The Ins and Outs of Successful Hospital Insurance Negotiations and Service Pricing

When it comes to health insurance contract negotiations, the battle between hospitals and insurers can be of heavyweight-caliber. The importance — and potential ramifications — of payor negotiations has been exemplified in the dispute between the University of Pittsburgh Medical Center and health insurer Highmark, as their contract covering roughly 3 million people could end on June 30, 2012, putting the hospital, insurer and patients at risk of an insurance debacle. Additionally, Highmark is exploring an acquisition with UPMC competitor West Penn Allegheny Health System in Pittsburgh, which has only intensified disagreements between the two parties and changed how hospitals must deal with insurers.

The health reform law is also rearing its head into the insurance discussion, as it will significantly restructure how and to whom health insurers provide coverage. By Jan. 1, 2014, under the Patient Protection and Affordable Care Act, health insurers will not be able to discriminate against or charge higher rates for any individuals based on pre-existing medical conditions, health insurance exchanges will be in full force to give people a marketplace for choosing health coverage and numerous other conditions will impact how people can receive coverage and how healthcare groups handle coverage.

Hospitals must negotiate with their payors periodically, and it might not always be an easy task. Now, with both reimbursement cuts as well as health coverage expansion, payors might be asking a lot from hospitals. There are several things a hospital can do, however, to prepare properly for insurance negotiations and service pricing.

Understanding your contract and prep work
Typically, large health systems do not have problems with the pre-negotiation steps; it's usually community and regional hospitals that have a more difficult time because the people that negotiate payor contracts usually wear several different hats at the hospital and may not have all the software tools that can help model contracts, says Kyle Kobe, principal at Equation, a healthcare consulting firm.

The first and most important step to a hospital's payor contract negotiations is to do the homework and take the time to understand the existing contracts, Mr. Kobe says. Hospitals must benchmark contracts against each other, see how all of their managed care contracts compare to others and figure out the financial impacts of each contract. For example, comparing rates among Aetna, CIGNA and Blue Cross Blue Shield plans can give a hospital an idea of where rates are at in the market and how a hospital's current contract can be improved, Mr. Kobe says.

Furthermore, hospitals should do the research ahead of time to know what percentage of the insurer's business comes from the hospital. If a hospital shows a payor that it is 40 percent of the payor's business in cardiology, it builds a picture and gives the hospital leverage to show just how many patients they are serving on the payor's plan. Other numbers to have include the range and demographics of the patient population, the average cost per patient, the average cost per episode of care, costs per diagnosis code and the average cost to the payor of what they are currently reimbursing. "Tell how they affect you, but also tell how you affect them," Mr. Kobe says. "Payors will have the numbers together and know what they're talking about. You'll be at a major disadvantage if you don't take the time to compare contracts to each other."

Conducting research on current contracts goes hand-in-hand with keeping an inventory of all contracts and setting up a system that indicates which payors are coming up for a renewal, says Mary Ely, director of physician relations at Greater Baltimore Medical Center who is also in charge of managed care and negotiations with insurers. At GBMC, Ms. Ely reviews volumes, denial histories, Medicare fee schedule changes and other payor contracts prior to renewals for her research.

The mountain of information cannot deter a hospital's managed care department, though, because the research and comprehension of current contracts sets the tone for all discussions. "Sometimes it seems overwhelming when it comes to doing the homework and gathering the information you should put together," Mr. Kobe says. "But if you're planning ahead when contracts are due, there's not one hospital that can't do this."

Negotiations and the power of data
In order for negotiations to be seamless and less confusing, Mr. Kobe says it is best to space out contract negotiations throughout the year so a hospital is not negotiating everything with a majority of payors all at once. Additionally, a hospital could lose some negotiation leverage by having everything come up at once because the hospital would then be at risk on all or many contracts, which could lead to overly compromised deals.

When it comes time to sit at the negotiation table, there are several things hospitals should vie for — and a lot needs to be based on the research that was conducted beforehand as well as contract modeling software. Without clout, a hospital's bargaining power needs to come from data, Mr. Kobe says, and that data needs to show how proposed rates could help or hurt the hospital or practice.

Firstly, hospitals need to look at services where there could be opportunities for carve outs, which are contracts paid under a different arrangement. For example, if a hospital is only 20 percent of an insurer's inpatient business but 50 percent of its cardiac services, that is an area where the hospital can push and look for better reimbursements rates, Mr. Kobe says.

Highlighting the quality aspects of a program, the credentials of physicians and other areas that add value shows the hospital does not want an arbitrary rate increase — it shows the hospital is taking things seriously, Ms. Ely says. She adds that clear communication between the hospital and payor is essential, especially if the contract language needs to be renegotiated. For instance, Ms. Ely says any questionable or vague clauses that involve legalities or payment procedures like appeals processes should be scrutinized so disputes later do not cost the hospital money.

Finally, hospitals want to routinely update evergreen contracts, which are contracts that have much longer terms. Mr. Kobe says hospitals want to look at renegotiating contracts every two to three years, and evergreen contracts especially need updating because those types of contracts typically collect dust if no one is paying attention. "Nothing will happen unless someone raises their hand and says there needs to be a change," he says. He adds that hospitals should look to put "risers" in those types of contracts. Risers are stipulated increases over the life of a contract. For example, if a hospital negotiates a three-year contract with a payor, there could be an automatic 2 percent increase, or riser, after the first and second years to adjust for inflation.

Competitive pricing
Comparing payors against each other and knowing the hospital's market shares in all services are essential tools for negotiations, but hospitals also need to pay attention to the rates of other nearby hospitals, says Brian Workinger, business solutions consultant at Craneware. A hospital cannot price itself out of the market because it could eventually lead to weaker payor contracts and, ultimately, lost patients. "A competing nearby hospital may be 20 percent as much for the same procedure, and in the consumer-driven healthcare we're in now, the patient can go down the street and possibly save a substantial amount of dollars," Mr. Workinger says.

Prices for a hospital's procedures and services must be in line with other facilities in close proximity for the sake of not losing patients, but they must also match payor contracts. Payor payment that is inconsistent with contracts creates headaches for insurers and could stall future negotiations. Additionally, if hospitals do not take active steps to ensure payment matches contracts, they could lose out on valuable revenue. That's why a hospital's chargemaster is so important, says Kelley Blair, senior vice president of professional services at Craneware. Chargemasters show what a hospital charges for all services provided, and there are three items all hospitals need to do with chargemasters to ensure compliant pricing and to ensure they stick to the payor contract.

1. Keep codes up-to-date. CMS updates its codes quarterly, although that schedule will be slightly altered as ICD-10 becomes standardized. Regardless, hospitals must keep their codes current because payor contracts might differ from CMS. This could lead to confused billing and perhaps unnecessary denials.

2. Have dedicated chargemaster person/team. Ms. Blair says a dedicated chargemaster manager or team can recognize the important of its maintenance and can identify when, for example, a BCBS plan needs to be charged differently from a UnitedHealthcare plan.

3. Be proactive and conduct complete reviews with department managers.
"From a clinical person's perspective, the last thing they care about is making sure the chargemaster updated," Ms. Blair says. "They are worried about everything from patient care perspective." Therefore, those involved with the chargemaster must meet with service line department managers to see what services are being provided and if there have been any new divisions, services or updates. A proactive review is a key step in bridging the gap between the clinical and financial areas.

In the end, Michael Najera, professional services manager at Craneware, says hospitals must be compliant in its pricing with all regulatory bodies, but they must keep a more important and simple main goal in mind during these negotiations: Find the right contracts and price points that will make the hospital's services sustainable. "Ultimately, the financial objective is to ensure the revenue you're generating is sufficient to provide services to those that are in need your community but cannot afford to pay and to also ensure capital is available to reinvest in the facility to deliver recent or modern care with the latest equipment," Mr. Najera says.

Related Articles on Hospitals and Payors:

Uninsured Patient Sues Montana Hospital, Says Provider Agreement is Unconstitutional
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4 Ways to Gain Leverage in Payor Contract Negotiations

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