CONSIDER PAYER-PROVIDER CONTRACTS to be microcosms of overall industry trends. As concepts like pay-for-performance and consumer-directed health plans gain traction in the healthcare environment at large, they are also becoming the main issues in insurance agreements.
Seen as a “necessary evil” of the healthcare business, contracts between payers and providers have a history of being contentious – especially the capitated arrangements that were forged during the early days of managed care in the late 1980s and early 1990s.
Not exactly a pleasant experience, negotiations are what dictate each side’s revenues and expenses for a contract over the course of what is generally two or three years. Depending on the situation, the process can be congenial and expedient or acrimonious and protracted. Overall, the climate has eased somewhat in recent years, as relationships have thawed with greater understanding between the parties, said Todd Lueders, principal with Reden & Anders, the consulting arm of Eden Prairie, Minn.-based Ingenix.
While there have been many factors responsible for easing the adversarial nature of payer-provider contracts, the main reason seems to be that providers have greatly improved their negotiating skills, he said.
“They are better at building data sets and formulating modeling tools to understand the impact of contract changes,” Lueders said. “They have also become more proficient at outlining their cost basis for procedures and justifying why a certain amount of reimbursement is needed.”
Troy Roth, senior vice president of revenue management solutions for Dallas-based Accuro Healthcare Solutions, agrees that providers have come a long way in gaining contract leverage, contending that it is borne out of necessity.
“Providers are more empowered – they have to be,” he said. “Margins are so small that they are practically nonexistent – usually less than 4 percent to preserve net revenue and ensure their continued viability.”
Ultimately, both sides realize they have to come to a consensus, Roth said.
“It used to be that health plans would go in and set up terms in contracts that providers would have to give into and accept – they knew physicians couldn’t model or calculate what they should be paid,” he said. “Now, both sides are better at keeping complex logic out of it and are striving for less administrative burden.”
The main task providers face in hammering out contracts with payers is with dedicating themselves to quality-based measurements, whether it’s pay-for-performance or Medicare’s value-based purchasing concept, expected to take effect in 2009. In either case, providers must demonstrate their commitment to furnishing the best care for the lowest cost possible, and it is gaining wide acceptance in the provider community, said Kevin Burchill, director for Boston-based consulting firm Beacon Partners.
“In the evolution to quality-based purchasing, we’ve seen providers migrate to quantifiable measurements that enhance the payment system,” he said. “This includes hospitals, physicians and post-acute rehab facilities, along with long-term acute care facilities, skilled nursing facilities and home health agencies. Although the market as a whole is not mature yet, it is moving in that direction.”
Even so, performance measurements can be different for each side, which can lead to negotiation loggerheads, Burchill said.
“The payers want to pay once for each procedure, and providers want the most reimbursement possible,” he said. “There are terminology differences on both sides – providers call them patients, and payers call them enrollees or members. Both sides do understand, however, that P4P metrics really enhance public outcomes, whether it is fewer infections or needle sticks.”
For providers to get the most out of their contracts, Roth recommends they focus their efforts on the products and services they do well. Proven techniques, such as activity-based costing, can go a long way in helping providers ascertain the cost dynamics associated with them.
“Providers need to understand the root costs of these services, such as cardiothoracic, neurology and orthopedics, and ensure they get the most for them,” he said. “Pick out a few product lines instead of biting the apple all at once.”
Contract specialists generally agree that consumers are exerting more influence on health plans and care provision, but argue that their effect on payer-provider agreements is negligible at this stage.
“I don’t think consumers are influencing things that much,” Lueders said. “There are portals and Web sites to keep them apprised of which providers have the lowest cost, but most of that is after-the-fact rather than included in actual contracts.”
Roth says it remains to be seen how big an impact consumer-directed healthcare will have.
“At the end of the day, we’re still not seeing that many patients coming and acting on their own behalf,” he said. “Most patients still trust the physician to do what’s right for them.”
Burchill believes the roughest period in payer-provider negotiations is in the past, and he’s optimistic that both sides will become more proficient going forward.
“With the early adoption of standard measurements, providers are already working toward this goal,” he said. “I see no reason why the process can’t become easier in the future.”