Maintain compliance and safeguard assets when outsourcing managed care contract negotiations and contract reviews

As a consultant in the highly regulated healthcare industry, both in the USA and abroad, I frequently encounter challenges when clients ask me to do things that are not permissible as a professional and established healthcare business consultant.

Often, they ask for things out of ignorance. But when they know better and ask anyway, I decline to do business with them and turn down inappropriate assignments.

For instance:

• In the medical group practice setting, I cannot contract terms and rates and conditions or even analyze terms, rates and conditions for non-employed physicians. So if the clinic hires a few doctors and then engages others as independent contractors, I cannot negotiate the contract for the independent contractors. What they do with the outputs I supply after I've completed my analysis is not my business or concern. If they share these among the others and I have used reasonable commercial efforts to note my concerns with contracting for both shareholder or employees and their independent contractors in my engagement agreement, that's on them - and I am not a conduit for the malfeasance or non-compliance. Nor am I the FTC or DOJ police.
• In the non-profit IPA, PHO or MSO setting, a similar situation arises. I can act as the messenger for the non-risk, non-employed members of the IPA or PHO, but I cannot set terms, rates and contract language for all. 
• If the IPA, PHO, ACO or MSO participants are shareholders and assume risk and are deemed “economically integrated” by their attorney or general counsel, then I can negotiate terms, rates and contract language and push hard on deal breakers for the group as a whole.
• If I’ve had more than one client in a relevant geographic market (defined on a case by case basis) in the past two years, then I don’t want to see the rate sheets and price offers sent by the payer. Many novice consultants actually advertise their value as “knowing the rates you can get” in a certain market. Why not just call the Federal Trade Commission and the Department of Justice and self-report for naked price fixing! Ignorance of the law brings unfair competitive advantage - but only as long as it takes for the more seasoned consultant who has been impaired by the unfair advantage and antitrust violation to blow the whistle on them with a single phone call or email.

For the client who hires someone that knows and is willing to share their past clients' or employers' rates, sharing this information is unethical and violates the confidential nature of the rates negotiated for the previous client(s). But the breach may or may not actually give unfair advantage to a client's competitors.

If brand value is not commoditized, then knowing what the previous suppliers in the market were paid is essentially irrelevant beyond having a feel for a “range” that the payer can afford. 

For example, I can know what the Cleveland Clinic gets paid for a surgery in Cleveland, Fort Lauderdale, or Las Vegas. But if their competitor doesn’t offer Cleveland Clinic brand value, similar prestige and competitive advantage, what does it matter? Knowing those rates isn’t the same as being able to negotiate those rates for someone else.

To maintain “clean hands”, I prefer to let my clients keep the rates confidential and away from me and let me instead clean up waste and administrative hassle which, in the long term, reduces fully- loaded costs and preservers more margin from the rates that they agree to be paid.

Paying consultants on success or contingency

Consultants who engage to do managed care contract analysis and negotiation cannot be paid “on success” or contingency because there are many ways to relate that kind of arrangement with many constraints on raising healthcare costs in a market. Imagine the bad publicity associated with that if it were to come out in the media! "XYZ hospital hires consultant to gouge prices for healthcare!"

While it might seem like a great alternative at first blush, the contingency method to compensate an independent contractor analyst is too difficult to manage over time for both parties. At a minimum, it would require access on demand to an accounting of all payments, refunds, appeal decisions, etc., in order to enforce the consultant’s contract which would increase costs and administrative hassle for both consultant and the client. 

This sort of arrangement would also put the consultant in the position to have to know the rates, which as I stated above, is in appropriate unless the consultant only has one client in the region. Often that breaks one of the IRS definitions of an independent contractor. Without more than one client, the IRS can deem the consultant is really an employee. The client can then be held accountable for a lot of unanticipated costs.

Exclusive deals and Non-compete Agreements

I have never agreed to sign undefined, long term or wide area non-compete agreements ("NCAs") with clients. I will sign a non-disclosure agreement. I might sign a non-compete agreement for the time I am working with their competitor and a buffer zone of a few months, but what clients often don’t understand is that a non-compete for a consultant is essentially a “paid holiday”. 

For the duration of the time of the buffer zone, since the person who agreed to honor the non-compete cannot work in their craft during that time, they must be compensated for the inability to generate revenues with the competitor. I’ve had clients tell me they want a non-compete agreement in addition to the non-disclosure for any other competitor in the same specialty, anywhere in the country for two years. Sure! No problem. Please write a check for $150,000 (or more) and I will consider it. Most tell me that they had no idea that other people pay money associated with non-compete agreements. Most people view NCAs as an intangible asset. Not hardly.

A NCA must have an associated value to be enforceable. When valuing a non-compete agreement, an appraiser considers several factors. These include the value of the overall business, the probable damages a breach might cause, the likelihood of competition, and the enforceability of the non-compete agreement. Competition from a former employee or independent contractor consultant who didn’t sign a non-compete agreement could potentially force a company out of business. So the value of the entire business represents the absolute ceiling for the non-compete agreement’s value. Most likely, a key employee or independent contractor consultant couldn’t steal 100% of a business’s profits. Plus, tangible assets possess some value and could be liquidated if the business failed.

The next benchmark is estimating how much business the independent contractor consultant or a key employee could take during the term of the noncom non-compete agreement. Often an appraiser runs two separate discounted cash flow scenarios. The difference between cash flows with and without a non-compete in place represents a second ceiling for the non-compete agreement’s value. Factors the valuator considers when preparing the different scenarios include the company’s competitive and financial position, business forecasts and trends, and the employee’s or independent contractor consultant unique skills, market demand for those skills, existing and future customer relationships and potential future income that must be forfeited (and for how long) due to the non-compete terms and conditions.

Next, the appraiser multiplies each differential by the probability that the independent contractor consultant or key employee will subsequently compete with or enable competition with the business. If the party in question has no incentive, ability or reason to compete, the non-compete could be worthless.

But when considering and attempting to predict the threat of competition from an independent contractor consultant or key employee, the appraiser values the lesser of: the amount of economic loss if individual were to compete or divulge trade secrets to a competitor, or the level of reasonable compensation individual could have earned during the restricted period.

Keep in mind the old saying, “locks are for honest people”. If you really feel you need a non-compete agreement and cannot trust your employee or independent contract managed care consultant without one, should you really be betting the success and competitive value of enterprise on a piece of paper?

If your invoice from your consultant is $5000 once every three to five years, but the value of what they could leak if they violate your non-disclosure agreement is several million dollars, what’s the value of the non-compete agreement?

If the consultant wants to buy out their freedom in order to work for someone else, often the new client will pay the non-compete remaining value in order to be able to hire the consultant anyway. That value must be stated in the non-compete in order to make it enforceable.

In reality, when this has been explained to the client, they either choose to hire me and agree to acknowledge my integrity and settle on a non-disclosure agreement as a formality or they don’t hire me. I’ve never ended up having a client pay me to sit idle and not work for their competitor for a fee of $150,000 to $200,000. I have, however, had many who assumed I didn’t know any better and would simply sign their lawyer’s boilerplate NDA/NCA. They quickly learned otherwise.

One last consideration didn’t dawn on me until recently: Whether, in the absence of the NCA, the covenantor would desire to compete. If your consultant is near retirement or already semi-retired, and in the wind-down phase of their career, the valuation can change significantly. That is because if the likelihood or eagerness to work for more or other clients is low, then the appraiser will take that into consideration as a reduction into the amount that might be negotiated as the value of the NCA to replace reasonable compensation that the individual could have earned during the restricted period. This relates to Revenue Ruling 77-403 (1977-2 C.B. 302) from the IRS in how to substantiate and document the value of the NCA. I came to know this because I also negotiate a lot of physician employment contracts and many of these have NCAs embedded within their terms and conditions.

Assume that there will be 20 relevant factors to test for economic reality in valuing NCAs:

1.      The consultant’s ability to work for a competitor (skill, experience, expertise and training, age and health)

2.      The consultant’s intent to work for a competitor

3.      The consultant’s economic resources to sit idly until the restriction period is over

4.      The potential damage to the buyer posed by the consultant’s work for the competitor

5.      The consultant’s business expertise and standing in the industry

6.      The consultant’s contacts and relationships with customers, suppliers, and other business contacts

7.      Buyer’s interest in eliminating competition

8.      Duration and geographic scope of the covenant

9.      The consultant’s intent to reside in or work for other clients the same geographic area

10.  The enforceability of the covenant under State law

11.  Whether the payments under the covenant cease upon breach of the covenant or upon death of the grantor if paid periodically instead of in a lump sum

12.  Decreased overhead absorption due to lower volume?

13.  Higher marketing and branding or rebranding expenses?

14.  Increased salary expenses to keep incumbent employees from defecting to new competitor?

15.  More R&D required to stay competitive and brand differentiated?

16.  If competition rose up immediately, how long until it would affect the existing business?

17.  What are the start-up costs ($ and time) to competition with the guidance of the consultant?

18.  When would competition begin?

19.  Barriers to entry: Are current customers on long-term contracts? (In managed care, never!)

20.  Could the duration/intensity of competition be reduced by any potential retaliatory impact of the existing company?

The value of an NCA is most often derived from the avoidance of loss as a result of:

• Reduction in client’s revenue tied to the breach, stated as a damage
• Increase in client’s expenses tied to the breach, stated as a damage
• Deferral of development tied to the breach, stated as a damage
• Change in working capital needs tied to the breach, stated as a damage, and
• Anything that could otherwise reduce the cash flows or otherwise damage the business of the client

I hope that this brief article will help you engage with independent contractors who provide managed care contract analysis and negotiations easier and more effectively while keeping you out of harm's way. If you have questions, please write them below, call me or email me.

About Maria Todd

Maria Todd is a seasoned managed care contractor and analyst with more than 35 years of experience negotiating third-party payer contracts for doctors, hospitals, and other healthcare providers. She is the author of 18 indispensable handbooks and business management books written for physicians, hospitals and healthcare organizations.

She teaches Master Classes on Managed Care Contracting and Negotiation, Bundled Case Rate Development, Capitation, and Appealing Denied Claims. She helps clients with contract analysis and backs them up or attends negotiations on behalf of the client. She frequently teaches at the Healthcare Business Institute and also offers personalized coaching for hospitals and doctors at Red Mountain Resort and the Inn at Entrada, both located in St George, Utah (112 miles north of Las Vegas).

Get in touch with Maria at 800-727-4160.