11 Best Practices for Commercial Payor Negotiations on New Payment Models

As healthcare moves into the next decade, new payment models like bundled and episodic payments, risk-sharing agreements, value-based payments and accountable care organizations are picking up momentum and changing the way reimbursement functions in the healthcare market. These new models of payment support new models of care intended to achieve efficient, cost-effective and excellent health outcomes. As the industry moves to innovative payments, providers need to be proactive.

"If you are a provider, in the long run you need to manage population health cost-effectively to secure your position in the healthcare market and to be paid reasonably for the services you provide," says John Harris of DGA partners. "We have reached a tipping point where providers need to be planning for or at least experimenting with innovative payment models to secure their position in the healthcare market in the long run. How much, how quickly, how much risk to allow and who to partner with are all a function of the local market and specific organizational needs."

For the hospitals and health systems ready to engage in new payment models with payors, the process may seem overwhelming. Since successful payment contracts involve complicated and long-term relationships, it is important for providers to consider the right payor. In doing so, the following four factors need to be considered.

Identifying the right commercial payor

1. Select just a few payors. According to Stephen Thome, senior manager in Ernst & Young's healthcare advisory practice, providers should only select a few commercial payors for discussions about new payment models. New payment models between a provider and a payor involve a complicated relationship that needs to evolve and mature over time. Thus, it will be difficult for providers to have productive contracts with more than a few payors. "It would behoove hospital and health system executives to be proactive in identifying which payors they want to work with over a long period of time," says Mr. Thome. "Then, engage those payors in a conversation to get a head start on the process." To determine which to consider, providers should look at a payor's footprint and strategic focus.

2. Determine the footprint or geographic dispersion of payor.
According to Mike Cohen, principal and leader of the provider strategy practice for Deloitte Consulting, the extent that a payor has a geographic dispersion of membership in an area where the hospital also has strength is important i.e. the market footprint of the provider and the payor should be compatible. "There should be a mutually aligned member base to supply a population for both parties," says Mr. Cohen. For instance, if a health system covers an entire metropolitan area, the ideal payor would be strong in that same metropolitan area to provide patients for the provider. "If a health system ends up with only a small number of patients for an ACO, the infrastructure to manage care of those patients will become financially burdensome. A provider needs to make sure the payor can deliver a meaningful number of patients to its physicians," says Mr. Thome.

Beyond providing the population, a compatible footprint between the provider and the payor can help both organizations to grow. "Providers should look for a payor that would allow them to grow in market share for one of its weaker areas. New payment models are about incubating new lines of business rather than hanging on to established business. If a provider is actively seeking out new payment contracts it should be considering a payor in a market where it would like to see growth," says Mr. Cohen.

3. Examine strategic, philosophical focus. It is important for a provider to look at the possible payors and choose one that has a strategic focus most aligned with its strategy. "Every payor has a different strategic and philosophical approach," says Mr. Cohen. "Some payors are more focused on evolving payment models and others are further ahead in that regard. It is best for a hospital or health system to find a payor with a philosophical and strategic approach to new payments that aligns with its own."

4. Consider competitive market.
Providers should consider the competitive market dynamics of area payors when selecting a partner, recommends Mr. Cohen. "Providers can help stimulate payor competition based on who they choose to contract with," says Mr. Cohen. While providers do not always have multiple partners to choose from, providers that are able contract with new payors can increase competition in the market, which ultimately benefits the provider. "If I am a provider, I want to see if I can pick a payor to contract with that will create a more fragmented commercial insurance market," says Mr. Cohen.

The new payment model process

Once healthcare officials have identified a few payors as good fits, the next part of new payment contracts involves reaching out to payors and beginning discussions. It is helpful if healthcare officials know what to expect, what to bring to the table and how to handle negotiations. To engage commercial payors successfully, healthcare officials should use the following seven practices:

1. Gain buy-in and discussions at the executive level. In order for new payment models to be successful, there has to be a high-level of executive involvement. According to Elaine Daniels, senior strategic contract consultant for Blue Cross and Blue Shield of North Carolina, senior leadership buy-in is important for an effective and creative payment contract. Ms. Daniels believes the buy-in of senior leadership on both sides improved BCBSNC's discussions with CaroMont Health in Gastonia, N.C., on a bundled payment arrangement for knee replacement. The arrangement covered the entire knee replacement, including the pre-surgical period of 30 days prior to hospitalization, the surgery itself and most follow-up care within 180 days of discharge from the hospital. "The senior leadership really needs to want to implement a new model. In working with CaroMont for the bundled payment arrangement, it was clear that their senior leadership really felt the payment model was the way of the future. Their attitude and energy paved the way for a successful pilot," says Ms. Daniels.

Not only is senior leadership buy-in important, all of the discussion needs to include the executives. "A value-based or risk-based contracting relationship is a transformative event," says Mr. Thome. "It is important to define that transformation at the executive level."

When the executives discuss the payment relationship there is much greater freedom to define terms and apply creative solutions to sticky problems. For the same reasons, a single negotiation will not suffice for creating a new payment relationship. As mentioned earlier, the relationship is complicated and needs to mature thus; multiple meetings will improve the agreement over time. "It is more like a marriage than a short-term contractual relationship," says Mr. Thome.

2. Form a collaborative, trusting relationship. The commercial payors and the providers should approach new payment models collaboratively. "I don't like to use the term negotiate because everyone needs to be involved in the problem. Negotiating conveys a connotation that the final agreement will be a win-lose relationship," says Chris Day, chief business development officer for Aetna Accountable Care Solutions. Familiarity with your partners is important for creating new payment models that really work. In this case, it is ultimately, what is best for the patient: cost-effective and quality healthcare services.

"It is more than a matter of a getting a good contract or a good rate. If the provider and the payor can work together to create an ACO or a value-based contract, even if it doesn't exist now, that delivers high-quality and lower cost, it will become a valuable commodity," says Mr. Thome. "Additionally, the commodity will enhance the marketability and fuel growth for each entity. That is the ideal result of a payor-provider relationship."

3. Reconcile operational and contracting strategy. Many providers are currently on a continuum when it comes to new payment models. The first group is trying to stay in the existing world of fee-for-service. In the next group down the continuum, the providers have aspirations for new payments but their capabilities are behind their goals. The last group on the continuum includes providers with the capabilities and the ambition. According to Mr. Cohen, where an organization sits on the continuum should dictate how it negotiates its contract. "A provider should reconcile where they are operationally and align that with their contracting strategy," says Mr. Cohen.

A provider in the middle of the continuum — with a bigger appetite for a new payment model than the capabilities to sustain the model — should enter contracts more concerned about funding the investments they need and a mindset aimed for experimentation rather than trying to move all their business towards bundle care. Or, they should be willing to take a modest upside in exchange for a less near-term risk. However, a provider with more sophisticated capabilities can challenge themselves. "Now would be the time to exploit their capabilities and take advantage of becoming more accountable. They could handle the higher risk to reap the higher award," says Mr. Cohen.

4. Begin with the end in mind: Know your "ask." According to Mr. Cohen, providers need to enter new payment model negotiations with the end in mind. Having a good articulation of a strategic plan is important. "In many cases providers are proactively reaching out to payors. In addition to negotiations of rates and incentives, they are looking for payors to invest in infrastructure and capabilities," says Mr. Cohen. "Some providers do not think to ask for that, but if it they are aware of the possibility and it makes sense for them, it is important to bring it up." For these reasons, the provider needs full awareness of what they need so they can bring the accurate "ask" to the table.

Additionally, the payor is going to come to the new payment discussions with a sense of its own strategic and boundary conditions. "They aren't coming in just to fish; they have an end in mind and range to work within," says Mr. Cohen. "Providers need to recognize that the payor is coming prepared to make a deal so they can come to the meeting prepared to do the same." According to Mr. Cohen, it may be useful to leave the mindset of "rates" and think about the strategic, even operational, goals. What can a new payment model help the health system achieve within a broader strategy for accountable care and population health? "Get out of the mindset of rate and think about it more strategically and operationally in terms of what the relationship would do for broader strategy for accountable care or population heath," says Mr. Cohen.

5. Create data-driven value proposition. When a payor comes to payment contract discussions, they will have mass amounts of claims data about the clinical and financial effectiveness of the provider. In expectation of the payor's data, the health system should aggregate its own data to create a value-based proposition. A value-proposition consists of the areas where the provider knows its services and outcomes have been successful —where it can provide the strongest value. Preparing data around its value will give the hospital the information it needs to know the quality and cost levels it can be comfortable with in a new payment model. The value proposition will also help the health system be responsive to what the payor's claims data might show versus what their own data might say," says Mr. Cohen.

For instance, according to Ms. Daniels, when Blue Cross and Blue Shield of North Carolina negotiates a new payment contract with a provider, they will take the data they have on the health system and run various algorithms to determine a potentially avoidable complication analysis. "[BCBSNC] takes this analysis and compares it to hospitals in our Blue Distinction category, [an award given by the Blue Cross Blue Shield Association to providers with exceptional care quality], as well as to other hospitals in North Carolina," says Ms. Daniels. "Then we discuss the PAC analysis with the provider. This analysis breaks out the services that are considered typical for the procedure and those that are considered potentially avoidable. The potentially avoidable services are ones that a care management team would work on reducing. The reduction of complications will reduce the total cost for that service; it will also increase the quality of care rendered to that patient. If the provider is interested in increasing quality and reducing cost we share claims details around the entire episode of care and begin negotiating for the new payment model."

Other payors may have other ways of analyzing the health system's data before the initial negotiations. "A payor will most likely analyze the data at a population level to understand utilization and spending patterns," says Mr. Thome. "They will break the population down into disease categories and a variation of clinical practices."

Whether the payor looks at avoidable complications or past spending patterns, the health system should aggregate its own data in order to gain a sense of its strengths and weaknesses before negotiations begin. In other words, they should have a value proposition based on data-driven analytics. "It will give the health system a good sense of where it is apt to be successful in terms of sharing savings," says Mr. Cohen. "A health system should have a good sense of its value proposition so it can enter arrangements that emphasize its strengths and not its weaknesses."

6. Request data transparency. Although data is often shared at initial discussion meetings, it is important that a provider select a payor who is willing to continue sharing data throughout the process. This is important because if a health system is going to meet a value level, it needs to be able to access actionable info that gives a comprehensive view of the patient including claims, administrative data and financial data from a health plan. The health system needs to know if the patient is using a health risk assessment, if they are accessing their health information online or if they are not filling prescriptions. A patient's behavior could be a deciding factor in how to manage their care. If a provider and a payor work together by sharing data to identify value opportunities like disease management, cost reductions and other areas of quality to focus on, both will be more successful.

Even providers that have highly advanced data capabilities do not always have access to all of the data they need to manage populations. In order for a provider to be successful in a new payment model they need to be able to break down the silo walls of healthcare and see what happens to a patient beyond their walls. "Do not work with payors that are not willing to share data. Look for payors that have demonstrated willingness to provide performance-based payments — payors that are interested in a collaborative discussions," says Mr. Day. "Discussions should start with data sharing and not the 'old world' discussions of rate negotiation only." Sharing of the data should be a daily, weekly and monthly occurrence depending on the type of clinical data being tracked and reported. For instance, the provider and payor share aggregate population level data monthly to identify trends and design clinical responses to benefit the patient population.

Ms. Daniels also believes transparency of data is important to the new payment contract discussion. "On both the payor and the provider side you need good analytics teams to analyze the data to determine the appropriate care team for the episode. The care team is responsible for ensuring the member receives care at the appropriate setting. Once the new payment model is implemented," says Ms. Daniels. "Providing claims utilization data on a monthly basis will help to minimize and ultimately eliminate any leakage."

7. Align goals to enable simultaneous growth. It is important for a health system to align its quality goals with the payors quality goals and vice versa. A thriving payor-provide relationship will work simultaneously to meet similar goals. If the payor grows, the health system grows. According to Mr. Thome, the extent that the hospital can help the payor meet its quality measures will come back two-fold for the hospital in meeting its quality measures and receiving reimbursements. For example, if the health system can help the payor achieve its Healthcare Effectiveness Data and Information Set with the NCQA, a tool used to measure care and service performance, the payor will achieve higher premiums, which should circle back to higher reimbursement for the hospital. "If created together, the mousetrap of higher quality and lower cost should enable the payor and health system to benefit together," says Mr. Thome.

New payment models offer the healthcare industry a method to encourage better systems of care that support lowering costs while improving the management of patient populations. Now is the time for providers and payors to work together to achieve best practices for implementing successful, yet innovative payment contracts. "Being proactive with new payment models gives healthcare organizations the opportunity to be in the driver seat for ensuring their organization thrives today and tomorrow," says Mr. Day.

More Articles on New Payment Models:

8 Biggest Mistakes an ACO Can Make
The ACO Game of Wealth, Power and Local Politics
9 Ways Better Data Can Drive Hospital Bundled Payment Initiatives

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