In today’s complex healthcare landscape, health systems and physician groups typically find themselves looking for ways to improve their financial performance. One of the primary strategies healthcare organizations can use to fulfill this goal is contract negotiations, which can lead to increased payments, improved revenue cycle, and enhanced financial performance. When considering contract negotiations, you may have a number of questions: How do I know if I need to negotiate my managed care contracts? If I do need to negotiate, how would I conduct the negotiations? What should my negotiating strategy be? How is my relationship with the payers? The following three steps will help you determine if you need to conduct contract negotiations, how to develop a negotiating strategy, and then how to implement it:
STEP 1: ASSESS THE SITUATION
Before beginning any negotiations, you will need to fully assess the current state of your organization and the market in which you operate. The assessment can be completed by evaluating and analyzing the following topics and key corresponding questions:
Your Organization’s Market
- Understand the perception of your organization in the market.
- Recognize your organizational and service line strengths.
- Determine if your organization has made any recent investments or changes in order to enhance its services or if it has received any accolades.
- Identify any recent changes your competitors have made to augment their services.
Your Organization’s Performance
- Review your organization’s financial performance by payer for both hospital and physician services (e.g., contract payment yield, profit margin).
- Review the rate structures, rates, and financial performance by payer against internal and external benchmarks.
- Identify any significant changes in services.
- Objectively evaluate the quality of care.
Managed Care Contracts
- Identify the last date of rate changes and the history of previous rate changes (trend).
- Determine if there have been any changes to payer operations (e.g., increase in denials, reduction in authorizations, change in payment rates).
- Trend charge master increases.
- Review contract language for any opportunities for improvement.
Managed Care Payer’s Performance
- Assess each payer’s financial performance.
- Identify any changes or trends by payer (e.g., premium increases, profitability, membership).
- Determine if any payers introduced new products.
STEP 2: DEVELOP A STRATEGY
Based on the assessment in step 1, if you determine there is a need for your organization to engage in contract negotiations, the following key points can be used to develop your negotiating strategy:
Pricing and Rate Strategy
- Assess each payer’s payment rates to determine the highest and lowest payers.
- Determine the rate increases required to achieve parity within your managed care contracting portfolio and compare them against market-competitive rates (if benchmarks are available).
- Establish minimum and target increases over a
two-to-three-year period.
- Minimums: The lowest rates your organization is willing to accept over the negotiated time period
- Targets: The rates your organization would be exceptionally pleased to achieve in the negotiations over a multiyear period
- Choose which payer contracts need to be negotiated and which should not be negotiated
Product Strategy
Decide upon pricing targets and required “must haves” on pricing, language, etc. for HMO, PPO, Medicare Advantage, Medicaid, and other products.
Time Frames
- Create a priority list of payer contracts using multiple factors (e.g., by net payment, payment rates, market share, profitability).
- Identify the earliest opportunity for when payer
contracts can be negotiated.
- Is a payer contract on a current multiyear term?
- Can a payer contract be negotiated at this time?
- What is the contract termination notice period for utilizing a termination to negotiate strategy?
Negotiation Rationale to Determine the Expected Rate Increase
- Evaluate the following to boost your position
before entering into negotiations:
- Organizational strengths, weaknesses, and reputation in the marketplace
- Quality of care
- Recent service line and capital investments
- Unique services provided and/or services that no competitors provide
- Payer’s premium increases
- Profitability by payer
- Time period since the last rate increase
- Operational changes and/or payment issues with the payer
STEP 3: CONDUCT CONTRACT NEGOTIATIONS
The last step is to conduct the contract negotiations. The following key topics should be considered as your organization undertakes this step of the process:
Identify the key stakeholders in the negotiation and develop a resource deployment and communication plan.
- Determine the negotiating team (e.g., managed care leaders, revenue cycle, finance, data analytics).
- Identify key stakeholders to be informed of milestones.
- Utilize stakeholders for support in strategy development and input in decision-making (e.g., physician and administrative leadership, managed care, finance, legal counsel, medical group leadership, hospital board, marketing/ communication).
Define an approval and escalation process for the negotiations. Be clear on who makes the final decision.
Identify potential risks with the negotiations, and develop a communication plan.
In contract negotiations, each situation will be different. These steps will serve as a guide in preparing the organization and executing on its negotiation strategy.
Published May 21, 2020
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