DHA 715 Week 4 Contractual Risk Analysis Example

Read the Fine Print: Managing Contractual Risk in Payer, Vendor and Risk-Sharing Agreements for Four Rural Hospitals

[Student Name]

University of Phoenix

DHA/715: Risk Management in Complex Health Organizations

Week 4 Assignment

[Instructor Name]

[Date]

The rural hospitals, contracts, clauses, denial rates, dollar figures and review process are composites written for a model paper; research findings and report findings come from the sources cited.

On a Friday afternoon, the company that staffed the emergency department at the smallest rural hospital gave thirty days' notice that it was ending the agreement. The contract allowed either side to terminate without cause on that notice, a clause no one had reviewed since the agreement was signed six years earlier. The hospital found replacement coverage with eight days to spare, at 40% higher cost. The regional vice president asked what other risks were buried in the region's contracts. This paper answers that question.

The Contract Inventory

The first step was simply finding the contracts. The region's legal and finance teams gathered 212 agreements across the four hospitals: 19 payer contracts, 64 vendor and service contracts, 47 physician and staffing agreements, 38 equipment leases and maintenance agreements, 22 affiliation and transfer agreements and 22 others. Eleven could not be located in signed form, and 37 had renewed automatically without review.

Clauses That Shift Risk

Six kinds of clauses carried the most exposure. Termination without cause lets a partner exit quickly, as the staffing company did. Automatic renewal locks in terms that may no longer fit. Indemnification decides who pays when a third party is harmed. Limitation of liability caps what a vendor owes after a failure. Exclusivity prevents the hospital from using other suppliers. Data security and breach notification terms decide who responds, and who pays, when patient information is exposed.

Rating the Clauses

Each contract was scored on the presence and strength of these clauses and on the importance of the service it covered. Contracts for emergency coverage, anesthesia, laboratory services, the electronic health record and the largest payers were rated critical. Of the 31 critical contracts, 14 allowed the other party to terminate on ninety days' notice or less.

Payer Contracts

Payer contracts are the region's largest financial exposure. About half of the region's Medicare patients are now enrolled in Medicare Advantage, and denials of prior authorization for imaging and post-acute stays have risen. Rural patients waiting for approval to move to a rehabilitation facility often stay in the hospital longer, occupying beds without payment. Last year the four hospitals recorded 1,140 such waiting days, worth about $1.6 million at average cost. The largest commercial payer, which covers a third of the region's working-age patients, has a contract that allows it to change its payment policies with sixty days' notice, a clause that gives the payer unilateral power over rates the hospitals believed were fixed.

What Federal Reviewers Found

The rural experience is not unique. When federal reviewers examined denials issued by 15 of the largest Medicare Advantage organizations during one week in 2019, they found that 13% of denied prior authorization requests met Medicare coverage rules and that 18% of denied payment requests met both coverage and billing rules; common causes included the use of clinical criteria beyond Medicare rules and claims that documentation was insufficient when records supported the service (Office of Inspector General, 2022). A denial is not the final word, and the contract should say how quickly it must be reconsidered.

Negotiating Payer Terms

The region will seek contract language on decision timelines, peer-to-peer review with a physician in the same specialty, payment for days spent awaiting a plan decision and a limit on retrospective denials of authorized services. It will track denial and overturn rates by plan and bring the data to renewal negotiations.

Risk-Sharing Contracts

The network is considering a contract in which the rural region would share in both savings and losses for 18,000 attributed patients. Downside risk means that if spending exceeds the target, the region repays part of the difference, which could reach $2.1 million in a bad year.

What Evaluations of Risk Contracts Show

Evidence suggests savings are real but modest. In the first year of a Massachusetts global budget contract, spending rose less for enrollees in participating groups than in controls, a difference of 1.9% a quarter, with gains in chronic disease and pediatric quality measures; however, the insurer's bonus and surplus payments likely exceeded the savings that year (Song et al., 2011). In Medicare, organizations entering the Shared Savings Program in 2012 achieved about 1.4% savings in 2013 while those entering in 2013 showed almost none, and independent primary care groups saved more than hospital-integrated groups (McWilliams et al., 2016).

Implications for the Region

The evidence suggests caution. A hospital-integrated organization in its first contract year may not achieve savings, and a small attributed population makes results volatile. The region will accept shared savings without downside risk for two years, invest in care management and move to downside risk only if spending trends and data systems support it.

Vendor Contracts

Vendor contracts carry operational risk. The electronic health record contract limits the vendor's liability to one year's fees, far below the cost of a prolonged outage. The laboratory reference contract has no service-level commitments for turnaround time, even though delayed results for sepsis and cardiac markers can change treatment in a rural emergency department. And several technology vendors with access to patient data lacked clear breach notification timelines.

Physician and Staffing Agreements

Staffing agreements drive the risk of losing services. Beyond the emergency contract, the anesthesia group's agreement could also end on ninety days' notice, which would stop surgery at two hospitals. The region will seek longer notice periods, transition assistance obligations and, where feasible, backup arrangements with network providers. Physician employment agreements also need attention: several include compensation formulas tied to volume that compliance counsel flagged for review against federal referral laws, and noncompete terms that could keep a departing surgeon from practicing in a town with no other surgeon.

Clause Standards

The region adopted minimum standards for critical contracts: at least 180 days' notice for termination without cause, no automatic renewal without review, mutual indemnification, liability limits scaled to potential harm, breach notification within 72 hours and transition assistance at termination.

The Review Process

A contract review committee, chaired by the regional finance director with legal, compliance, information security and clinical members, reviews every new or renewing contract rated critical or high. A contract database records owners, key dates and clauses, with alerts 180 days before renewal or expiration.

Measures

Measures include the time from receipt of a draft to signature, the share of contracts with a named owner, contracts reviewed before renewal, critical contracts meeting clause standards, denial and overturn rates by payer and days awaiting payer decisions.

Priorities for the First Year

Three contracts will be renegotiated first: the anesthesia agreement, the electronic health record contract's liability limit and the largest Medicare Advantage contract's authorization terms. Each was chosen because it combines a critical service with weak terms and a renewal date within the next year, so the region can act before the next surprise.

Conclusion

A thirty-day termination notice revealed the risk sitting in the region's contracts. An inventory of 212 agreements found unreviewed renewals and clauses that left critical services exposed. Federal findings on denials guide payer negotiations, evaluations of risk contracts counsel a gradual move to downside risk and clause standards and a review process give the region control of its agreements.

References

McWilliams, J. M., Hatfield, L. A., Chernew, M. E., Landon, B. E., & Schwartz, A. L. (2016). Early performance of accountable care organizations in Medicare. New England Journal of Medicine, 374(24), 2357-2366. https://doi.org/10.1056/NEJMsa1600142

Office of Inspector General. (2022). Some Medicare Advantage organization denials of prior authorization requests raise concerns about beneficiary access to medically necessary care (OEI-09-18-00260). U.S. Department of Health and Human Services. https://oig.hhs.gov/oei/reports/OEI-09-18-00260.pdf

Song, Z., Safran, D. G., Landon, B. E., He, Y., Ellis, R. P., Mechanic, R. E., Day, M. P., & Chernew, M. E. (2011). Health care spending and quality in year 1 of the Alternative Quality Contract. New England Journal of Medicine, 365(10), 909-918. https://doi.org/10.1056/NEJMsa1101416