December 2009
Feature Story

Karen Lusky

In some ways, hospitals are in the driver’s seat when negotiating a contract with community pathologists who want to provide pathology services and laboratory direction for patients at a hospital. More than one pathology group is often knocking at the hospital’s door to do business, and hospitals control the Part A payment for the professional component of clinical pathology services.

But contracting acumen and savvy bargaining skills can boost pathologists’ odds of getting and keeping favorable hospital agreements. And pathology groups that become highly valuable players to a hospital’s administrators and medical staff may have a special ace up their sleeves at contract renewal time.

“A lot of contract negotiation is just jousting,” says consultant Mick Raich, president and CEO of Vachette Pathology, Blissfield, Mich. As bargaining chips, provisions are put into the contract that the hospital is likely to remove when the wrangling begins, such as asking the hospital to pay for part of the cost of a pathology assistant or second opinions, he says.

Quid pro quo can be a constructive tech­nique to help the other party see your perspective, says Paul Valenstein, MD, president of Pathology and Laboratory Associates, Ann Arbor, Mich. “When presented with what I consider to be an onerous requirement, I propose making the requirement reciprocal—binding on both parties—rather than rejecting it outright. This approach helps the other party think about what it is like to be on the receiving end of the requirement. Maybe we both need to be held to the proposed standard. Or maybe it isn’t right for either of us.”

It also pays for pathologists to know, in general, which contract provisions actually benefit them—and which need to be ditched or fixed. Being able to tell the difference isn’t always easy.

Attorney Jack Bierig, of Sidley Austin LLP in Chicago, gave a presentation at CAP ’09 on pathologist contracts with hospitals. He believes it is a major mistake in the contract to characterize the services of the pathology group as services “for the hospital” or as “administrative services.”

“If a pathologist is going to bill patients or their payers, then the services billed have to be medical services for patients—not administrative services and not services for the hospital,” Bierig says. “When a pathologist is looking at a slide or signing out a clinical pathology report, or when any specimen goes through the lab, what the pathologist is doing is for the patient, not the hospital. It’s not about diagnosing the hospital; it’s about diagnosing the patient”—whether or not the pathologist actually reviews the particular specimen. Conversely, the contract should not attempt to denominate true administrative services as patient services. Conduct such as participation on utilization review committees is not a service for patients. “I’d distinguish them from patient services in the contract,” he advises.

The pathology group should also be careful in the contract to characterize accurately the services that are covered by any payment from the hospital, Bierig says. “If the payment is just for Part A clinical pathology services to Medicare patients, the contract should not recite that the payment is for clinical pathology services to patients generally.” Making that distinction is important, Bierig explains, because if the hospital is going to pay the pathologist for the professional component of services provided to private pay patients, the pathologist cannot charge private pay patients separately. “The patients or their insurance companies could, and probably will, accuse you of doubling billing, on the theory that you have already been paid by the hospital for those services pursuant to the payment provision in the contract.”

Bierig also cautioned CAP ’09 attendees to beware of contract provisions requiring them to pay a leasing fee for the laboratory and equipment. Hospitals sometimes try to impose such a fee in an amount that approximates what the hospital would otherwise offer as payment for Part A services to Medicare patients. The result is a quid pro quo that leaves the pathologists with no or token payment for directing the laboratory for Medicare patients. If asked to agree to such a provision, he suggests, pathologists might tell the hospital administration that they’ll pay rent for the laboratory when the hospital starts charging surgeons for operating room use.

As for calculating Part A payment, which is included in the hospital’s DRG payment, pathologists have a number of options. Vachette’s Mick Raich says the options include using a formula based on the number of hospital beds, using an hourly rate, or using the relative compensation equivalent, or RCE.

Using the RCE methodology, the group breaks out the time each pathologist spends providing clinical pathology services to Medicare patients, Raich says. As an example, suppose a pathologist practicing in a metropolitan area with fewer than 1 million people spends 30 percent of his or her time on clinical pathology in a hospital that has a 60 percent Medicare census. The pathologist would multiply .3 (30 percent time) by .6 (the Medicare population), Raich explains. That total, .18, would then be multiplied by $219,500, which is the RCE for one FTE pathologist. Thus, $39,510 is the RCE. If the group consists of four pathologists, $39,510 would be multiplied by four to get the total group estimated payment of $158,040. “Of course, this is all arbitrary,” Raich notes, “as the number could be bigger or smaller depending on the negotiations.”

“There is no set benchmark for Part A,” Raich adds. “Everyone wants to say the RCE is a benchmark, but it hasn’t been updated forever. When working with pathologists, I like to put two or three options out there to see how they compare.”

Getting the hospital to ante up what the pathology practice views as fair Part A payment can be a tough sell in some cases.

Ten percent of pathology groups, Raich says, do not receive any Part A payment from hospitals with which they contract, and that varies regionally. “HCA and Tenet have been very aggressive about not paying for Part A work, and as hospital revenues get tighter and tighter, hospitals that hear they maybe don’t have to pay pathologists for Part A work then follow suit.”

Many hospitals, says attorney Jane Pine Wood, of McDonald Hopkins in Dennis, Mass., “do not understand they are actually getting payment through the DRG for the professional services related to clinical pathology.” And “if they don’t pay the pathologist for those services, it looks like a kickback” for giving the pathologist the Part B anatomic pathology work, she adds. Other hospitals are perfectly aware of the DRG payment and choose to ignore the compliance issue, in Wood’s experience.

Hospital administrators and legal counsel at various hospital chains—and even a compliance officer, a lawyer, at one for-profit hospital organization—have told Wood that they know the OIG is concerned about Part A payment but that “if the pathologists make a fuss about it,” the hospital will terminate their contract.

“And there may be some other pathology group in town that has excess capacity who would be happy to take over the contract. Or some of the national labs may bid on it,” Wood says.

Bierig agrees that, in theory, the government should pursue cases in which the hospital does not pay the pathologists adequate Part A payment. “A failure to pay fair market value for the Part A services is, in effect, payment by the pathologists, and receipt by the hospital, of something of value—that is, the value of the Part A services, in return for the referral of the Part B work covered by the contract.” Thus, the anti-kickback provisions of the Medicare Act are implicated. “But the government generally goes after anti-kickback violations where the government is out of pocket, and in this case,” he says, “the pathologist is out of pocket—not the government.”

Thus, if it’s a choice between having that theoretical risk or the contract, Bierig says, “I’d take the contract.”

Even if the hospital will not provide adequate Part A payment, a pathology group may still be able to forge a viable deal by billing nongovernment payers for the professional component of clinical pathology.

“Component billing,” says attorney Rick Cooper, who spoke on the topic at a McKesson sponsored session at CAP ’09, “can work out well for many groups.” Cooper, who is with McDonald Hopkins in Cleveland, says his firm has had a number of clients who have generated “substantial revenues” by billing for the PC of clinical pathology services.

“The AMA, which manages the CPT system, has stated that you do not need a written report to bill the PC for clinical pathology—you attach the 26 modifier,” Cooper notes.

Linda Liston, CPC, director of managed care services with Mc­Kesson Revenue Management Solutions, presented with Cooper at CAP ’09. She says there are very few states in which pathology groups are not billing private carriers for the professional component of clinical pathology. “Many of the larger carriers will pay the clinical pathology PC as long as you negotiate with them in good faith,” Liston says, and are willing to enter into a multiyear contract. In her experience, the payment range for PC services runs from “a low of $3 to a high of $10 per line item.”

Pathologists should try to make sure, however, that the hospital contract doesn’t take that potential revenue off the table.

“Ideally,” Cooper says, “the hospital contract would give the pathologist the express right to bill for those services.” If it does not, he says, pathologists should watch out for provisions that prohibit them from doing so, or provisions requiring them to obtain hospital permission to bill for it after signing the contract. The latter provision, as Cooper noted in his presentation, “locks the pathologists into the contract” without their knowing if they can bill for the PC of clinical pathology services. And that makes it hard to know how economically sound the contract is.

Pathologists should also take a hard look at managed care provisions in the hospital contract to make sure private payers do not end up managing the practice’s revenue. “Sometimes the managed care plans require lab work on their patients to be sent to a national lab,” Bierig says, and that’s bad for pathologists, who should try to get a provision in the contract giving them the right to match whatever the managed care plan is paying.

“The worst thing you can see in contracts,” Vachette’s Raich says, “are punitive managed care clauses” requiring the pathologist or group to sign every insurance plan the hospital signs or the hospital will cancel the contract within 90 days. Raich recently reviewed a contract in the Pacific Northwest that had such a clause in it—and “it’s the death knell for pathologists,” he says. “Payers know those clauses are out there and they use this to their advantage when they negotiate.”

The ideal hospital contract provision related to private payers, Cooper says, is one that allows the pathologists to choose with whom they contract. “The second best would be a provision that says the pathology group will enter into good-faith negotiations with payers” but has no obligation to sign a contract with a payer if the group chooses not to. “The third best approach would be a provision that says the pathology group has to participate only with payers that pay them at or above a pre-determined fee schedule.”

As a compromise of sorts, Bierig proposes pathologists include a provision that requires the hospital to pick up the difference between what the managed care plans will pay and what the pathology practice considers to be a “reasonable” rate. The provision would specify that the pathology practice and hospital “shall work together in good faith to arrive at a reasonable rate for such services,” Bierig says.

“That’s a fairly good managed care provision,” he adds, even though the definition of “reasonable” is open to negotiation. “At least it gives you a hook.”

Even if hospitals would like to be reasonable, Wood says she has found that some of the private insurance payers play hardball. She has, for example, seen some Blue Cross insurers include language in their contracts that docks the hospital 10 percent if the hospital does not get all of the hospital-based physicians to participate in its managed care plans. As a result, “a pathology group we represent got called to a meeting with the hospital and Blue Cross where the hospital said, ‘You have to sign or we’re [invoking the 90-day termination clause] in your contract.’

“The pathology group signed,” she says.

That scenario underscores the dangers of another contract provision that is not usually the pathologist’s friend: The 60- or 90-day termination clause.

A three-year term contract with a 90-day termination notice is “really a rolling three-month term contract,” Cooper says. Too often, he finds that pathologists “will look more at the term and not the termination provision in the contract.” He advises trying to negotiate a multiyear contract that isn’t subject to termination without cause. The contract should also define what constitutes cause and provide “a reasonable opportunity to cure” it.

Can a 60- or 90-day opt-out ever work in pathologists’ favor? “Generally speaking, no,” Cooper says. “It gives hospitals ongoing leverage to always threaten to bring in a new group.” However, the notice-termination provision can be of benefit “if the group feels it’s entering into a bad agreement, however they define that, and it’s not a hospital the group absolutely has to retain.”

Certain noncompete contract provisions should also signal pathologists to move into negotiation mode. That, Bierig says, would include one that prevents the pathologist from “practicing in the vicinity of the hospital after termination.”

In Bierig’s view, the contract should specify that the pathologist or group will provide needed pathology services to patients at the hospital 365 days a year, 24 hours a day. That way, “if the pathology group wants to cover another hospital, it can, as long as the patients of the first hospital are adequately served and the doctors are adequately served.” That type of provision also helps prevent the pathologists from looking more like employees than independent contractors.

If the pathology group is going to agree to a noncompete, Cooper advises, it should watch out for provisions that forbid the group from doing any work with a hospital’s competitor within a service area without nailing down the area’s geographical scope. And the group should limit such provisions to include the health care facilities that exist at the time the contract is signed, he stresses. “Otherwise, the hospital could... acquire a facility that intersects the service area of another hospital where the pathology group is providing services—and suddenly the pathology group is technically in violation of the contract,” he says.

Pathologists have to take steps to negotiate the best possible deal when the hospital contract comes up for renewal, which can be tough to do in today’s economy. It can also be dicey for interpersonal reasons.

When pathologists have to renegotiate contracts, they can find themselves in an adversarial position with people they have to work with daily, Raich notes. That’s one reason pathology groups often tap a third party to handle the negotiations. In such cases, “the pathologist can say, ‘That consultant is crazy. We don’t want $400,000—we will take $370,000.’”

Whether the hospital says yes to a certain asking price depends in large part on how the administration and medical staff view the pathology group’s contributions to the bottom line and patient care. Examples of such contributions, says Edward Fody, MD, chief of pathology at Holland (Mich.) Hospital, include cost savings related to selecting the right tests to implement, interactions with clinicians about ordering the right tests, “and blood bank utilization especially.”

“Ordering the right tests,” Wood agrees, “means the patients may be treated more quickly and appropriately, reducing hospital stays and malpractice claims.”

Wood says pathologists who have proved their value to the hospital administrators and medical staff are those who have been able to come out with much better contracts than one might otherwise expect.

In a few instances, Wood has even seen pathologists prevail in tough negotiations with hospitals by calling in their chips with the heavy admitters hospitals value the most: gastrointestinal specialists, cardiothoracic and orthopedic surgeons, and oncologists. The specialists threatened the hospital with taking their business elsewhere if the hospital didn’t renew the pathologists’ contract, she says. “The pathologists had really proven their worth to the surgeons and oncologists in helping them diagnose difficult cases and improve patient care.”

Pathologists, says David Novis, MD, a consultant in Dover, NH, need to find ways to market themselves to clinicians. “For example, how many groups put out newsletters on a regular basis to tell clinicians how the tests are interpreted and what they need to order? When you do that, you create a dependency of the customer on your practice.”

But when the hospital has an inflexible budget and the pathologists are negotiating for a raise, the good relationships that pathologists have within the hospital may go only so far. In that case, one option is agreeing to put some of the contract at risk based on performance metrics. “Instead of giving the group $500,000,” Raich says, “the hospital may give it $300,000 and say, ‘If you meet these performance criteria, we will give you the other $200,000.’”

Using that approach, the hospital may use money in its “flex pool for discretionary spending to pay the pathology group,” Raich says, so “it doesn’t come off line items.” That way, “it’s easier to get payment past the hospital board.”

Cooper is not in favor of pay-for-performance incentives if they simply serve to reduce the pathologists’ compensation without rewarding “exemplary performance.” The metrics have “to be crafted,” he says, “using a win-win approach.”

Some pathology groups are forging business relationships with hospitals with the idea in mind that the more win-win deals they have in place with a hospital, the more likely they are to retain the hospital’s business over the long term.

As one example, Dr. Fody says he was a member at one time of a pathology practice that bought the anatomic pathology lab from a hospital, taking ownership of all the equipment and hiring the existing hospital lab employees.

“We were able to streamline operations of the lab and reduce the turnaround time [for tests] because pathologists had complete control of the operations,” he says. “The hospital was elated because it was able to cut the number of employees. So it was a win-win. Our pathology group was able to bill globally rather than just the professional component, as we did the technical component.” The increase in reimbursement wasn’t a “bonanza,” he admits, “but overall the relationship was well worth doing.”

Professional Pathology Services (PPS) in Columbia, SC, has a number of contractual relationships with hospitals, including for Part A services provided to hospital patients, says Edward Catalano, MD, CEO of the practice. PPS bills the professional component for clinical and anatomic pathology to nonpublic payers. And it has a number of cooperative initiatives with the hospitals it serves, the most recent one being a histology joint venture with two large hospitals the practice serves in Columbia. PPS, which has consolidated the histology operations for the two hospitals at its private lab, is doing the joint venture “on a pro-rata cost-sharing basis with both hospitals. We also consolidated pathology IT from both hospitals onto our IT platform,” Dr. Catalano explains.

PPS is performing the technical component of the histology work, but in this venture, the TC “isn’t lucrative because we are doing it on a prorata cost-sharing basis,” he says. Even so, the arrangement means the pathology practice no longer has to compete with the hospital for histotechnologists, which was putting it in an adversarial position with the hospitals, he notes.

“By consolidating operations,” Dr. Catalano concludes, “we were able to improve our relationship with the hospitals, bond those hospitals to us, stabilize the workforce, and decrease our daily operational costs.”

Might the tables turn eventually to give pathologists more leverage in general in negotiating favorable hospital contracts? Raich says supply and demand for pathologists could have that effect over time. “There seems to be a shortage of pathologists, and this will only increase their value as the work pool decreases.”

Cooper points out that the diagnostic professions are going to become even more critical, not only to health care in general but to hospitals in particular. “And they are going to be a great source of revenue for hospitals,” he predicts. Laboratory services, in general, are already “becoming more and more of an economic focal point for hospitals.” And pathologists who recognize that and make the most of their leverage with hospitals because of it, Cooper says, are going to be on much more solid ground.