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 issues. The following article identifies challenges faced through the managed care contracting process and how PYA assists clients with meeting those challenges to minimize unintended financial consequences that often result from accepting new contract terms.
Background and Business Issue
Managed care contracting can be a complex and frustrating process for healthcare systems. The number of issues that require focus when negotiating a new agreement is vast:
- Term of the agreement and termination clauses
- Payer policy issues
- Payer obligations for payment (e.g., timing, clean claim definitions, etc.)
- Arbitration process for claim denials 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
To navigate these complexities effectively, PYA helps health systems develop a comprehensive payer scorecard process as a sound business practice for managed care contracting. Creating a current state analysis of key payer agreements as a starting point of the contracting process is a critical part of the payer scorecard. This information will guide future payer discussions to address issues and negotiate new agreements. It will also set the course for contract expectations that align with your organization’s strategic goals for services and growth.
Step 1 – Developing a Payer Relativity Analysis
A payer relativity analysis involves analyzing a dataset of closed claims data (ideally one year of claims) to calculate reimbursement rates by payer and type of service. This information enables health systems to compare their commercial payers based on service volume and relative reimbursement as a percentage of billed charges by type of service between payers.
Additionally, commercial reimbursement rates as a percent of charges can be overlayed onto this analysis to generate a benchmark comparison to Medicare (e.g., what percent of Medicare reimbursement the health system is receiving for outpatient services). By ranking payers based on reimbursement rates and reimbursement value (volume of services), health systems can guide future contracting expectations, provide a basis for contract negotiations, and better align agreements with the organization’s strategic goals.
Figure 1 represents a sample payer relativity analysis PYA performed for a health system, consolidated at the system level to include hospital inpatient, outpatient, and professional services. PYA recommends, however, that each line of business should also be analyzed separately to understand relative reimbursement compared to other payers and local competitors, especially for price-sensitive services.
Figure 1
In the example above, the health system was negotiating with a key payer. Based on leadership’s strategic direction and alignment with the payer, goals were set for overall reimbursement value, growth, and reimbursement rate goals.
PYA analyzed closed claims for actual reimbursement compared to expected reimbursement to understand the payer’s claim processing behavior. This involved measuring the gap between actual and expected reimbursement as a percentage of overall expected reimbursement while accounting for factors such as payment denials, underpayments, bundling of services, and lack of payment on patient portions of claims. The gap between actual and expected reimbursement, by payer, is reflected in Figure 2.
Figure 2
Figure 2 illustrates the relative performance of these key payers in terms of reimbursement accuracy based on contract expectations. While Payer F has an excellent rate of 98% accuracy, two payers did not provide reimbursement within 90% of expected rates. For these organizations, the reimbursement gaps were material and needed to be addressed with each payer based on the specific issues causing underpayments.
Step 2 – Incorporating the Payer Relativity Analysis into a Payer Scorecard
Using the output from the payer relativity analysis, PYA then created a scorecard template, populating it with relevant information to track payer contracts (terms, termination, scope of services, reimbursement arrangements, etc.) and payer performance. The payer relativity analysis should be a key component of these scorecards, as it provides valuable insights for communicating payer-related information to health system leadership during payer strategy discussions.
Importantly, while the illustration above focuses on commercial contracts, this type of analysis can also be conducted for Medicare Managed Care (Medicare Advantage) contracts, Medicaid Managed Care contracts, and other lines of business to support contract negotiations.
Step 3 – Addressing Payer Issues and Negotiating New Payer Agreements
Good, better, best. As contracts are negotiated, the payer relativity analysis serves as a powerful tool for accurately communicating a specific payer’s alignment with its current health system agreement(s) and identifying areas for improvement in the future contract. Health systems can leverage real claims data to demonstrate that other payers are performing better in terms of rates and contract performance, facilitating a data-driven and transparent negotiation process.
Managed care contracting can be a frustrating and time-consuming process for health systems. By organizing and analyzing the right data through a payer relativity analysis and incorporating it into a comprehensive payer scorecard, health systems can track payer performance, identify areas for improvement, communicate payer-related information to leadership effectively, and level the playing field with payers.
This data-driven approach empowers health systems to negotiate better contracts, create agreements that hold payers accountable for outcomes that matter, and align payer contracts with the health system’s strategic objectives for driving long-term success.
How PYA Can HELP – 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.