Observation Deck

Understanding Managed Care

What are Managed Care Plans and how can HME providers properly prepare to negotiate agreements with those plans?

Historically, DME suppliers have taken care of Medicare patients and have billed CMS directly. This is known as “Medicare fee-for-service” (or “Medicare FFS”). Also, historically, suppliers have taken care of state Medicaid patients and have billed state Medicaid programs directly (“Medicaid FFS”). All of this is changing. Today, about 35 percent of Medicare patients are covered by Medicare Managed Care Plans (commonly known as “Medicare Advantage Plans”) and about 70 percent of Medicaid patients are covered by Medicaid Managed Care Plans. These percentages are increasing.

Here is how a Medicare Advantage Plan works:

  • An insurance company will create (and own) a subsidiary corporation (or LLC) that will sponsor the “Plan.” The Plan will sign a contract with CMS.
  • The contract will say that the Plan will be responsible for those Medicare patients who sign up with the Plan.
  • The Plan will market to Medicare beneficiaries with the goal of persuading them to “sign up” with the Plan...as opposed to staying with Medicare FFS or signing up with a competing Medicare Advantage Plan.
  • The Plan will create a “network” of health care providers: hospitals, physicians, labs, DME suppliers, home health agencies, etc. A provider will join the network by signing a contract with the Plan.
  • When a Medicare patient sees a Plan provider, then the Plan provider will bill (and receive payment from) the Plan. The Plan, in turn, receives payment from CMS.
  • The Plan’s goal is for the money it receives from CMS to be more than what the Plan pays providers...with the Plan “pocketing the spread.”

A Medicaid Managed Care Plan works essentially the same way:

  • Less populated states may have only a couple of Medicaid Managed Care Plans.
  • Populous states will have a number of Plans that compete with each other.

Challenges Facing Suppliers

As DME suppliers are being drawn into the Medicare and Medicaid Managed Care arenas, they are facing a number of challenges:

  • A Plan may be “closed” to new DME suppliers. Essentially, the Plan says to the supplier that wants to be admitted into the Plan’s network: “We have enough DME suppliers to service our “covered lives. We don’t need you in our network.”
  • A Plan will announce on e.g., 1/1/19 that (i) it has been paying $100 for Product A, (ii) it should have been paying only $80 for Product A, and (iii) therefore, the Plan will retroactively recoup the difference back to 12/31/17.
  • The Plan’s contract will state that the supplier must take “assignment” from the covered life (i.e., the DME can’t sell an item to the covered life for cash).
  • The Plan’s contract will state that the supplier must adhere to the Plan’s manuals, policies and other written guidelines as amended from time to time. Said another way, the supplier must adhere to “outside” documents that are not part of the contract.
  • The Plan’s contract will state that the Plan can amend the contract from time-to-time (including modifying the reimbursement) upon giving written notice to the supplier.
  • The Plan’s contract will allow the Plan to terminate the contract without cause upon giving prior written notice to the supplier.
  • The Plan will enter into a “sole source” contract with ABC Medical Equipment, Inc. This means that the Plan’s covered lives can only secure DME from ABC.

Preparing for the Negotiation Process

In entering into contract negotiations with a Plan, the DME supplier should take several steps to improve its position under the contract. The supplier should evaluate its reasons for entering into the contract. For example, does the supplier really need the contract? Is the supplier discovering that so many of its existing and prospective patients are covered by the Plan that it is important for the supplier to secure the contract? The supplier should have a sense of its strengths and weaknesses, conditions influencing the market, and the competition. In doing so, the supplier will have an understanding of how strong — or how weak — its bargaining position is.

The supplier should find out information about the Plan. For example, the supplier should attempt to determine how many other DME suppliers are already in the Plan’s network or whether the Plan intends to expand. The supplier should have an understanding of the Plan’s market position and how it handles contracts with other health care providers/suppliers. The supplier should seek to determine if the Plan is financially solvent. A telling fact about any Plan is its age and its market share. The supplier should obtain a copy of the contract proposed by the Plan, as well as collateral documents incorporated by reference in the contract, and review them carefully.

Prepare a list of questions to ask the Plan regarding the contract including:

  • The amount of time the current contract form has been used;
  • Whether or not the Plan knows of other DME suppliers that would be willing to discuss the terms of the contract;
  • The terms that are most commonly modified in the contract; and
  • Any significant modifications made to the form contract within the past 12 to 18 months.

By taking these steps, the supplier will have the basic information necessary to review the contract and prepare a list of issues to be addressed during negotiations with the Plan. The supplier should determine whether its state has an “any willing provider” law … and if it does, whether such law extends to DME suppliers. If the supplier desires to join with other suppliers in order to “negotiate as a group,” then the supplier should have an understanding of antitrust laws. For example, such laws prohibit suppliers from engaging in “price fixing” or “restraint of trade” or “market allocation.” The supplier’s ability to negotiate specific terms depends on the amount of leverage it has in its market. Suppliers need to educate Plans concerning the suppliers’ costs in providing the products and services required under the contract. Before the supplier can do this, however, it must know its costs.


This is a portion of a four-part series of articles on Managed Care Plans from Jeffrey S. Baird, Esq. that is available on HME-Business.com.

This article originally appeared in the April 2019 issue of HME Business.

About the Author

Jeffrey S. Baird, Esq., is Chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents HME companies, pharmacies, infusion companies, manufacturers and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or jbaird@bf-law.com.

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