‘Carve outs’ among keys in managed care negotiations

Among the range of considerations for providers negotiating contracts with health plans, “carve outs” are a crucial consideration that some may miss, says a seasoned hospital veteran of negotiations.

Providers with managed care contracts need to ensure they have appropriate carve outs to cover additional costs for certain types of patients, in order to ensure sufficient payment to cover the costs of such services, said Joe Avelino, CEO at College Medical Center in Long Beach, California in “Understanding the Semantics and Execution in Contract Negotiations,​” a July 15 session of the HFMA 2020 Digital Annual Conference.

Avelino provided case studies that highlighted the financial significance of including carve outs to help cover additional costs associated with conditions like mental health care, implants, high-cost drugs and dialysis.

“Some organizations take this for granted but you have to ask because at the end of the day what happens? With that patient for that health plan, you’re responsible to pay for that dialysis,” Avelino said. “But when I negotiated the specific contract, I made sure I had a carve out for dialysis.”

Providers need to request the specific carve outs, whether they are negotiating with commercial health plans, Medicare Advantage plans or Medicaid managed care plans.

The carve out proposals should follow separately from proposed per diem rates, as part of the negotiation.

Service line effects

Some health plans offer lump sum payments that include care provided through medical-surgical beds, intensive care units and telehealth. But the costs for each setting can vary widely and hospitals should understand their average costs for each to ensure specific rates are paid for each.

“You need to ask those questions because those different levels of care can be more complex and more expensive,” Avelino said.

In the case of medical-psychiatric services it is important also to account for detox services, as an example of common associated care.

“Ask to negotiate that carve out,” he said.

Hospitals paid through MS-DRGs will receive payments for three to four days of care. Successive administrative days during which a patient’s post-acute placement is sought will require a specific negotiation.

Separate negotiations also are needed for patients placed in observation status for certain conditions when they don’t meet the medical criteria for inpatient status.

Separate payments for emergency departments (EDs) care also need to be negotiated for each of the ED I-V status levels, which denote intensity of care and can have widely varying costs.

Dialysis rates should consider whether hemodialysis or peritoneal dialysis is used.

“Take an average of your costs for your dialysis patients and their bills and then ask for that during your negotiations,” Avelino said.

Additional carve outs are needed for high-cost drugs, including those administered to HIV and cancer patients.

“If you don’t ask for it as part of your negotiations, guess who’s responsible for that? You are, as an organization,” Avelino said.

Although some health plans have pushed back on carve outs for CT scans and MRIs, hospitals still should seek them, he said.

High costs make carve outs especially important for surgery and implants. For instance, total hip orthopedic implants can cost $15,000.

Additionally, in the case of outpatient surgery covered by the health plan, a hospital may negotiation for 100% of Medicare rates.

DOFR key

The division of financial responsibility is another important tool in the contracting process by health plans, physician organizations and hospitals in capitated or shared risk payment arrangements to define which party is financially responsible for services rendered.

“When you go into negotiations understand who is going to pay for it,” Avelino said. “Is it going to be the health plan, is it going to be the physician group, is it going to be the hospital or is it part of a capitated, shared-risk payment arrangement? Know that in advance before you sign the contract.”

Avelino also warned hospitals entering large, fixed-payment, shared-risk models to find out if they are responsible for out-of-network services those patients also receive. Those can include costly care, such as orthopedic procedures, oncology services, HIV care and cardio-thoracic surgeries.

“So, don’t even come to an agreement just because it favors the fact that you have 100,000 lives [under contract] but at the end you will continue to have losses because you don’t have carve outs,” Avelino said.