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Physician Compensation and Managed Care Contracting: Successful Negotiation Strategies

By: Reed Tinsley
Tel: (281) 379-5988
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We all know we are in an era of declining physician reimbursement. What physicians get paid for their services is much less than it was 5-10 years ago. This is particularly true with respect to managed care payers.

It is important to understand that employers drive managed care. Most employers, in an effort to contain their own costs want good insurance coverage for the owners and the employees, but do not want to pay a large sum for it. This is especially true of larger employers. Employers are constantly attempting to reduce or contain what they pay out for health insurance. As a result many are switching to managed care plans for their health insurance coverage simply because of the cost savings that can be achieved.

This creates constant pressure on managed care payers with respect to pricing their premiums. If health plans have to reduce or maintain what they charge as premiums to the local employers, they must find ways to maintain their profits. One way is to look at their cost structure - Specifically how much and at what price they are paying their contracted health care providers. Reducing what prices they pay providers is one simple way to maintain and increase their profits.

As medical practice revenue declines and overhead increases, guess what gets caught in the middle - physician owner compensation! Overhead often increases from year to year but most medical practices have done a good job creating an efficient overhead structure - in simpler terms, overhead needed to run the medical practice is "lean and mean." This way, a medical practice can concentrate its efforts on increasing its top line - revenue. If revenue can be maximized and overhead contained, the result is increased monies for physician compensation.

One way medical practices can increase their top line is by negotiating or re-negotiating with their managed care payers. When originally contracting with or renegotiating a provider contract with a managed care plan, the physician and the medical practice should strive for two specific goals: (1) to obtain the most favorable legal terms possible and (2) to obtain the most favorable financial terms possible.

What a practice should do

To increase revenues, a medical practice must attempt to negotiate with its managed care payers. Without any attempt at negotiation, any practice will be at the mercy of any payer in its own service area. In other words, whatever the payers says, goes, whether it is about reimbursement rate setting, service utilization, usage of other providers and facilities, etc.

This chapter will give you insights on how to successfully negotiate with managed care payers, regardless of whether the payer is a managed care company, an independent practice association, another health care provider, or any other integrated delivery system. The tools and strategies described in the following pages can be immediately implemented by most health care providers. Before getting into the specifics of how to successfully negotiate with managed care payers, the first step is to understand the keys to a successful negotiation.

Keys to Successfully Negotiating a Managed Care Contract

Leverage: The main key to contracting success - Leverage is a major pathway to successful negotiation of a managed care contract. The ability to negotiate or renegotiate a managed care contract is often determined by the amount of leverage a particular practice or provider has in the marketplace. Consider the following scenario: A major managed care payer you contract with has decided to reduce the amount it will reimburse physicians for their services. (Sound familiar?) Now answer this question: If you were to approach the payer in an attempt to renegotiate their proposed rate change, how do you think the payer would react to you? Would they listen to what you have to say or, as in most cases, would the payer simply tell you this is their policy -- take it or leave it? If the payer or payers in your service area adopt a take it or leave it stance in respect to your practice, the result may very well be future reduced physician compensation.

Success in changing the terms of a managed care contract usually varies from locale to locale. However, success can be achieved only if the practice has the LEVERAGE to negotiate or renegotiate favorable contract rates and terms. This is the same type of negotiation that occurs when professional athletes negotiate their own contracts or in any other type of negotiation scenario. The party with the "upper hand," whether perceived or real, will usually be the party who gets the most out of the negotiation. If a practice does not have leverage, it likely will have to accept whatever is offered by the managed care plan. More often than not, this offer will negatively impact the finances of the practice.

Define your leverage

Most physicians come to the negotiation table without a defined contract strategy. This strategy must be developed before the negotiation process even begins. The core of the strategy is to define up front what leverage your practice has for your delivery system. The failure to define leverage before negotiating has soured many physicians on the contracting process. Often this is because leverage did not exist in the first place, and the physician or physicians wasted time and resources trying to negotiate a contract they had no chance of winning. In other cases, they had leverage but nobody recognized it, resulting in a failed or unfavorable negotiation. Payers certainly are not going to bring up missed points of leverage with you.

Decide what you want to negotiate

Before you begin the negotiation process, you must decide on the important issues that you want to negotiate. There are two main issues involved with any managed care contract negotiation: (A) negotiation of financial terms and (B) the negotiation of legal terms. It is no secret that financial issues are critical factors to physicians since they have a direct impact on compensation. However, it is often difficult to get consensus on what legal terms need to be negotiated. The objective is to try to negotiate into a contract legal terms similar to the ones included in the American Medical Association's model agreement.

From a practical standpoint, it will be difficult to change everything in a managed care contract; you must be reasonable in your requests. As the next key emphasizes, there must be some give and take in a negotiation. So before negotiating, decide which general legal issues you want to concentrate on.

Try to find out what the payer is interested in

The best negotiation is a win-win scenario for both of the parties to the negotiation, one where each party walks away from the negotiation table knowing something was won. To bring this off, find out what issues the payer is most interested in from a contracting point of view. Your goal is to deliver these issues to the payer in exchange for what you want to achieve as part of the negotiation process. In other words, try to create a "you scratch my back and I'll scratch yours" situation. This is one way to you find your leverage.

Most payers are primarily concerned about what they pay out for medical costs. So, as an example, think about the cost drivers for your own medical specialty. Put yourself in the payer's shoes and ask: How can all related costs be reduced for this medical specialty? The following are a few examples:

  1. The cardiology group that worked with and taught the emergency room physicians how to properly diagnose real situations of cardiac arrest. This reduced the number of unnecessary treatment costs and admissions.
  2. The primary care physician who, in conjunction with medical specialists, developed treatment protocols for specific clinical situations. This reduced the number of unnecessary referrals for specialty care. This, in turn, might reduce related costs for surgical and inpatient care.
  3. The specialists above who participated in the development of the clinical protocols. The payer should reward these physicians in exchange for their decreased volume as a result of the protocols but, more important, for the protocols' ability to reduce many other health care costs.
  4. The radiology group that worked with the payer to identify situations where ordered radiological exams were unnecessary.

Of course there are many, more examples of these types of situations. The negotiation strategy here is clear: You will be much more successful if you make the negotiation a two-way street rather than making it a one-way, my way or no way, situation.

Starting the Negotiation Process

As a practice, the first step in the negotiation process is to create a contracting strategy. You need to decide if you want to negotiate new managed care contracts or attempt to renegotiate existing ones.

Negotiating New Managed Care Payer Contracts

Decide whether or not any new payer contract will be reviewed and negotiated before it is executed. Many physicians and practices will sign almost any contract that comes across their desks. However, part of the contracting strategy must be to decide how many resources the practice or delivery system is willing to put into the negotiation. For example, if the payer is new to the service area, is it worth the time and effort to negotiate a contract submitted by a payer that has few or no enrollees? For any new contract you are considering executing, you may want to find out the answers to the following questions:

  1. What is the plan's current market share in the physician's practice area?
  2. What is the anticipated market share in each of the next two years?
  3. How does the plan attempt to secure this market share?
  4. Which employers are currently signed up with the plan?
  5. Which other physicians in the physician's medical specialty are also participating providers in the plan?
  6. Which hospitals participate in the plan?
  7. What are the contracting rates? (Across the board rates and/or the rates for the top 25 CPT codes.

The answers to these questions should give you some indication of whether it would be worth your time and resources to negotiate the contract. However, keep this one very important point in mind as you decide how to implement this portion of your contract strategy: Most times there is a consensus among physicians that if a payer cannot deliver a certain number of enrollees (i.e. patients), then it is not worth negotiating a contract at all. Nevertheless, in many cases a payer will start out with little or no market share and end up gaining a significant amount of market share over time.

Renegotiating Existing Managed Care Payer Contracts

When dealing with existing managed care payer contracts, the first step is to identify those contracts you find unacceptable. These could include contracts you think do not pay you fairly and/or those that contain objectionable nonfinancial terms. The nonfinancial terms of the contract should be reviewed both internally and externally -- internally by a physician, practice administrator, contracting committee, etc. and externally by a health care attorney or health care consultant who has a vast amount of experience in managed care contracting. This review process will identify the contract provisions and clauses that need to be renegotiated. You can also benefit from using this process when negotiating new managed care contracts.

. . .Continue to read rest of article (PDF).

Reed Tinsley, CPA, is a Houston-based CPA, Certified Valuation Analyst, and healthcare consultant. He works closely with physicians, medical groups, and other healthcare entities with managed care contracting issues, operational and financial management, strategic planning, and growth strategies. His entire practice is concentrated in the health care industry.

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