What is a Participation Agreement?
Participation agreements are contracts that set forth the terms under which a provider will participate in a healthcare insurance network. These terms include which provider policies apply, the amount of reimbursement the provider will receive for services (typically at a discounted rate off billed charges), the provider’s billing and claims procedures , and the bases upon which insurers may terminate the provider’s network participation.
Often, participation agreements are not stand-alone contracts but are incorporated by reference into standard insurance or HMO provider service manuals. By its very nature, a participation agreement is a one-sided contract that benefits the insurer, and providers should not rely on them as a vehicle for negotiating terms with insurers.
Elements of a Participation Agreement
A participation agreement typically is a multi-party agreement by which a bank or other financial institution that is the administrative agent under a credit arrangement with the borrower (the "Administrative Agent") extends credit to such borrower by making a loan to such borrower through one or more lenders that have agreed to participate in such loan (the "Participants"). Administration of Participations is a significant credit risk management function, and the level of risk management is expected to correlate closely with the size, complexity, and risk of the underlying credit. The best way to manage this risk is to have an appropriate participation agreement in place with the Participants.
The agreement will typically include the following key components:
Parties Involved. The identity of the parties to the participation agreement will be set forth. The agreement may cover participations in multiple loans. In that case, a separate exhibit could be attached setting forth each loan separately with its information. The recitals of the participation agreement will set forth the background of the document and describe the nature of the participation transactions to be entered between the indicated parties and the purpose for such transactions.
Rights and Obligations of the Participants. The rights and obligations of the Participants will be set forth. It will also explain the confidential nature of the participation between the bank and the Participants and that they generally have the same rights with regard to risk of loss as the bank. The agreement will state that the Participants will not have any right or obligation to deal with any other Participants; that each Participant will purchase participations from the bank independently without consultation with or notice to any other Participant; and that the relationship between the Participants and the bank is that of debtor and creditor and not partnership or joint venture. No Participant will be entitled to require accountings of the loan, and all books and records will be maintained by the bank.
Terms of Participation. The term of participation will be generally set forth. It will usually set forth the method for determining interest rates, charges and other information. This section should also covey to the Participants that the bank will have sole authority to control the enforcement of the rights of the lenders and to determine the manner and time of application of all payments from the Borrower. The agreement would typically set forth the procedure for selling participations issue on a "best efforts basis" and spell out the form of participations and the purchase price,
Books and Records. Accounting records will be maintained for each credit facility and issued issuance price. The bank will promptly send monthly statements to the Participants. Payments will be made on a monthly basis into a common trust fund established for the Participants that will pay principal, interest and fees due on the loan. The Participants will also have access to all collateral information concerning the loans. Any losses for which the bank is liable among the Participants will be shared by the Participants on a pro-rata basis.
Participation Agreement Models Available
The term ‘participation agreement’ can refer to a number of different types of agreements. For the purposes of this blog post, we will be looking at investment funds, real estate, franchising, joint venture and other sector participation agreements.
Investment Funds Participation Agreements
Investors in investment funds will enter into participation agreements with a fund. The participation agreement will usually stipulate a minimum amount that can be invested by the fund investor, and designate a methodology for calculating and distributing the returns on investment.
Real Estate Participation Agreements
Participation agreements in the context of real estate are effectively similar to investment fund participation agreements, except that the return is generated through the lease of the property rather than by dividends or capital repayment.
Franchise Participation Agreements
Franchise participation agreements are more specific than general participation agreements in that such agreements are often referred to as franchise agreements. Franchise agreements, therefore, have more terms and clauses than participation agreements that are not franchise agreements.
Joint Venture Participation Agreements
Joint venture participation agreements can refer to participation agreements between parties who wish to participate together in a joint venture. Alternatively, joint venture participation agreements can refer to specific participation agreements between joint venture parties participating with the joint venture. This category of participation agreement is therefore very broad.
Advantages of a Participation Agreement
Employing a participation agreement to structure an agreement results in several advantages for a participator. In addition to more favorable risk sharing, there are usually other benefits. A multi-layer approach, where several level agreements are put in place, allows the parties to divide up their relationship into easily managed segments, with the view that those segments will combine to produce the desired outcome.
Finding where the value is created for the participants and ensuring that it is defined and protected is a key aspect of the process of determining the structure that will best fit the participants. Understanding where and how value is created in a particular engagement is critical and as the specifics of a business solution become clearer, so too should the benefits of a properly structured participation agreement.
Risks and Pitfalls
Despite all the assurances and protections that participation agreements provide, there are still risks and challenges, such as 1) a participant breaching the agreement, 2) the issuer breaching the agreement, 3) disputes about the contract’s interpretation, and 4) other non-compliance by the agreement’s parties. The protection offered to the participant is more of a promise by the issuer that it will comply with its obligations than a guarantee that it will do so.
Some issues arise in dealing with an issuer that has breached a participation agreement . Is there a remedy available to the affected participant? Are damages limited to just the amount of its investment? Can the issuer’s attorney fees be recovered? What if the issuer is not also the issuer of the underlying bonds benefitting from the reimbursement agreement? If the issuer breaches a participation agreement, can the participant stop buying bonds or selling bonds if the participant is also a broker-dealer?
In addition to these issues arising with regard to breach or enforcement of the participation agreement, there also can be a question of liability of the issuer for dealings of the participant if the issuer claims that the participant caused it damages. Because a participation agreement is a continuing obligation between the issuer and the participant throughout the life of the financed bonds, a material adverse change that occurs after the making of the loan but before the end of the interest payment period could trigger an event of default under the participation agreement. While unlikely, the issuer and its counsel should consider how the issuer might be held liable for the actions of the other party if there is a breach of the participation agreement.
Drafting and Legal Guidance
The particular language of a participation agreement must be carefully tailored to the circumstances. An experienced lawyer can help participants anticipate the risks and opportunities that different programs entail and draft an agreement that sets out those details. For example, if the particular multi-employer program this participant is joining has special credit or experience rating rules, the participation agreement should reflect those rules, be signed by all participating employers, and be subject to audit by the program between agreements if the rules change. The participation agreement should also specify when the participant must provide notification of any material change in business or financial position or reporting of loss experience that could affect those credit-rules. The default participation agreement, however, is a starting point and lawyers are experts in drafting and revising documents to fit the circumstances of the client. The following key drafting considerations should be addressed by legal counsel: Revising and updating participation agreement terms and conditions in step with changes in legislation will help get a better grip on program’s particular set of rules and provisions.
Examples of Participation Agreements
Participation agreements are not a new concept. Several examples have been leveraged by large employers, third-party payers, and insurers to create long-term, favorable fee structures for all parties. The following examples provide further insight into how participation agreements are operating across the country.
BlueCross BlueShield of Minnesota and its affiliates recently entered into a five-year participation agreement with the Mayo Clinic and the Mayo Clinic Health System. The program is designed to improve quality of care, streamline health information technology, and improve care access for Minnesota residents. In return, the agreement provides Mayo with improved access to millions of BlueCross BlueShield members by expanding Mayo’s patient base in Minnesota, Wisconsin and Iowa.
The BlueChoice of the Carolinas, a network of independent physician practices, hospitals and health care providers in several states, provides one of the nation’s largest fully aligned health care delivery systems that offers an integrated approach to pre-paid, population-based care. BlueChoice of the Carolinas utilizes participation agreements to recognize the quality of care managed by independent practices. Reflecting the growing transformation of risk-bearing entities to align with value-based care and alternative reimbursement models, BlueChoice of the Carolinas requires each primary care provider within the network to sign a participation agreement.
The recent departure of Aetna from its participation agreement with the Houston-based Memorial Hermann Health System over a disagreement about narrowing its provider network has raised the level of scrutiny on participation agreements. Two of the three largest health insurers, Aetna and Cigna, are seeking to merge with Humana and Oxford Health Plan, respectively. Using participation agreements to reduce available options will not go unnoticed by the courts. In particular, the U.S. Department of Justice’s antitrust division has demonstrated a willingness to challenge "all encompassing" networks with participation agreements as evidence of anti-competitive behavior.
Frequently Asked Questions about Participation Agreements
These appear to be some of the more commonly found questions:
What is a participation agreement?
In most cases, a participation agreement is a written agreement between a hospital and a participating provider setting out the terms under which the participating provider will participate in the hospital’s health plan participation (or direct contracts with health insurers), and include any administrative service agreements between your group practice or provider and the hospital.
What are the terms typically covered by these agreements?
Generally, participation agreements contain the terms related to health plan participation, including fees, billing and collection process, these agreements also often have language granting the hospital a right of first refusal (or negotiation) for physician services applicable to the physicians participating in such contract , often there is a requirement for physicians utilizing the hospital to refer patients to other physicians in the hospital’s network of physicians. Some agreements have an exclusivity provision requiring the physician to refer patients only to that hospital.
How can I find a sample agreement for review?
Some agreements are publicly available on certain California Department of Managed Health Care website. In other states, these agreements may be publicly available on the state department of insurance (contractual) website.
Can I take a sample agreement and change it to suit our needs?
It depends on whether you are a participating provider or a hospital. Of course, if you are a participating hospital and you utilize the sample as a basis for a mutual negotiation with another participating hospital, that is fine.