In contract law, disproportionate forfeiture – paying nothing if a service is not completed precisely as agreed under the contract – is considered a penalty because of its failure to take into account the percentage of work completed. Disproportionate forfeiture and penalties, two related doctrines in contract law, both apply when a breach of contract results in zero payment.
Penalties generally are unenforceable in contract law. In private contracts, for example, the law does not support stipulating zero payment if a contractor fails to complete a small portion of the work on a house. If the homebuilder agrees to a red door but delivers a green door, then it is fair to deduct the cost of replacing the door, not to withhold all payment for an almost-perfect house.
In managed care contracts, common technical breaches include provider notification of patient admission, concurrent review and prior authorization deviating slightly from a doctor’s actual procedure. Instead of imposing a penalty when damages are incurred, the parties should make a good-faith effort during contract negotiations to estimate the real cost of future damage, using liquidated-damage provisions to assign reasonable percentages as pre-agreed damages for technical breaches.
Unfortunately, it is common to find penalty clauses either in the payer-hospital-negotiated facility participation agreement (FPA) or in the provider manual. Although not signed unlike the FPA, the provider manual (or administrative guide) is incorporated in the agreement as a protocol to be followed by the facility. The manual is much more detailed than the contract and changes every year. Nevertheless, if providers don’t comply with all protocols under the contract, payers can deny 100 percent of payment.
In fact, payers routinely deny all payment for failure to provide notification of hospital emergency-room admissions within 24 hours or by the next business day. Same with authorization, as most health plans require authorization within this same timeframe, or even preauthorization, for such services as maternity, acute hospital, rehabilitation facilities, hospice and skilled nursing facilities, elective and emergent admissions.
Case in point: A doctor performing surgery, having received prior authorization using the ICD-9 (10) code for that procedure, needs to change the technique at the last minute due to a newly discovered hernia that needs to be repaired. Because of the patient’s medical circumstances, the surgeon could not determine this problem prior to the surgery. But prior authorization requires different codes for different techniques. Thus, the payer denies all payment for the procedure because the surgeon failed to stick with the code.
Such cases of disproportionate forfeiture in managed care are all too common. In other areas of contract law, expectancy damages – assigning a specific dollar amount in the contract for damages from nonperformance – provide a good way to avoid penalties. And the dollar amount ensures complete recovery from damages caused by the breach.
But there is no way to use expectancy damages in healthcare because it is impossible to know the value of services ahead of time. In managed care contracts, liquidated damages are the only fair way to address breaches and avoid penalties.
Providers know that to pay zero for technical breaches of contract is disproportionate and a penalty. Backed by doctrines found in the common law, hospitals should always seek liquidated damages in cases of zero payment for failure to notify or authorize. Reasonable percentages of 10-20 percent are generally acceptable in such cases. What is not acceptable is paying zero.
Anderson & Quinn, LLC is a renowned law firm based in Rockville, Maryland, providing individuals, businesses, corporations, and healthcare institutions with the legal and litigation support they need.
