Payor Contracting

Different Types of Insurance Contracts | PayrHealth

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Whether dealing with life insurance policies, a universal life insurance policy, dental insurance coverage, liability insurance, or any other form of insurance contract from a healthcare provider or insurance company, the terms associated with each contract and healthcare contract management are complex and sometimes overwhelming. You could be putting yourself at financial risk if you do not take the time to understand the insurance policies and contracts you are committing to.  

What Are Insurance Contracts?

What are insurance contracts? These contracts between payors and providers form the foundation of our modern healthcare delivery system. Under the Managed Care model, insurance contracts between managed care organizations (MCOs) and providers are defining the scope and type of services available to specific groups of patients and how and how much providers are reimbursed. Health insurance is often covered as indemnity contracts, meaning the insurance company pays for actual losses only.

Understanding the types of insurance contracts an insurer, or insurance company, holds is an important factor in strategic decision-making. While fee-for-service-based contracts have been in use for nearly half a century, the growth of value-based contracting is influencing how providers organize, plan, and succeed in the modern healthcare environment.

What Are the Types of Insurance Contracts?

The two main types of insurance contracts in the United States are fee-for-service and value-based. Fee-for-service contracts have been in use for decades in the United States, while value-based contracting has only recently gained widespread traction. The transition to value-based contracting poses significant ramifications for the healthcare system in general. At the same time, under a value-based contracting system, providers will need to develop a contracting strategy that aligns with their institutional goals, patient and contract mix, and the specific realities of their geographic location and market.

Continue reading this guide to look at these two different types of contracts in detail to obtain a better understanding of why a comprehensive contracting strategy is essential in today’s healthcare environment.


There is a condition that helps understand the difference between a fee-for-service model versus a value-based contracting model. Under a fee-for-service model, the insured party pays their provider for every service they perform during the medical examination. For example, if you arrived at the hospital with a form of bodily injury, the patient will be billed for every service performed to treat such injury. The amount you will pay is based on the insurance coverage you have at that time. General, the liability of the remaining balance on the account after the insurance coverage is left to the patient. In contrast, under a value-based system, compensation is tied to health outcomes.

Fee-for-service contracting is an insuring agreement that has been the norm within the healthcare industry since the establishment of Medicare and Medicaid in 1965. Under the fee-for-service model, providers are compensated for each discrete service they provide to a patient, such as diagnostic tests or procedures.

The core criticisms of the fee-for-service model are twofold. In a fee-for-service contract, the insurer is incentivized to provide as many services as they can on the policyholder. Providers will be compensated for each individual test or procedure performed. In this way, the fee-for-service model creates and rewards an organizational posture where the increased volume of services is equated with success.

A second criticism of the fee-for-service model is that it has been a key contributing factor for the rise of healthcare costs within the United States. In response, alternative models have been pursued that could be used to drive down healthcare costs for an insured person while still delivering high-quality care. Those alternatives have coalesced around value-based contracting.

Value-Based Contracting

Value-based contracting is an agreement between an MCO and a provider where reimbursement for services is tied to the value of those services. Specifically, value-based contracting ties reimbursement to patient health outcomes and the quality of the service provided.

Within value-based contracting, the value can be understood as the quality of care divided by the cash value of that care. Put another way, value is the degree to which health outcomes are achieved for every dollar spent on care. Value-based contracting places more professional liability on healthcare providers due to them receiving a significant amount of their compensation based on the results they can achieve.

A notable characteristic of value-based contracting is that it relies heavily on measuring the health outcomes of a policyholder and tracking them over time. Because compensation, or reimbursement, is tied directly to how well or poorly a provider achieves health outcomes, under value-based contracts, providers are incentivized to more efficiently deliver higher-quality care for less money.

How are Value-Based Contracts and Managed Care Tied Together?

Both value-based contracts and the Managed Care delivery model are intended to help create a more cost-effective healthcare delivery system. Under Managed Care, MCOs hold contracts with providers that determine how care is delivered and the type of care that is delivered. These contracts carry specific stipulations for care delivery in order to provide consistent care to every patient covered under the MCO.

Value-based contracting is one of the key ways that MCOs are driving the delivery of more cost-effective healthcare. By tying reimbursement to specific health outcomes, the Managed Care model places hospitals, healthcare systems, and other providers in the role of a population health manager. Under Managed Care, providers are incentivized for reducing care expenses through preventative services and community engagement.

5 Key Components of Insurance Contracts

We’ve established the different types of insurance contracts that you will commonly run into, along with their implications. Now, let’s look at some of the most important contract terms that providers should be aware of.

Every provider should take the time to understand their contract portfolio, including the terms of each of their contracts and which ones provide the most value. This information can then be used to inform strategic decision-making for contract negotiation.

1. Provider Manual Updates

The provider manual can be considered a direct extension of your contract terms and should be closely followed for your contract’s duration. Provider manuals can change over time, and payors can make unilateral changes to the provider manual that are binding for contract holders.

Take the time to understand how the provider manual change process is outlined for your contract. Understand the mechanism by which changes are made, what notification process is required (if any), and what rights providers have once an update has been made.

2. Medical Necessity

Your insurance contract will define what procedures and services are medically necessary. For reimbursement to occur, providers must offer only medically necessary services. Understanding the thresholds for meeting the medical necessity criteria in their insurance contracts should be a top priority for all providers.

3. Claims Payment Provisions

Your contract will outline how claims are submitted, and what the best practices for claims submission are. It is important to note that you’ll want to clearly understand these requirements. In particular, any requirements for supporting documentation to provide medical necessity. Ensuring a seamless claims submission process in line with the requirements outlined in your contract is critical for receiving timely reimbursement.

4. Lesser of Provisions

The lesser of provisions language in your contract essentially compares your fee schedule to what you bill patients for those services and compensates based on the lowest rate. Understanding this provision’s specifics in your contracts is an important way to maximize what you’re getting out of your contracts.

5. Contract Term and Termination Clauses

How long does your contract last? How do you exit a contract if you find it unfavorable? The answers to these questions should be known for each contract you hold. As your contract is nearing the end of its term, you’ll want to be prepared to renegotiate. This process can take anywhere from six to nine months, so beginning early will give providers the most flexibility when negotiating insurance contracts.

Closing Thoughts

Insurance contracting forms the basis of our modern healthcare system. By defining the types of care providers are reimbursed for, who they provide care to, and what that level of care is, health insurance contracts prove crucial in strategic decision-making for providers of all sizes.

Most insurance contracts are either fee-for-service or value-based. Value-based contracting is rising in popularity due to the perception that it drives down costs and results in better health outcomes. Value-based contracting has important implications for providers, as recompensation under value-based contracts is tied to health outcomes for patients.

Insurance contracting in the healthcare industry has a long history of being contentious and difficult. Under the value-based model, providers that offer a unique service or exceptional quality care have an opportunity to re-engage with payors to create value-based contracts that reward them for their achievements.


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