How to Negotiate Payer Contracts (Part 1): Making a Plan

In today’s healthcare payment landscape, every dollar counts—especially in the physical therapy realm, where increasing regulations and decreasing reimbursements seem to be the name of the game. That’s why now, more than ever, it’s crucial that you get the most out of your private payer contracts—and to do that, you’ve got to negotiate. To help you make a case for the rates you deserve, I’ve put together a two-part guide to successfully negotiating payer contracts. Today, I’ll lay out a prep plan to ensure you’re ready to talk numbers before you meet with health plan representatives. And tomorrow, I’ll discuss strategies for broaching rate increases when you actually sit down to talk.

1. Know the terms of your contracts.

As this article from the Journal of Oncology Practice explains, many of these documents are “evergreen,” meaning they’ll automatically renew unless one party explicitly requests a change to the agreement. With that in mind, make sure you keep tabs on the expiration/renewal dates for all of your contracts as well as how far in advance you must submit any proposed modifications. In the above-cited article, Jeff Milburn, a practice management consultant with the Medical Group Management Association, says you’ll get much better results if you ask for small rate adjustments consistently rather than requesting major changes on a sporadic basis: “It’s easier to ask for a 2% to 3% increase every year or every other year than to chase down a hefty 10% increase all at once.”

2. Pinpoint where you are and where you want to be.

Before you start making demands, get a pulse on your current payer situation. How? In this Medical Economics article, author Donna Marbury suggests creating a spreadsheet that includes “your top eight payers and your top 25 current procedural terminology (CPT) codes to analyze financial performance of the payers and their reimbursements.” This will help you establish concrete goals for your negotiations. According to the Journal of Oncology article I mentioned earlier, you should set “an optimum, minimum, and target goal. The optimum is your starting point...the terms you consider ideal...the minimum is the point that must be met for you to sign, and the target is the point at which you would like to end up after negotiation.”

3. Calculate your weighted averages and break-even points.

According to the Journal of Oncology article, this is a “quick and dirty” method of assessing the overall fee schedule in a payer contract. Please note that you can only determine this value for current contracts (not new opportunities). To calculate your weighted average for a particular payer:

1. Make a spreadsheet with all of your CPT codes and the number of times you billed each code for that payer.
2. Multiply the frequency of each code by the proposed payment amount.
3. Add up all of your totals and divide by the total number of all codes billed.

By comparing this figure among all of your payers, you can get a pretty good idea of which contracts are the most valuable to your practice. Additionally, you can compare the data for individual CPT codes to determine which plans pay the least for certain codes. You can then establish your break-even point for each plan by “adding in your overhead expenses and your [clinician] compensation and dividing this sum by the total frequency of all codes for all payers. The result gives you the weighted average of your costs, which is your break-even point.”

If you discover that the weighted average for a particular plan is less than the break-even point for that plan, “you should participate in that plan only if there are other reasons to do so, such as keeping your top referring physicians happy.”    

4. Arm yourself with data.

If you think your services are worth more than you’re currently getting from a particular payer, you better be able to back up that claim with cold, hard numbers. According to the Journal of Oncology article, you should maintain and present “data about the utilization, revenue, and expenses of your practice.” Perhaps even more important, though, is amassing an arsenal of objective proof that demonstrates your effectiveness and efficiency as a therapist. “Measures of quality are extremely important,” the article says. “Systematically and regularly survey patient satisfaction and gather information from hospital administrators and referring physicians about the performance of your practice.”

5. Assess your market leverage.

If you’re a small practice, you might not think you have a lot of negotiating power. And to some degree, that’s true. “Size matters when it comes to negotiating with private payers, and the reality is that small practices are at a disadvantage,” Marbury writes in the Medical Economics article. But that doesn’t mean you should throw up your arms in surrender. Marbury quotes healthcare consultant Reed Tinsley’s advice to small-practice providers who often shy away from the negotiation game: “Every practice needs to engage payers about rates. How do you know what you can and cannot change in a contract if you don’t try?

In fact, you may have more leverage than you think. Is there a particular niche in which you specialize? How many clinicians in your area offer the same types of services that you provide? Do you have a strong reputation as a quality rehab therapy treatment provider—especially among top referring physicians? If you can position your clinic as an irreplaceable option for patients in your area, payers will be more willing to work with you to ensure that you keep your contracts with them.

6. Beware of legalese.

Payer contracts are often rife with confusing legal speak, and if you aren’t crystal clear on what you’re agreeing to, it could end up biting you in the you-know-what at some point down the road. Here are a few red-flag phrases to watch out for, as presented in this article:

• “Industry-accepted”: Payers might try to use this vague descriptor as a determining factor for your reimbursements. Don’t let this happen; it opens up the door for “payer discretion about reimbursement.” Instead, push for set-in-stone commitments. Also, keep in mind that some plans reimburse based on a percentage of the Medicare fee schedule. If that’s the case, shoot for above 100%, as Medicare’s reimbursements are “low enough already.”
• “Except as otherwise indicated herein”: This implies that there’s an exception hidden somewhere in the body of the contract—and chances are, it does not benefit you as the provider. Some self-funded plans may attempt to use variations of this verbiage within their definitions of medical necessity. “For insured plans, medical necessity is defined by law,” the article explains. “This should be the definition for self-funded plans as well.”
• “Hold harmless patient member”: Regardless of what happens with the carrier—bankruptcy, for example—you should still get paid for any services you’ve already provided to the patients on that plan. The contract should make clear that the patient is ultimately responsible for whatever the insurance does not cover.
• “Affiliates and assignments”: Make sure these entities are clearly defined and that the contract specifies what would happen “in the event of mergers and acquisitions.”

Now that you know how to get all of your pre-negotiation ducks in a row, tune in tomorrow to learn how to successfully negotiate the details of a payer contract so that you get the most out of your relationships with private payers.