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5 Ways to Maximize Profitability in Contract Negotiations

 |  By Margaret@example.com  
   March 16, 2011

Few healthcare providers would consider going into a critical negotiation process without a plan of action – in the form of extensive patient indexes, historical reimbursement rates and methods and competitive insights – yet numerous hospitals across the country are doing just that when it comes to negotiations with payers. In fact, many hospitals do not have a consistent or effective methodology for managing and negotiating complex contracts with managed care organizations. As a result, providers often enter into negotiations blind – not knowing the projected financial impact of their future contracts.

When providers are armed with the right information and resources, they can turn the negotiations process around to capture all revenue rightly owed to them by payer organizations. Below are five important steps to maximize revenue capture and maintain profitability by product lines when negotiating contracts.

1. Embrace Modeling Technology – Effective contract management systems should include modeling and analysis technology. Modeling helps contract negotiators consider “What if …?” scenarios before entering the negotiations process while allowing providers to create their own game plan – before they receive the first proposal from a payor. When modeling capabilities are in place negotiators can view current net revenue per day against cost information and quickly determine current utilization and profitability of services from a given payor. Negotiators can also compare the current contract inventories (not merely the payor under negotiation) against the proposal to understand the overall financial impact for their book of business, leveling the playing field with payers. It is important to always use scrubbed claims data in models as this provides an “apples to apples” comparison to the Healthcare Effectiveness Data and Information Set (HEDIS).

Many contracts are complicated by specific “second dollar” stop losses, exclusions and high-dollar case rates. The modeling process brings transparency to contract terms and rates being proposed by payers and influences better decision making based on facts. Some facilities have contract modeling databases in their contract management solutions that automate the manual processing, improve accuracy and afford users to better align contract forecast to annual budgets. Requesting decision support information joined to current CDM for manual calculations is no longer needed as this functionality should exist within existing tools.

2. Invest in Training Employees – Information gleaned from contract modeling software is only as good as the claims that are available within the system. This is why employees are a hospital’s greatest asset when it comes to contract negotiations. It is employees who must select the proper set of claims and corresponding data and then interpret that data – a process that can be difficult for contract auditors who haven’t been specifically trained. Providers should empower employees to ask the “why” questions: why are we losing money in service lines; why are we not getting reimbursed correctly; and why are payers denying claims? Then, give them the tools and the authority to collect underpayments and fight for net revenue the organization is contractually owed. It’s crucial to educate and train employees on a hospital’s contract management solution to demonstrate effective utilization of the system. Organizations can also create individual policies and procedures to enable a repeatable process for recovering all they are owed and promoting better financial forecasting.

3. Examine Your Source – If you have problems with a certain payor, it’s likely that you have that same problem with other payers on similar service types, and it’s important to acknowledge that the problem might be on your end. Improper billing, coding, and charging patterns and incorrectly loaded contract terms are often the culprits. Services that are often affected include cardiac care, high cost drugs and implants. It’s crucial to look for the root causes of your issues, and you should be prepared to implement true cultural changes to resolve the challenges.

Hospitals should train contract auditors to think outside the box and incent them to get to the root of issues to truly maximize returns. Tools like an “account work list” give hospitals the ability to analyze payment trends and evaluate opportunities to improve contract terms. Combined with contract modeling tools and capabilities, hospitals can model the impact of changes and make informed decisions when negotiating new payor agreements.

4. Have Plans A, B and C – As with every successful project, hospitals must have a plan for contract negotiations. It’s important to address crucial issues, such as how to handle the “what if” scenarios, how to formulate and compare large volume payers to one another, and how to make enterprise-wide cultural changes, not just departmental changes, around the negotiation process. Hospitals should start with a key goal in mind – net revenue growth. They should identify specific volume and growth expectations, always using the prior year as the basis. To ensure the total net revenue goal is met, providers must revisit prior payor behavior for trends in areas such as underpayments, overpayments, denials and patient liability shifts. This step also helps forecast how much administrative time will be spent on a particular negotiation and identify prospective views of what might roll to allowances for doubtful accounts or bad debt.

5. Know Where You Net Out – In addition to utilization, contract modeling calculates an organization’s net revenue per day per contract as well as averages of other payers, including length of visit by service line type, total patient days, visits by IP/OP and high risk items like observation and multi-service bundling. Net revenue per day serves as a benchmark of how much money a hospital must bring in per patient per day to ensure profitability, and it usually comes up during contract negotiations. Armed with this information, all internal parties involved in the negotiation process can see the causes of any reimbursement or pricing issues and work together to resolve them in advance of negotiation sessions.


Troy Roth is senior vice president of revenue cycle product strategy and solutions support for MedAssets, a financial improvement partner for healthcare providers. Roth can be reached via email at troth@medassets.com.

Margaret Dick Tocknell is a reporter/editor with HealthLeaders Media.
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