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Health care providers are moving towards initiating their own contracts, and must be prepared to negotiate with third-party payers and organizations similar to ACOs.

Navigating health reform

Four Tips for Contracting With Third-Party Payers

  • 9/29/2014

Recent studies by Catalyst for Payment Reform estimate that roughly 11 percent of commercial in-network contracts include new payment models such as pay-for-performance incentives or bundled payments — and this is anticipated to grow to 20 percent by 2020.

In 2015, Pioneer ACOs (accountable care organizations (ACOs) already experienced in coordinating care for patients across care settings) will be moving toward having at least a portion of their payments capitated. That means they will be initiating their own contracts with providers, delineating both payment schedules and expected performance.

In addition, pressure on commercial insurers offering health plans through the federal and state marketplaces or exchanges will undoubtedly impact the networks and payment rates that insurers negotiate with providers. Some areas of the country are already witnessing a narrowing of provider networks, where the insurer promises volume to be driven to the provider in expectation of a deep discount on the provider’s payment.

Given all of these changes both in the public and private sector, contract negotiation skills will become paramount to ensure provider survival. These four tips outline the basics to consider:

  1. Know the rules
  2. Know what the third-party payers need and want
  3. Know your organization’s value
  4. Know your contracting options

Know the rules

Depending on the type of contract your organization may be considering, it is essential that you understand the rules that govern the arrangement. Typically, federal and state rules that govern the contract terms may be found in insurance licensure statutes, Medicaid managed care program requirements, or Medicare Advantage regulations, including quality incentive payments. Contract terms, such as start dates and phase-in provisions, need to be understood and spelled out. The programmatic requirements may define the target population and target conditions (such as diabetes or chronic obstructive pulmonary disease) and performance expectations.

State regulations often set provider network and contracting terms. For instance, they may establish a payment floor that plans can pay providers or stipulate the portion of its incentive payment that they must share with providers. Some states have dictated a specific contract that third-party payers must use in contracting with providers.

Know what third-party payers need and want

Third-party payers want to ensure they are able to meet the terms of their licensure with the state and any other managed care contractual obligations they may have with the state or federal government as a Medicaid managed care entity or Medicare Advantage plan. These requirements generally are centered on network adequacy, compliance, and designated performance metrics tied to some pay-for-performance or shared savings incentive payment. The third-party payers want to ensure their members have access to the right care at the right place, at the right time, and at the right cost. This can result in substitutions in care — providing services in the lowest cost setting possible.

Ultimately, third-party payers want to make sure that they can keep their costs low in comparison to the premiums or capitated payments they receive to cover the care of their enrollees.

Health care providers need to ask the following questions and understand the answers:

  1. What is stated in the standard contract and supporting documents (such as a provider policy manual)?
  2. How are the key terms defined throughout the contract and which terms might cause your organization financial harm (i.e., payment based upon the “lesser of” language, determination of medical necessity, prior authorization, and the process around eligibility determination and dispute resolution)?
  3. Which items are negotiable (keeping in mind that third-party payers typically want to maintain a standard contract as much as possible)?

Finally, it is important to know the third-party payer you are contracting with. What do you know about its financial stability? Will it be able to pay claims promptly? What is the public perception of — from both consumers’ and other providers’ perspectives? Is there any pending litigation against it? What is its track record related to customer satisfaction?

Know your organization’s value

Once you understand the rules and what is important to the third-party payers, as a provider you must determine your value proposition. It is important to be able to articulate your services, quality, and outcomes in terms that convey how you can help third-party payers deliver cost-efficient, quality service to their members and meet licensure, quality, performance, and other contract obligations. Your value proposition should tell your organization’s story and may address some of the following:

  • The populations you serve (e.g., clinically complex, older versus younger, ventilator dependent)
  • The services you provide today (e.g., congestive heart failure program)
  • Services you might provide if you were reimbursed for them
  • Other populations you might serve if you were reimbursed for them
  • Your standard of quality in terms of performance and in relationship to benchmarks and competitors (e.g., readmission rates, nursing home quality metrics, return to home, or functional status)
  • Your payer mix, average cost of care per individual (also consider by diagnosis and whether this is lower than your competitors), average length of stay, and your model of care

In general, you need to understand where you have something they want, and how partnering with you is more advantageous to them than your competitors. You also need to know the amount of risk your organization is willing to take on (e.g., bundled payment versus pay-for-performance). For example, what portion of your revenue is derived from this third-party payer or how many of your patients or residents are covered by their plan or ACO? If it is low, what is the risk of forgoing signing the contract if the terms are disadvantageous to your organization? This will guide your negotiations.

Know your contracting options

To negotiate favorable terms, organizations need to understand where they have leverage and what types of risk-based payment options, if any, they are willing to pursue. For instance, are you the only network in town? Would a third party payer need your organization to meet network adequacy? Do you have the highest quality or value in comparison to others? Are you willing to offer or consider an alternative reimbursement model such as bundled payments, shared savings, pay-for-performance, or capitated, per-member-per-month payment arrangements? If so, does the organization have the reserves necessary to sustain the potential downside risk?

Finally, ensure that you understand the consequences if the parties cannot come to agreement and do not sign a contract. Do you serve a significant portion of their enrollees? Could any other provider offer them the same level of quality and outcomes? This could provide you with leverage in negotiations. Alternatively, do most of your patients or residents have their insurance? If so, what are your options if you don’t contract with them?

How we can help

If understanding contracting with third-party payers seems like a daunting activity, finding some solid resources can help.

  • CLA has many years of experience working with contracting large health systems as well as small dental practices.
  • We have negotiated contracts on behalf of for profit and nonprofit health care organizations.
  • CLA has a broad understanding of the direction that health care reform is taking. This provides us with a context for understanding how third-party payers and other entities can work together.

Fully understanding third-party contracting will help your organization position itself to negotiate contracts that lead to future financial sustainability.