It's unlikely that any courses taken in business and finance school ever fully prepared financial leaders for the shrewd rigors of healthcare payer contract negotiations. Nevertheless, it still falls on the CFO to ensure contracted payer reimbursements stay as favorable to the hospital or health system as possible.
Without a strong background in contract negotiations, however, financial leaders can make costly missteps, says Kyle Kobe, a principal at Equation, a Salt Lake City, UT-based healthcare consulting firm. To remedy this, he offers three strategies for to make this process a more fruitful one for the hospital and health system.
Strategy 1: Know Thy Current Value
Kobe says financial leaders should begin the contract negotiation process before the payer arrives. So, keep in mind that all three of these strategies are meant to be tackled prior to talking with your payers.
"You need to know the current value of your contracts within the hospital or health system," he says.
Healthcare leaders often take this to mean knowing the percent of profit for the overall charges with a payer, but Kobe recommends going beyond that and understanding the margins and how much every payer they work with is contributing to the overall bottom line.
"A negotiation should be predicated on creating a contract that supports the level of work the hospital does [for the payers]," he says. "Then they need to say, 'This contract is worth this much to us in terms of our bottom line, as well as what we are trying to accomplish as a hospital or health system.'"
Strategy 2: Know Thy Market
Kobe says it's important to understand how valuable the hospital, health system or physician practice is in the market and then discern whether the current or proposed contract reflects that position. First, for example, assess what services are offered at your hospital versus others in the area. Or factor in whether you are the sole provider for an offering, and then do a benchmark for your rates. While you may not be able to learn how much your competitor(s) are earning with the same payer's contract, you can take each of your existing payer contracts and benchmark the rates against one another.
"You need to understand where this contract fits into the spectrum of contracts you have," Kobe explains. "Then you can talk to the payers about the rates and have an understanding of where the [contract] needs to go. Once you know the benchmark … you can be more aggressive in your negotiations. You can potentially push back to get what you need."
Kobe says to keep in mind that your analysis may also reveal that you don't have as much market power as you might think. "Even if you don't have any market power, by understanding and knowing where your strengths lie you may be able to pick up a couple of additional points," he notes.
Strategy 3: Know Thy Options
When it comes to negotiating, it helps to have a tactical plan. The first two strategies avail you of the information you have in your system, now you need to run some best- and worst-case scenarios.
"You need to know what's financially viable with this contract; what you're willing to accept in terms of rates, and what your fallback position is," Kobe says.
Part of your tactical approach should include revealing the data you chased earlier. By showing the payer this information the financial leaders is indicating an awareness of the economics of the contract as well as how the reimbursements are reflected in the health system, Kobe explains.
For instance, if the hospital's internal analysis uncovered that a large number of the payer's clients come through the system, then now is the time to play that up as market power. Bear in mind however, that you should be aware of what percentage of your overall patient census is coming from this payer, too. If the payer is your largest source of revenue and the payer knows it, it could weaken your negotiating position.
Alternatively, if you have little market power, Kobe says, healthcare leaders could take their case to the public via the press. "You look at the numbers and explain to the press that the hospital may have a difficult time providing care if it doesn't at least get a market rate from the payer, or you may want to show how it could cause financial trouble for the hospital if the rate stays the same," he says.
Beyond financials, Kobe suggests that financial leaders come prepared with clinical outcome rates and services provided for the payer's customers.
"Regulatory changes are pushing healthcare in different directions and in some cases encouraging partnering with payers," he notes. "It may be beneficial to find out how a hospital can work with the payer on areas such as diabetes to reduce the costs to the provider and the payer."
Lastly, as part of your tactical strategy, Kobe says that healthcare financial leaders should also know when or if they are willing to cancel a contract entirely.
"If you are going to take the nuclear option, you have to know in advance if it is economically viable to give up the contract," he says.
The tactic can be beneficial in some instances, Kobe says, as it can result in a more mutually beneficial negotiation later. "I've seen it happen where the payer would negotiate in the beginning and the provider dropped them. Later when the payer realized they needed [the hospital] they were more willing to negotiate. … Sometimes you need to surprise the payer to really get everyone talking," he says.
Although the payment environment may change in the coming years, one area that's unlikely to change is payer contract negotiations—payers certainly won't make it any easier for financial leaders to get additional reimbursement. By coming prepared with data and strategies, CFOs can make the process less favorable for payers and more favorable for the hospital or health system.
Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
