Negotiating payer contracts

Rent is up. Labor costs are up. Supply costs have increased. Patients want more attention and convenience than ever. Yet through it all, your practice has continued to deliver great care, and patients have a high rate of healthy outcomes and give you good reviews.

Take control of your payer contracts: Image Credit: ©Medical Economics

But payers have not recognized this. Reimbursement rates are stuck where they were before COVID-19, and in a high-inflation environment, that can push a practice into a financial crisis. Why don’t payers recognize the great work your practice has done and offer you better reimbursement?

Because you have not asked.

“Unless there is something with the Medicare fee schedule that could be advantageous to payers, they prefer to leave the contracts in the state they are,” says Tracy Watrous, vice president for member services, Medical Group Management Association. “It kind of falls on the physicians and practices to initiate contact with the payers to say, ‘Look, I’ve had this contract in place for however many years and it hasn’t been changed, but my expenses and cost of care have increased, so I’d like to talk about an increase in my contract.’”

The payoff is that getting even a 2% to 3% increase from a payer that is heavily represented in your practice might result in $500,000 in additional revenue during the year, says Watrous.

If you want to renegotiate a contract, experts say you need to be extremely persistent and well prepared. Here is what you need to get started.

Do your homework

Negotiations take time; when dealing with payers, expect delaying tactics before you even get to the table.

“It’s not something that you can contact the payer about and have a conversation and immediately get a new contract,” says Watrous. “It’s not in their best interests financially to negotiate a new contract. Practices need to be prepared to reach out to these payers multiple, multiple times in order to actually get a contract negotiated.”

She says that persistence is key, especially if there is no response or if the first answer is a no, because that is to be expected.

Once a practice reaches the bargaining table, preparation is the key to success. “They need to be prepared with data,” says Watrous. “They need to be prepared to substantiate their case for asking for an increase in reimbursement, because they can’t just contact a payer and say, ‘I want a 5% increase’ and can’t substantiate the ‘why’ behind why you deserve that. Payers work on budgets just like the rest of us, so you have to have a very strong business case that you can use to support the request to increase your reimbursement.”

Practices should start by understanding the terms of the contract that they want to renegotiate. Do an analysis of the top 20 to 30 Current Procedural Terminology (CPT) codes that are billed to the payer and understand the reimbursement rate and how it impacts the practice on a code-by-code basis, says Watrous. Any proposal offered by the payer can be compared to this analysis, illustrating what effect the change will have on practice finances.

Watrous advises looking at what your charges are for each code. “Understanding how your reimbursement rates compare to your charges is really, really important,” she says.

Ideally, the practice will be able to figure out the total cost of care and what it costs to see a patient from a particular payer. If that cannot be calculated, then the practice needs to at least be able to show how its costs have increased over time.

“They need to be able to say, ‘Since this contract was negotiated, my expenses have increased 8% or my expenses have increased 12%,’ ” says Watrous. “They can say, ‘I have to have an increase just to be able to keep my doors open and, honestly, just to fund my practice so I can continue to see your patients.’ ”

Practices also need to understand where they fit with that payer. How many patients do they have from that payer? Is the practice an underrepresented specialty that the payer cannot afford to lose? Does the practice see many patients from a large demographic? Does the practice provide unique services? “You really have to make the case for why your practice is valuable to that payer and why they can’t afford to lose you from their network,” says Watrous.

Payers may evaluate the quality the practice provides by looking at utilization cost per patient, says Michael Abrams, managing partner, Numerof & Associates, a global health care consultancy. “If the practice can show that it delivers high-quality, preemptive care, especially for patients with chronic conditions, that generally results in lower utilization costs,” says Abrams. “Thus patients are less likely to wind up in the hospital, and that’s what will appeal to payers.”

A practice’s effectiveness may be measured by health metrics such as A1C numbers for patients with diabetes, periodic blood pressure readings for those with high blood pressure, or similar metrics for other kinds of complex cases. The better a practice does with these patients, the more attractive it will be to payers, says Abrams. If the practice does a good job managing variation in care, the costs for these patients with chronic conditions will be within a relatively narrow range without a lot of outliers.

This last aspect is important as more payers are looking at
value-based contracts, says Abrams. The other two questions payers will want answered, particularly if it is a value-based contract, are: Does the practice demonstrate transparency in the cost and quality of care — in other words, can the practice talk about what its costs look like and share that with the patient if needed — and does the practice have a compelling economic and clinical value narrative that makes the case for using it? “Can they explain why a patient should come to their practice instead of some other source?” says Abrams.

In addition, the patient experience is becoming increasingly important. “Delivering a positive patient experience which can be operationalized as high Medicare star ratings and low historic patient turnover can also make the practice more attractive,” says Abrams.

For a smaller practice, the patient experience is an often-underutilized negotiating point, says Rick Gundling, senior vice president for professional practice, Healthcare Financial Management Association. “People like the closeness to the physician, and that’s a huge benefit,” says Gundling. “Monitor some of those patient experience metrics using something easy, like maybe there is something patients fill out a satisfaction survey each visit or once a year.” The more that members like a physician, the better the case to the payer for renegotiating the contract.

The smaller the practice, the more important it is to come to the table with as much data and defined value proposition as possible, because a smaller practice has less leverage. A larger practice leaving a network might disrupt thousands of patients, and payers do not like that, says Watrous. A smaller practice must spend more time defining its value and proving its case to payers.

“You can think of practice size as a force multiplier, if you will,” says Abrams. “The larger the practice and the corresponding active patient base, the greater the impact the practice will have on lowering utilization costs and increasing patient experience ratings. Everything else being equal, size makes a difference.”

Location also plays a part, with practices in densely populated regions having more clout than those in rural areas.

“I think there’s no question that for rural practices, they’re certainly not in the driver’s seat,” says Abrams. “I would expect that payers look at any given rural practice relative to other rural practices and make their decisions based on who looks the best among that subset. So even within that peer group, a practice can stand out if it brings the quality, the size and the location that is more desirable for that payer.”

One unknown that is coming into payer negotiations is the explosion of retail clinics that provide many primary care services. Abrams says payers will be looking to contract with those clinics, so if they lower the patient volume a practice can claim, it lowers the negotiating power of the practice.

“Just staying with the status quo is not a great strategy,” says Abrams. “It’s important for conventional providers to take a look at what they offer and asking themselves, ‘How can we make this more competitive with the experience that consumers have at retail clinics?’ ”

Although price is important, there is also the issue of building a true patient relationship. “If you’re a complex patient — you have a blood pressure issue or you’re a diabetic or prediabetic — the practice needs to show them the data that shows they have better success with complex patients like that,” says Abrams. “Make the case why they should come there for care. If they can do that, then that gives them an advantage over the clinics that are proliferating so rapidly across the country.”

Define your strategy

Most practices will have 20 to 30 payer contracts they are managing at any given time. Watrous says that a decision needs to be made on how many negotiations will be undertaken at one time. Will they be negotiated one at a time, or all at once? And are you willing to walk away from a bad contract?

Watrous says that if negotiations are not going well with multiple payers at once, the threat of walking away from all of them may not be realistic.

“I would say to take on one at a time,” says Watrous. “Start with the one you know is your lowest rate of reimbursement that you are contracted for now and then develop a timetable that says, ‘I’m going to initiate a negotiation once a month or once every two months.’ ”

The other case against doing them all at once is that doing a thorough CPT code analysis for each payer takes time, and the data needed to make a case for each payer may overwhelm the practice’s resources.

In addition to reimbursement rates, practices also need to be aware of contract language that could be detrimental to them if allowed to stay in the contract.

“A lot of these contracts have these unilateral amendment clauses that if a payer says, ‘I want to decrease your reimbursement by 10% next year, I’m amending your contract to a lower rate,’ ” says Watrous. “If that language is in the contract, then the physician really doesn’t have any leverage at all other than to terminate the contract.”

Also vital to a practice is the language associated with the fee schedule. If the payer contract stipulates a fixed fee schedule based on the current Medicare rate and that rate increases, the physician reimbursement rate will not increase with it. “Another common practice for a payer is to include language that says a physician is being reimbursed under a proprietary fee schedule and you have absolutely no idea what that means in terms of what you get reimbursed per CPT code, because it’s their homegrown fee schedule and there’s no fixed methodology behind it,” says Watrous. “It’s really hard to understand how you are getting reimbursed.”

If walking away from a contract becomes necessary, Watrous says you need to understand the termination clause in the contract. In some cases, a contract can be terminated without cause 90 days prior, and some might require a 60-day written notice. “If you don’t send notice within that window, there’s nothing they can do and they’re in that contract whether they like it or not,” she says.

Overcome the fear factor

For smaller practices, there may be some hesitation about trying to renegotiate with payers that make billions of dollars each year for fear of souring the relationship. Not every practice can walk away from a payer, but payers can certainly walk away from most practices.

“Some of these contract negotiations obviously can get pretty adversarial, and I think if they get to that point, you can obviously sour the relationship,” says Watrous. “But I think in most cases, the payers understand that a physician is trying to do the best for their practice and to serve the patients, and it’s a negotiation. I don’t think — generally speaking — there’s a risk of really souring the relationship long term.”

Part of the reason there is little risk is that payers are just too big and the financial implications to them from a small practice are minuscule. No matter what a small practice does, there is really no danger to the payer, so negotiations will be far less intense than with a health system that has large numbers of practices.

Watrous says the most likely negative outcome for a practice renegotiating a contract is not losing the contract — it is not being able to negotiate anything better. At that point, the practice must decide whether it is worth staying with that payer. If you do walk away, do not worry; you can almost always go back.

“The payers want to have as big of a network as possible, because it makes them more attractive to employers, so you can always go back,” says Watrous. The only exceptions would be if they closed their network because they are overrepresented in your specialty. Although that is a risk, Watrous says in most cases they will offer you a new contract, but it might be for a lower rate.

Negotiations can be time-consuming and stressful, but experts say practices must make the case and prove they are efficient in what they do to maximize their reimbursement.

“The bottom line is that conventional practices are going to have to compete,” says Abrams. “And they’re going to have to compete for the attention of both payers and patients, and competing in a way that may be new for many of them.”

Increasing competition likely means physicians will find themselves at the negotiating table more than in the past, so sharper negotiating skills are a must for long-term practice success.

“They just need to be confident negotiators and understand how much they’re adding to the quality and safety of the health care system and put that forward,” says Gundling. “Don’t always be a price taker; be a negotiator.”