Payor Contract Negotiations: What Went Wrong?

After several long months, the contracting team at Community Hospital completed negotiations with its largest commercial payor and came out of the discussions feeling optimistic about the rate increases obtained.  Not only did they anticipate significant revenue increases but they also felt satisfied in being able to use this opportunity to transition from a percent-of-charge to Medicare base rate methodology – affirming their commitment to gradually evolving to value-based payments.  An excellent steward in its community, Community Hospital also took pride in avoiding the runaway charge increases prevalent in the market.  Things were looking up…until the payments came in.  The hospital’s analysis had projected that any increase in rates would translate to the same increase in payor revenue. The financial reports, however, were telling a different, less favorable story.

So what went wrong?

The managed care team failed to consider some peripheral elements during contract modeling.  The circumstances at Community Hospital could have been avoided with a more comprehensive modeling process that accounted for key contract provisions, including:

  • “Lessor of” provisions related to the hospital charge master.
  • Outlier payment protections.

“Lessor Of” Provisions

The contracting team did not account for planned charge master increases in future years and by the second year, the “lessor of” provision resulted in significant reductions to anticipated payments. The hospital could have caught the charge master deficiency through more inclusive modeling and implemented corrective action enabling them to optimize commercial payor reimbursement.

Outlier Payment Methodologies

In order to calculate a revenue-neutral base rate and subsequent yearly increases, the contracting team considered Medicare acuity standards for historical commercial payor claims.  Despite their preference for a first-dollar POC outlier payment structure, the hospital accepted a second-dollar per-diem payment structure based on their understanding of the shift in the industry toward second-dollar outlier methodologies.  Actual experience resulted in a population with higher acuities requiring more hospital resources. Failure to secure a first-dollar POC outlier payment (at least equal to the prior POC percentage) left the hospital vulnerable and disadvantaged relative to the previous contract.   While their perception of industry trends toward second-dollar payments may have been justified, they lacked specific benchmarks relevant to their peer group that supported alternate outlier payment methodologies.

Lessons in Contract Negotiations

While Community Hospital utilized a standard approach in payor negotiations, the modeling of contract rate proposals didn’t include all aspects of the terms that affect payment.  Only then can modeling be an effective decision-making tool for negotiations.  Community Hospital and others underestimate the power of a data-driven discussion with payors in which market intelligence can effectively support not only payment level requests for targeted payment levels but also other key provisions within payor arrangements.  While Community Hospital was satisfied with their increases, how did those increases/rates and structure compare to the rest of the market? Resources, such as ECG’s National Hospital Reimbursement Survey, can provide hospitals and other providers with current and relevant market intelligence to compare expected yields to aggregate and service line level benchmarks – and ultimately optimize commercial payor reimbursement and relationships.

For more information about the National Hospital Reimbursement Survey and how you can participate, contact me at or 571-257-1002.


This entry was posted in Business Intelligence, Managed Care Contracting, Strategic Planning and tagged , , , , by Purvi Bhatt. Bookmark the permalink.

About Purvi Bhatt

Purvi joined ECG in 2005 and works in the firm’s Contracting and Reimbursement practice. She assists physicians and hospital enterprises in developing and executing strategic and tactical managed care contracting plans that result in significant revenue enhancements. She also works with providers and health systems as they transition from volume- to value-based delivery systems, analyzing quality and financial data; facilitating stakeholder discussions regarding a culture of collaboration, creativity, and accountability; and developing accountable care organization/delivery-based strategies. Prior to ECG, Purvi worked in the Program Evaluation and Quality Improvement Department at MedStar Health, a nine-hospital health system, where she identified opportunities for clinical process improvement and effective resource management for Washington Hospital Center and National Rehabilitation Hospital. She has master’s degrees in business administration and health services administration from the University of Houston and a bachelor of arts degree in psychology from the University of Texas at Austin.

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