Today’s healthcare facilities face numerous challenges that impact optimal financial performance while managing tight operating margins. PYA brings nationally recognized subject-matter experts and world-class data intelligence tools to our clients faced with such challenges.
This article identifies challenges faced through the managed care contracting process and shares how PYA assists clients in meeting those challenges to minimize unintended financial consequences that often result from accepting new contract terms.
Background and Business Issue
Negotiating managed care contracts can be a complex and frustrating process for health systems. The number of issues that require focus when negotiating a new agreement is vast:
- Term of the agreement and termination clauses
- Payer (claim processing entities) policy issues
- Payer obligations for payment – timing, clean claim definitions, appeal rights, etc.
- Arbitration process for claim denials and/or underpayment issues
- Definition of services to be reimbursed with each payment appendix
- Scope of providers and payers subject to the agreement and related site of service considerations
- Economic terms of the agreement by type of service, service bundling, and more
The Difficult Economics of Payer Agreements
As the industry moves away from traditional reimbursement methodologies like percent of billed charges and per diem rates, understanding the economic terms of payer agreements becomes increasingly more difficult, especially for smaller and mid-sized hospitals. The shift to more sophisticated fixed-rate methodologies with outliers, carve-outs, and special reimbursement rules can be challenging.
The Challenge
Many hospitals accept the payer’s modeling as the source of truth for expected reimbursement under a new fixed-rate contract, often with the promise of a 5-7% increase in reimbursement. After about six months under the new agreement, however, hospital chief financial officers often tell PYA the actual yield on the new payer agreement is generating only a 0.5% or less increase from the current rate structure! What happened?
Payers may not be modeling the hospital’s historical claim information correctly, or they may not be considering the lesser of billed charges or allowed amounts from the fixed reimbursement schedules they are offering the hospital. If a hospital relies on information entirely from the payer’s point of view, it may not be receiving fair reimbursement rates for the services it is providing to payer members.
Common issues PYA sees in payer information provided to hospitals include these:
- Modeling of limited claim information that does not represent the future state service mix for the hospital
- Utilizing the market region rather than the hospital’s actual data when modeling claim information (PYA sees this especially for new payer contracts)
- This approach is risky because the hospital may be using different revenue codes or charge methods to bill for services compared to the data used by the payer, which could result in a material misrepresentation of actual expected reimbursement to be received under the contract terms.
- Failing to account for the lesser of reimbursement or billed charges on a claim basis while modeling reimbursement yield, resulting in a material overestimation of the actual contract reimbursement yield
- Modeling software used by the payer that does not align with the claims processing software, leading to lower actual reimbursement than modeled
The Solution: Independent Analysis
To level the playing field in negotiations with payers, hospitals should conduct an independent analysis of at least six months of closed claims to understand the true economics of the proposed payer reimbursement agreement. The modeling should incorporate the following key variables (Figure 1) typically seen in payer agreements for hospital services:
Each claim should be repriced based on the application of reimbursement provisions as reflected in the payer payment appendix to be considered, as well as the payment policies that impact reimbursement such as bundling, allowable charge(s), and other key provisions.
The output of the payer contract proposal should reflect information by the type of service reimbursed, such as service volumes, charges, current and proposed reimbursement, and the expected increase or decrease in reimbursement of the proposed contract terms, as reflected in Figure 2.
Once the model is developed, additional iterations can be created to optimize overall reimbursement by adjusting assumptions related to the anticipated volume and mix of services under the new agreement.
PYA stresses that the economic assessment should be complemented by a comprehensive assessment of the non-economic contract terms. This step is essential to protect the hospital from any unintended consequences from entering into the new payer agreement.
Managed care contracting can be a frustrating and time-consuming process for hospitals, but organizing and analyzing the right data will help put you on par with payers to create an agreement that holds all parties accountable for outcomes that matter. By conducting an independent analysis, hospitals can better understand the true economics of proposed payer agreements and negotiate more favorable terms when needed.
Revenue Management Overwatch
Today’s healthcare professionals face numerous roadblocks due to an ever-changing environment, increased pressure to maintain positive margins, retiring/changing workforce, etc. Through PYA’s Revenue Management Overwatch, PYA brings nationally recognized subject-matter experts and world-class data intelligence tools such as our Revenue Management Tool and Contract Management Tool to assess our clients’ current situations, identify tangible solutions to their problems, assist with implementation and remediation, monitor for ongoing optimal performance, and provide additional capacity when needed. PYA also helps manage denials, underpayments, and changes in benefit design, among other payer initiatives that impact revenue. Monitoring tools can be customized to meet the specific needs of the client. Our team gives clients only what they need, when they need it, working alongside every step of the way. Learn more about PYA’s Revenue Management Overwatch and how it can help you, and learn about all of PYA’s Overwatch services. For more information, our executive contacts are happy to assist.
