Managed Care Outlook 2025

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Read time: 6 minutes

Improper vendor decisions can endanger insurers

Health insurance companies often rely on third-party vendors to perform functions related to utilization management, preauthorization or claim audits. These vendors can add value in helping review claims for medical necessity, appropriateness and cost-effectiveness of health care services given their subject matter expertise and economies of scale. However, outsourcing these tasks to third parties may expose health insurers to legal risks, especially if the vendors use questionable methods, criteria or algorithms to deny or reduce coverage for care.

One of the primary legal risks for insurers is a lawsuit from health care providers or members who challenge the decisions made by vendors. For instance, vendors hired by managed care organizations (MCOs) to handle prior authorization requests have been accused of using improper claim algorithms to increase denial rates, thereby inappropriately cutting costs for MCOs. Both MCOs and vendors have been sued by providers and members alleging breach of contract, bad faith, negligence, fraud and violations of federal and state laws. In addition to the potential liability for alleged improper claim denials, MCOs also face potential penalties, punitive damages and attorneys’ fees.

Another legal risk for MCOs is regulatory scrutiny or enforcement actions from federal or state agencies that oversee health insurance markets and consumer protection. For instance, the Centers for Medicare and Medicaid Services (CMS) has audited MCOs and vendors for compliance with Medicare and Medicaid rules and standards, and has imposed fines, sanctions or corrective actions for violations. Additionally, some states have enacted laws or regulations that impose specific requirements or limitations on the use of prior authorization, utilization review or claim audit processes by MCOs and vendors, such as disclosure, transparency, timeliness, accuracy and appeal rights.

On top of these litigation and regulatory risks are potential reputational harms to MCOs related to unfavorable publicity stemming from failure to properly oversee and manage vendors’ claims review activities. As a result of these potential pitfalls, MCOs should carefully research, select and monitor their vendors, paying attention not only to cost savings achieved by partnering with them but also ensuring that they have adequate contractual safeguards, operational controls and quality assurance mechanisms in place. Our team has identified areas of concern and suggested actions to help minimize legal risk.

Key takeaways
  • MCOs face legal risks from their vendors’ decisions and compliance issues
  • Payment/medical policies and plan terms must be current and adequately followed
  • Risks of improper denial are lessened by aligning vendor incentives with billing accuracy and quality of care
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