Managed Care Contract Negotiations Provider Prospective June 26, 2008 - PowerPoint PPT Presentation


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Managed Care Contract Negotiations Provider Prospective June 26, 2008


Market leverage is the second most important tool in any negotiation ... Hospital has no idea if cost margin is even reasonable in their market ... – PowerPoint PPT presentation

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Title: Managed Care Contract Negotiations Provider Prospective June 26, 2008

Managed Care Contract Negotiations Provider
Prospective June 26, 2008
Overview of Topics
  • Payer, Provider Relations
  • Payer, Provider Negotiations
  • Managed Care Market Strategy
  • Managed Care Market Modeling
  • Examples
  • Future Trends

Payer/Provider Relations
Payer/Provider Relations Historical Context
  • Payers and Providers have historically had a
    somewhat contentious relationship with very
    little trust between them
  • Some payers have taken advantage of
    hospitals/physicians using payment hierarchies,
    bundling policies, and misleading methodologies
    as well as arbitrary denials and audit take-backs
  • Some hospitals have taken advantage of payers
    using phantom or targeted chargemaster changes

Payer/Provider Relations Climate of Most
  • Historical relationship creates a atmosphere of
    distrust in every negotiation
  • Arbitrary mandates are set because of this
    history (for example)
  • of charge contracts are bad for the payer and
    good for the hospital
  • Fixed fee contracts are bad for hospital and good
    for the payer
  • Atmosphere of distrust does not allow for the
    development of creative solutions
  • This ultimately hurts the employer/consumer/member

Payer, Provider Negotiations
  • Myths about Payer/Hospital Negotiations
  • Managed Care Strategy
  • Modeling for Negotiation
  • Market Based Modeling
  • An Example

Myths about Payer/Hospital Negotiations
  • Payers have access to more data than providers,
  • Payers will always have the advantage of better
  • Payers have many (more) actuaries and financial
    analysts, so Payers will always have a modeling
    advantage over Hospitals
  • Payers understand the market better than
  • You must get the publics support
  • In a tough negotiation, whoever wins the publics
    support first will have a huge advantage

Facts about Payer/Hospital Negotiations
  • Data is the most important tool in any
  • Market leverage is the second most important tool
    in any negotiation
  • A good negotiator must understand the data and
    its limitations in order to effectively use
    market leverage

Managed Care Strategy
  • Before beginning any negotiation, a hospital must
    have a data driven well-developed managed care
    strategy that
  • Takes into account the local market realities
  • Key payers
  • Other hospital competitors
  • Major local employers
  • Changing plan designs
  • Premium rates
  • Fits in with hospitals long term financial plans
  • Is realistic and can be implemented

Modeling for Negotiation Cost Based vs Market
  • Targets for negotiations are usually set based on
    contract profitability, not market rates
  • That is, the provider estimates cost and develops
    a cost plus margin to propose to managed care
  • Hospital has no idea if cost margin is even
    reasonable in their market
  • An efficient provider may be making a profit, but
    could be making an even greater profit if they
    understood market rates
  • Most hospitals idea of identifying market rates
    is what is the payer were about to negotiate
    with paying the other hospital(s) in town?

Approach to Managed Care Contracting
  • Cost Basis
  • Understand your cost for providing services
  • Develop expected cost margin
  • Calculate needed reimbursement rates
  • Market Basis
  • Understand market dynamics
  • Develop model of managed care market
  • Calculate rates that market can support

Market Based
  • Analyze the local managed care market
  • What are local market premiums?
  • What are providers being reimbursed?
  • Hospitals
  • Physicians
  • Ancillaries
  • Key questions to be answered from analysis
  • What is the local market paying for the services
    we provide?
  • How much can we receive for our services and
    still be in line with the market?
  • What will be the effect on the local market of
    our rate requests?

General Approach
  • Collect managed care market data
  • Publicly available information
  • Hospital financial data
  • Rate filings
  • Consulting firms
  • Data services
  • Proprietary information
  • Hospital financial information
  • Negotiated provider contracts
  • Market knowledge
  • Consulting firms

General Approach (contd)
  • Develop an actuarial model of the local market
  • Process is much more difficult in a very
    large/diverse market
  • Manhattan/New York City
  • Los Angeles County, CA
  • Very easy in smaller/less diverse market
  • Indianapolis, IN
  • San Diego County, CA
  • Most Georgia markets
  • Greenville, SC

General Approach (contd)
  • Once the model is developed, all the key
    questions can be answered, and a managed care
    strategy can be developed
  • Target reimbursement rates (In general and by
  • The actuarial model contains all the necessary
    information about the market

Modeling Markets
Market Hospital Data
  • Begin with financial (cost report) data for 3
    major systems in the market
  • Adjust data for known market facts to produce
    known financial results
  • Clients financial performance
  • Medicare reimbursement and market share
  • Make similar adjustments to unknown data
  • The key is to always be conservative
  • Produce expected average reimbursement for
    hospitals in market

Actuarial Model Development
  • Collect Clients system utilization and
    reimbursement data
  • Inpatient and Outpatient
  • Estimate hospital market share and commercial
  • Develop actuarial model for market
  • Gross up Clients data based on market share
    and membership to develop expected utilization
    per 1000
  • Use hospital utilization per 1000 to develop
    physician utilization per 1000
  • Apply expected physician reimbursement rates to
    complete PMPM cost projection

Actuarial Model Development (contd)
  • Compare results to market premiums
  • Rate filing information
  • Other data (Mercer surveys)
  • Adjust assumptions until actuarial model predicts

Model Results
Baseline Hospital Data for Market (All Data is
Publicly Available)
Adjustments to Baseline Data
  • Baseline data must be adjusted to remove
    non-managed care payors
  • Medicare
  • Medicaid
  • Workers Compensation
  • Self Pay/Charity etc
  • Other

Adjusted Commercial Results
Projection to FY 2008 and Chargemaster Adjustments
Actuarial Model Assumptions
Premium Rate Development
Negotiation Basics
  • Never ask for unrealistic rates
  • They do not give you room to negotiate, they only
    make you look unprepared, uninformed and weak
  • All rate proposals have to be defensible to all
  • Hospital Board, Employers, Payers etc
  • Stick to your strategy, adjusting tactics
    throughout the negotiation
  • Expect the worst (because thats probably what
    youre going to get)

Finalizing Agreements
  • Never depend on payers data without some
    external verification
  • Dont allow artificial payer deadlines to
    complete contract cloud your judgment
  • Pay attention to all details
  • Be careful of insignificant issues
  • If truly insignificant, they should be
    insignificant to both sides

Examples of Other Markets
  • The following examples are of two markets in the
  • The data used for this analysis is all publicly
  • A complete analysis would use this information to
    develop an actuarial model
  • This is simply the hospital reimbursement portion
    of the analysis
  • This information would then be merged with
    physician reimbursement and client specific
    information to develop a premium build up
    actuarial model

Market A
Lessons from Market A
  • Hospital 5 clearly is below market
  • Although hospital 5 is not at the same prestige
    level as hospital 1, they could increase
    reimbursement significantly without a payer
    terminating their contract
  • Hospital 5 is subsidizing the market
  • Hospital 5 probably has know idea that they could
    increase managed care revenue 25-30

Market B
Lessons from Market B
  • Hospital 1 clearly is paid out of line with the
  • Hospital 1 probably would not be able to ask for
    a large increase
  • Payers would be able to put a much cheaper
    product in the market by avoiding Hospital 1

Some Examples in Georgia
  • Results Are All Based On Publicly Available Data

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Future Trends
  • Consumerism
  • Tiered networks
  • All Providers
  • Physicians only
  • Price Transparency
  • Consumers are increasingly interested in the true
    cost of services
  • Employer Cost Shifting
  • Member out of pocket payments
  • Continually increasing
  • Create hospital bad debt