/01laws.asp.

10 Workers’ Compensation: Benefits, Coverage and Costs, October 2017, National Academy of Social Insurance,
Washington, DC, at 5. Separate U.S. government programs cover federal civilian employees and workers in specific
high-risk occupations.
11 Workers’ compensation insurance is optional for employers in Texas. Construction companies on contract for
governmental entities, however, must have coverage.

12 Id. at 5, 7.
13 Christopher J. Boggs, Benefits Provided Under Workers’ Compensation Laws, Insurance Journal, March 23, 2015,
at 2; accessible at https://www.insurancejournal.com/blogs/academy-journal/2015/03/23/360655.htm (accessed

May 2019).
14 Fred L. Hubbs, Jr, Employee Rights on Initial Medical Treatment, USLAW (Hall Booth Smith, P.C., 2015),
http://www.uslaw.org/files/Compendiums2015/Employee%20Rights%20on%20Initial%20Medical%20Treatment/E
mployee%20Rights%20on%20Initial%20Medical%20Treatment%20Compendium%20of%20Law_2015.pdf.
15 Kate Hopman, et al, Clinical Practice Guidelines for the Management of Rotator Cuff Syndrome in the Workplace,
The University of New South Wales, Medicine, Rural Clinical School, Port Macquarie Campus, 2013; av ailable at
https://rcs.med.unsw.edu.au/sites/default/files/rcs/page/RotatorCuffSyndromeGuidelines.pdf
16 https://ota.org/education/patient-education/psas/military-and-civilian-medicine
17 SHERYL TATAR DACSO AND CLIFFORD C. DACSO, M.D., Health Plan Answer Book, 2nd ed. (New York: Panel
Publishers, 1997), 11-6.

18 John Robertson & Dan Corro, WORKERS COMPENSATION VS. GROUP HEALTH: A COMPARISON OF UTILIZATION 9
(NCCI Holdings, Inc., Nov. 2006).

19 Can I get Both Workers’ Comp and Social Security Disability?, Disability Benefits Center (2019),
https://www.disabilitybenefitscenter.org/faq/workers-compensation-and-social-security-disability.
22
19 How Workers’ Compensation and Other Disability Payments May Affect Your Benefits, SOCIAL SECURITY
A DMINISTRATION (July 2017), https://www.ssa.gov/pubs/EN-05-10018.pdf.
20 Gerry Dumke, “Managing Long-Tail Workers’ Compensation Claims,” Caitlin-Morgan (Mar. 14, 2017).
21 Michael B. Stack, “Develop an Injury Prevention Program to Reduce Workers’ Comp Costs,” Workers Comp
Resource Center, https://blog.reduceyourworkerscomp.com/2018/03/develop -injury-prevention-program-reduce-

workers-comp-costs/ (Mar. 22, 2018).
23

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AHM 530: Network Management and Course Overview

Network Management and Course Overview

Following the completion of this lesson, you should be able to:

• Describe the role of a network management director, a contracting specialist, and a

• Define profiling and explain its significance in network management

• Explain the relationship between network management, medical management, risk

Preview of Course Topics

Here are some of the topics we will be covering in this course.

Provider Contracting A critical component of building and managing a health plan’s

Retention Whereas other lessons address the value of a health plan’s

Network Management Key Terms and Module Overview

Provider A provider is any healthcare professional (an individual),

Practitioner The term practitioner is sometimes used to refer to an

Provider Network A provider network, also called a provider panel, is the

Provider Panel Another name for a provider network

The use of a defined network of providers is a distinguishing characteristic of managed

• health plans direct members in need of healthcare services to providers in the

Network management includes all activities conducted by a health plan to design,

Network Management Key Terms

Members Members, also called subscribers,

Accessibility Accessibility is a measure of the extent to

Quality Quality refers to a health plan's

Primary care Primary care is care that is provided directly

Network Management History and Development

Network management, as a function, has fluctuated in focus and importance depending

• provider selection and recruitment

• New models of care delivery, such as patient-centered medical homes (PCMHs)

Patient-centered Patient-centered medical home (PCMH) is a model of care in

Accountable Care Accountable Care Organizations (ACOs) are groups of

Episode of Care An episode of care (episode) is defined as the set of services

Value-based A value-based bundle payment is a single payment for

Pay for The pay for performance reimbursement model provides

The Scope of Network Management

• physicians and acute care hospitals

Network management may be further complicated by considerations for special

Physician-Hospital A Physician-Hospital Organization (PHO) is a legal entity

Independent An Independent Practice Association (IPA) is an organization

Relationship Between Network Management and Providers

Another significant aspect of network management is establishing and maintaining

Organization of the Network Management Function

From an organizational perspective, the network management function is usually a self-

Example B: Local staff collect credentialing or performance information from providers

Organizational Structure of Network Management

Network Management Staffing

Network Management Directors

Utilization and Quality Management Programs

Utilization Utilization management (UM) means managing the use of

Quality Quality management (QM), also called quality assurance (QA)

Example: Contracting personnel should consider the claims administration department's

Provider Relations Representatives

• health plan's records for claims, QM, and UM

A more common use of profiling is to measure the overall performance of providers

Applying Performance Measure

Because provider relations representatives are often a provider's main source of

Figure A: Examples of Operational Areas and Issues that Representatives Address

Benefit coverage: Authorizations and referrals: - When the provider practice

Improving Provider Satisfaction

• policies and procedures with which providers must comply

Organization of the Provider Relations Staff

Support and Training for Network Management Staff Overview

Network management functions encompass a variety of activities that require different

• sales training and experience

• Education about internal plan operations

Education About Internal Plan Operations