Defining Insurance Contractual Adjustment
Insurance contractual adjustment is the process of adjusting the terms of an insurance contract following its issuance. The adjustment process is designed to modify the terms and conditions that apply to the coverage and claims handling in the event of a covered insured loss. The fundamental purpose of the adjustment process is to determine whether the loss is covered under the terms of the policy, to what extent it is covered, and the amount of the adjustment accordingly. The insurance policy adjustment procedure will generally be set forth in detail in the insurance policy itself.
The practical result of the insurance contractual adjustment process is that the carrier will agree to conditionally adjust the terms of the policy in the event of a covered loss adjustment. To facilitate that contractual adjustment , a proof of loss will usually be supplied to the insured by the carrier, and the completed proof of loss is then submitted to the carrier via the above-described adjustment procedure. Consider that the policy adjustment process is not structured to provide any additional coverage in the event of a covered loss. Instead, the policy adjustment process is focused on limiting the carrier to only those coverage amounts agreed to if a loss occurs. In addition, the policy adjustment process will usually require the insurer to adjust upward the limit on coverage up to the amount agreed to in the insurance contract only if the proved loss exceeds the limit agreed to under the policy. These contractual adjustment provisions are a necessary component to understanding the scope and limitations of the insurance policy coverage.
Types of Insurance Adjustments
Insurance contractual adjustment is the balance that remains after the contractual amount is deducted from the gross charge. The contractual adjustment is a result of the various discounts and/or adjustments that hospitals have negotiated with insurance companies or other payers. Insurance contractual adjustments are reported on the hospital’s financial statements as a reduction to gross patient revenues. Usually, changes to the contractual adjustment are made as a result of changes to the contractual agreement between the provider and the payer of the claim, resulting in accounts that were previously deemed "closed" being reopened for billing/collection purposes.
The types of insurance adjustments are referred to and recorded in several different ways:
Retrospective adjustments are insurance adjustments that are necessary to record a change in the contractual agreement between the provider/hospital and the payer that will impact multiple accounts/claims in the future. For example, a new contract or an amendment to a contract is implemented with a payer, such as the application of a new risk adjustment formula for a third party payer.
Write-offs are one-time entries to adjust the claim to an appropriate payment amount based on the new contract formula/rate schedule that has been implemented for that payer. A write-off would also be recorded if a payer were to disallow coverage for a previously allowed service due to a specific circumstance. For example, a procedural code may be denied on the grounds that it is not covered by the particular payor due to an administrative error, but is otherwise a covered service under the group contract.
Reconciliations, also referred to as accounts receivable write-offs, are adjustments recorded to fully resolve an account. They are often recorded when accounts are billed/collected in bulk, but the actual payments received are not sufficient to fully cover the amount due.
There are several ways to document the approved adjustments for the month. Allowances may be booked using the payer contract rates, percent of charges method, or unbanded allowed amounts report method. Some hospitals rely upon the A/R aging report for scheduling the allowances. In essence, this should not be the final document for approving, following-through and recording contractual allowances.
Effects of Contractual Adjustments on Policyholders
Contractual adjustments typically come into play in two situations, first, when there is some type of ‘cap’ in an insurance contract on the amount payable for a particular service, and second, the co-insurance situation. An example of a contractual adjustment would be a Preferred Provider Organization (PPO) agreement or some other type of agreement in which there is a predetermined discount that is applied to a bill. It is also typically a situation where the provider agrees to a significant reduction in their bill in exchange for being on a provider panel.
The unfortunate situation for the insured is that in many cases, they are not aware of the contractual arrangement between their carrier and the provider in which they have sought medical care. So in the case of a PPO, if the prior care provided by the doctor or the procedure performed is not within their contractual agreement with the carrier, the carrier will render a contractual adjustment resulting in additional out-of-pocket expense of the insured.
Most times, it is not until the provider sends a bill to the insured patient that they realize that the agreement was not in effect and the balance will be their responsibility as well as the balances not covered by their primary care carrier.
In a situation many of my clients are aware of, the problem again occurs where the insured is not aware of the agreement between the provider and his carrier. Therefore, when the insured has out-of-network benefits at the higher Hartford insurance plan deductible, but goes for services at a provider using Blue Cross/Cigna contractual arrangement with the insurance company, the insured has provider bills balance after reaching the higher deductible with the primary insurer, despite having out-of-network benefits.
Another instance of contractual adjustment would involve providers who directly charge the carrier more than a patient’s usual and customary rate. This is common with surgical procedures. For example, let’s say the patient has reached their deductible limit and therefore once the claims come in, they only owe 20% of the negotiated rate. The provider has charged $10,000 to the carrier and agreed to be paid $5000 by the carrier, and $1000 by the insured. The patient’s share is $1,000. If the provider then decides he is going to charge the patient directly $10,000, then the contractual adjustment is made entirely on the carrier end. The carrier only pays the provider $5000 as they would have; however, the patient must pay the provider $4,000, as opposed to the $1,000, and the patient is responsible for the entire bill. In other words, the contractual adjustment saves the carrier money, shifts the financial burden to the patient, and as such, should not be included in the payment calculation.
The impact to the insured is that they now have a balance due to the provider that they were not expecting to pay and, depending on the carrier, may not have any available out-of-network benefits. This will result in have to pay the balance as well as the onerous situation of having to attempt to collect from the provider. In the alternative, the patient must make a payment plan with the provider and then points later will have that amount billed to the carrier as a disputed claim. I have had patients whose balances have been in the thousands of dollars; in one instance that I can think of, my client’s deductible was $8,700. The bill was around $7500 and after an appeal we were able to get the carrier to pay the provider directly, and now my client is only responsible for the deductible.
Negotiating Insurance Adjustments
In order for providers to avoid unexpected contractual adjustments, they can analyze and review their contracts; using their findings as negotiation leverage. When negotiating contracts, whether with new or existing payors, the following clauses can be included to gain leverage, pending whether they are a managed care organization or a traditional insurance carrier: Co-Insurance and Co-Payments: Plan to bill the discounted amount. The hold harmless clause will prevent a policyholder from billing more than the contracted fee. Providers should differentiate between contracted rates and the discounted amount for commercial insurance. Commercial insurance payment would be billed as evidenced by the contract, and the remaining balance between the billed rate and the copayment/co-insurance would not be billed to the policyholder. A contractual adjustment should be billed to the plan. However, emergency services to members of managed care insurance should be billed at the undiscounted rate, the copayment should be billed and the balance should be adjusted. The hold harmless clause for insurance carriers is little known, but is important to use. The clause will prevent the balance from being billed to the policyholder and pushed back to the insurance carrier . Patient Balance Transfers: Any non-contractual allowances that the provider desires to have paid by the plan, insurance carrier or patient should be negotiated, in addition to payment for co-payments and co-insurances. Capitation Incentives: If capitation is an option, service caps should be negotiated for five providers. The cap will be based on volume. Provisions can be inserted to dictate how excess funds are to be distributed among the providers. Capitation can be obtained if more than five providers join the plan as a group. Group contracts may restrict the capitation to the top five providers who perform the most services. Capitation can also be negotiated through capitated health models. Outsourcing: Outsourcing specialty physician medical care can help negotiate credentialing. Credentialing requirements and baselines for specialty providers can be negotiated by billing. The insurance carrier will receive a percentage of the collection as a capitated amount. A specialty care model will be created by the insurance carrier. Only a portion of the payment is retained by the provider. The specialty provider will receive an increased reimbursement in exchange for their support.
Legal Aspects of Contractual Adjustments
As hospitals and insurers navigate the clinical and financial ramifications brought on by the COVID-19 pandemic, the issue of contractual adjustments in the context of insurance contracts is being placed under more scrutiny. While maintaining an appropriate relationship with contracted payers is important and is often times the primary factor for considering whether to accept an adjustment, the potential legal issues with contractual adjustments should always be at the forefront of one’s mind when executing a new or existing contract.
Insurance Regulators Have Clarified that Contractual Adjustments Are Not Agreed to by Operation of Law In 2020, the National Association of Insurance Commissioners (NAIC) produced a white paper entitled "Guidance on Insurance Company Contractual Adjustment Provisions." The NAIC noted that contractual adjustment provisions have the potential to generate disputes between providers and payers. The NAIC raised the following questions as to how providers and payers should proceed when faced with contractual adjustments: The NAIC observed that "[w]hen evaluating the legality and enforceability of contractual adjustment provisions, regulators must recognize the limits placed upon states by the [McCarran-Ferguson Act, 15 U.S.C. ยงยง 1011-12]." In particular, subsection 1012(b) preempts state law unless it relates to the "business of insurance." Because state regulators can only regulate the business of insurance pursuant to the McCarran-Ferguson Act, the NAIC reported that "[i]t is well-established that contractual adjustment provisions are not ‘part of the contract of insurance,’ but rather ‘part of the relationship between claims administrator and provider.’" NAIC White Paper at 6. While not controlling law, the NAIC White Paper provides detailed analysis of issues relating to contractual adjustments and provides relevant guidance for courts attempting to analyze this issue in the future. Further, in July 2021, insurance regulatory agencies in Arkansas and New York joined the NAIC’s position that contractual adjustment provisions are not agreed to by operation of law and courts should give no effect to them under an insurance policy terms.
Potential Contract Claim Causes of Action Hospitals or providers should be aware that if they execute an insurance company’s adjustment form, they are likely waiving their rights under the contract to recover full payment for the services provided. Hospitals and providers may want to consider that entering into a contract, even after lengthy negotiations, does not protect against statutory changes to the law or other circumstances beyond the control of the parties. Even if one party to the agreement waives a particular requirement, the other party may still be entitled to that remedy because courts routinely hold that, despite waiver by the parties, statutes or regulations are imputed into insurance contracts. See, e.g., Gen. Cas. Co. v. Sentry Ins. A Mut. Co., 130 P.2d 573, 576 (Colo. 1942) ("The requirement of notice or proof of loss, however binding upon an insured by contract, may be dispensed with by the local statutes.").
Litigation over Insurance Contractual Adjustments Has Resulted in Mixed Results When courts do address contractual adjustment provisions, courts have reached different conclusions depending on the facts and circumstances of each case. For example, in Parsons vs. The Hartford, the Court of Appeals for the First Circuit reversed judgment of the District Court (in the District of Massachusetts) that: (1) prohibited the insurer from reducing its total exposure to Parsons through a confidential payment arrangement; and (2) alternatively prohibited the insurer from including the Medicare rate as a form of payment in the confidential payment arrangement. Parsons v. Hartford Life & Acc. Ins. Co., 272 F.3d 633, 635 (1st Cir. 2001). In reversing the District Court, the First Circuit Court of Appeals found that the District Court improperly interpreted the insurer’s power to make "contractual adjustments" as limited to only the dollar amount owed, rather than also including the form of payment. Id. at 637-38. The First Circuit explained that the insurer’s calculations used in setting the "contractual adjustment" were not in error but were part of the benefit determination and "were the product of the exercise of discretion vested in the Defendants." Id. However, in In Re Imperial Palace, the Bankruptcy Appellate Panel of the United States Bankruptcy Court for the Ninth Circuit (BAP-9) affirmed the bankruptcy court’s ruling that a contract term incorporating contractually impermissible adjustment provisions is unenforceable. See In re Imperial Palace of Biloxi, L.L.C., 2010 WL 3910307, at *6 (Bankr. D. Md. Sept. 30, 2010) ("Imperial Palace"). A junior creditor of the insured sued the insurer for failing to pay the maximum amount due to the insured under the insurance policy. In response, the insurer argued an adjustment provision in the insurance policy reduced the senior creditor’s deductible and thus, reduced its liability under the insurance policy. Id. The BAP-9 found "[t]he Bankrupty Court correctly found that, where the adjustments are impermissible under Mississippi law, the Adjustment Provision is unenforceable because it is integrally tied to the contract in such a manner that it cannot be enforce separately without mischief to the remaining terms of the insurance policy." Id. at *6-7.
Upcoming Trends in Insurance Adjustments
Moving forward, the insurance industry will likely trend toward increased standardization of adjustments. Adjustments will follow a quantifiable rule set, as opposed to the more qualitative rules existing today. Insurance entities may establish internal and external benchmark target adjustment rates, which are generally indicative of their regular business practice, in order to satisfy and improve upon contractual payment obligations. Common benchmarks, such as benchmarking recent quarter payment data, payment data over the last twelve months or year-to-date performance, across quarter-to-quarter or year-to-year periods, for example, are already common. They may be supplemented by time-based benchmarks, such as the quarter of the year or the month of the year during which the payments were made, or by developmental benchmarks, such as the development age of the claims.
Certain insurance entities have initially trialed internal benchmarking and these efforts have been successfully used for years. However, it is now becoming increasingly common for insurance entities to use external benchmarks . Internal or external benchmarks, in association with standardization of contractual adjustments and standardization of profit margins, may create a dominate paradigm. The goal would be that the adjustment process, from start to finish, is formulaic. The insurance entities would regularly apply a quantifiable and predetermined adjustment rate to certain types/categories of claims. Their claims administrators would regularly apply a predetermined adjustment rate during the transactional claims adjustment process. These parameters would streamline the claims adjustment process, meaning that claims administrators would have more time to adjust other claims (which may be of higher value and profitability).
In the end, insurance entities will benefit from these methodologies because they will have increased operational efficiency and profitability in connection with their claims adjustment operations. Because insurance entities would not manually prepare data, service providers may similarly benefit from increased claim volume. Policies may be made less by human negotiation and more by human automation.