Understanding MCO Fixed-Rate Contract Negotiations [Case Model]

The Hope Outreach Medical Clinic

By Staff Reporters

The Hope Outreach Medical Clinic (HOMC) is a private, for-profit, single specialty medical clinic in a south-eastern state.  It submitted its bi-annual Request for Proposal (RFP) to continue its current managed care fixed-rate contract.  Upon review of the RFP, however, Sunshine Indemnity Insurance Company, the managed care organization (MCO), denied the contract request for the upcoming year.

CEO Shock

In shock, the clinic’s CEO asked the clinic’s administrator to work with its legal team to develop a defensible estimate of economic damages that would occur as a result of the lost contract.  The clinic intended to bring suit against the MCO for breach-of-contract.  However, the administrator is not an attorney and is loathe to-enter the fray.  After consideration however, he decided to assist in filing the Statement of Claim (SOC) because he realized that changes in patient services (unit) volume would be a valid economic surrogate.  He then requested the following information from his controller, in order to develop a change in economic profit [damages] estimate:

  • Change in patient visits (unit) volume
  • Fees (price) per patient (unit)
  • Marginal (incremental) cost per patient (unit)
  • Change in current fees (prices)
  • Patient volume (units) affected

Key Issues:

1) Fee (price) per patient (units) may be obtained from the fee schedule used by the MCO to pay HOMC.

2) Marginal (incremental) costs per patient (unit) are approximated using variable costs.

3) Higher cost payers exist because lower patient volumes raise the average cost per patient (unit) due to existing fixed costs. The administrator’s financial work-product to estimate monetary damages and assist the legal team is explained as follows.


Change in profit estimate by: www.MedicalBusinessAdvisors.com

Change-in-Profit = Change in patient (unit) volume X [Fee (price per patient unit) – Incremental (marginal) cost per patient (unit)] – [Change in current price (fees) X Patient (unit) volume affected].


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One Response

  1. My List

    There are several things to consider in this type of situations and a ton of variables when it comes to negotiating / finding a solution to an issue this complex. Here are some things to keep top of mind:

    1. Don’t get too emotional.
    2. Don’t get personal or lose your dignity.
    3. Do not share your information as it may be used against you later.
    4. The first offer should not be the last offer.
    5. Stand firm and wait for better counter offers.
    6. Take your time.
    7. Seek professional help if you feel you are in over your head.

    Make sure whatever you end up putting together here (either a new provider or a new contract) that you incorporate some protective or ‘safe harbor’ clauses to cover termination of contracts and renegotiation.



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