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How hospitals can get more out of their payer contracts
Chandler Barron |
October 25, 2024 |

 17,168 total views

How Hospitals Can Get More Out Of Their Payer Contracts

Hospitals manage numerous payer contracts, each comprising hundreds of pages detailing how they can charge, bill for and receive reimbursement (revenue) for their services. The reimbursement they receive depends on a variety of factors—a hospital might lose money on a service with one payer but profit from that same service with another. This complexity is common, but it raises the question: How can hospitals effectively manage profitability with such a convoluted set of requirements and regulations?

In the healthcare revenue cycle, the process that tracks and manages these details is called contract management. In recent years, this term has gained significant attention, especially as the complexity of healthcare reimbursement grows. Thankfully, software solutions now handle much of the heavy lifting, though understanding how to manage multiple payer contracts efficiently is still crucial for maintaining financial health.

When done right, contract management involves a thorough review of terms, conditions and rules, particularly when contracts are up for renegotiation or renewal. Partnering with revenue cycle experts can help hospitals avoid pitfalls and enhance their margins by analyzing how contracts are performing against expectations. This includes continuously evaluating contract performance, integrating modeling and conducting price sensitivity analysis to ensure hospitals maximize reimbursement from each payer.

Do Prices Matter?

Most healthcare contracts are structured to pay a percentage (or discount) of the list price rather than a fixed amount. This gives hospital revenue cycle directors some flexibility to adjust list prices for products and services. While few patients or payers actually pay the full list price, it still plays a key role in determining reimbursement for many services where payers compensate based on a percentage of that list price.

Given the complexity of third-party payer contracts, hospitals benefit from experimenting with how changes to prices and coding might impact overall reimbursement. However, this is not always straightforward. For example, increasing the list price for a particular service might boost revenue, but it could also decrease service volume, ultimately reducing total revenue for that procedure. A comprehensive price sensitivity model can provide hospitals with insights into the optimal balance between price, volume and net revenue.

The Role Of Contract Management Software

Effective contract management software can impact hospital revenues even if there is no change in the actual contract terms. For example, a hospital may frequently perform a certain procedure. Since the facility already handles large volumes of this service, increasing the price by a few dollars may not affect volume while still boosting revenue. Conversely, for services with unused capacity, lowering the list price could lead to a surge in volume, ultimately increasing net revenue.

In a price sensitivity analysis, the software models various scenarios using different variables. The most effective price sensitivity tools allow for multiple inputs and unlimited scenarios, helping hospitals understand how even small price changes could influence both volume and net revenue.

Since contract management can be complex and time-consuming for revenue cycle staff, it’s often deprioritized on a list of high-priority tasks. In times of labor shortages, contract reviews and updates may be delayed, and contracts could even renew without being properly evaluated. This can snowball into reduced revenue and fewer resources—a vicious cycle many hospitals face.

A price sensitivity model functions like a historical lookback, aligning future reimbursement with expenses to ensure the hospital operates at the necessary margin. By repricing claims at various levels, hospitals can identify which services will yield more reimbursement from a payer when prices are adjusted.

The Importance Of Expertise In Contract Management

A skilled contract manager and a knowledgeable price sensitivity partner are crucial for hospitals, especially given the customization required to accurately “load” contracts into the hospital’s electronic medical record (EMR) system. While your organization may excel at negotiating, if you’re not skilled at loading contracts, you likely won’t be able to successfully execute the contract you just negotiated. This could result in denials, downcoding or other reimbursement challenges, causing underperformance compared to expectations.

An experienced partner who understands how claims are likely to be billed—based on handling thousands of similar claims with the same payer—can be invaluable.

Preparing For Vendor Partnership Or Maximizing In-House Efforts
Before engaging a revenue cycle partner, hospitals can take practical steps to assess their current situation and better prepare for an effective partnership. These actions not only help hospitals maximize their internal capabilities but also set the foundation for collaborating with an expert vendor when needed:

1. Conduct a contract inventory audit.

Create or update a central repository for all payer contracts, including amendments, addendums and updates. If this system isn’t already in place, it should be established. Understanding key contract terms—such as payment rates and reimbursement schedules—and centralizing this information ensures easy access for ongoing evaluation and future optimization. Hospitals that establish this clarity internally will be in a better position to both maximize their current contracts and collaborate effectively with outside experts.

2. Use data analytics to drive insights.

Hospitals should leverage their existing data analytics tools to uncover insights, identify trends and spot inefficiencies in their current contract performance. By regularly auditing this data, revenue cycle teams can make data-driven decisions that enhance profitability. Advanced analytics provide a strong starting point for hospitals looking to make immediate improvements in reimbursement, but they also lay the groundwork for deeper analysis that an external partner can offer through more sophisticated tools and expertise.

3. Set clear expectations for the vendor.

If a decision is made to partner with a revenue cycle expert, hospitals should establish clear performance goals, such as improving claim resolution times or reducing underpayment rates. Having well-defined metrics ensures that both the hospital and the vendor are aligned on objectives and that the hospital can measure the vendor’s impact. Doing this upfront can ensure a smoother transition to a managed service model more quickly.

Balancing In-House Efforts And Vendor Expertise

While these steps can help hospitals optimize contract management on their own, they often reveal deeper complexities or opportunities that require specialized skills and tools. By combining internal efforts with external expertise, hospitals can work to unlock the full potential of their payer contracts.

Pricing in hospitals is complex, but by regularly reevaluating and optimizing pricing across all payer contracts—either through internal efforts or with expert guidance—hospitals can increase net revenue, ensure they are compensated fairly and secure their financial stability for the benefit of the communities they serve.

Author: Chandler Barron

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