Back to Basics: Medicare Advantage Revenue

To anyone who’s spent a lot of time in Medicare Advantage risk arrangements, this will be review. My target audience is people who are new to MA risk arrangements and people who maybe just want to know more about how the math works. This will be a high-level review, but it’ll get you most of the way there, enough to be able to read an MA payor contract and understand the operations impact on your bottom line.

  • Premium: This is the core of your MA revenue, based on the health plan’s bid to CMS. Your base will include at least the Part C basic premium, and may include rebates and supplemental payments depending on how you defined CMS revenue in your contract (it can be worth quite a bit). That base is modified by your negotiated Percent of Premium (POP) to determine your PMPM (per-member per-month) payments before adjustments. Let’s say the PMPM value of the health plan’s CMS bid is $1000 and your POP is 85%; your base PMPM is $1000 x 0.85 = $850pmpm. But wait, there’s more…
  • Star Rating: This is how CMS aligns their quality goals with the health plans’ and medical groups’ financial incentives. There are a lot of benefits to having a high Star rating (special enrollment, marketing), but for the purposes of this discussion I’m most interested in the impact to funding. If the health plan has a 4-Star (or higher) rating, they get a 5% bonus to their funding. If your funding is based on POP, that bonus flows downstream to you too. Using our previous example, $1000pmpm x 1.05 (Stars) x 0.85 (POP) = $892.50pmpm – a substantial improvement, especially when you calculate that increase across thousands of member months. This leads to one of the rules of payor contracting that has nothing to do with the written contract itself – not all health plans are built alike. A POP of 85% with a 3-Star plan and a 4-Star plan have different dollar values, an important fact to account for in your financial modeling. While this is calculated at the health plan level, your group’s contribution to that score can give you good negotiating leverage; plans want to put more members in their higher-Star groups to improve their own Star rating.
  • Risk Adjustment Factor (RAF): RAF is how CMS adjusts for differences in members’ health/expected costs, and is calculated by CMS at the individual member level. Each person is assigned a RAF score based on a variety of factors including age and gender, but more important are the parts based on diagnosis codes. A member with diabetes or a heart condition is worth more than a healthy person; a member with both is worth even more. Making sure you accurately capture this coding is critical to making your MA contracts as profitable as possible – CMS can only give you credit for the diagnoses you report to them. A robust encounter data system is your friend here, and the health plans will aggressively monitor this since RAF impacts their reimbursement as well as yours. While RAF is calculated for each individual member, it’s impractical to do accounting that way; much easier to calculate your average RAF across all MA members for that health plan, then use that figure in your calculations. Continuing our example from above, a decent average RAF score might be 1.35, so the math is $1000pmpm x 1.05 (4-Star) x 0.85 (POP) x 1.35 (RAF) = $1204.88pmpm, much better than where we were two bullet points ago. By contrast, a poor average RAF might be 0.9 (something is wrong with your encounter data) would result in $1000pmpm x 1.05 (4-Star) x 0.85 (POP) x 0.9 (RAF) = $803.25pmpm, worse off than we were when we started this math problem.

So what’s the point of this math lesson? Understanding how the funding is calculated can help you make informed decisions about your payor contracting strategy. You want to strategically choose your MA partner plans to favor those with good track records of quality to ensure high Star ratings in the long run; 87% POP at 3-Stars ($870pmpm) is worth less money than 85% POP at 4-Stars ($892.50pmpm). You want to do everything possible to contribute to the health plan’s high Star rating, and they’ll happily assist you get there, because you both benefit (I love win-wins in contracting). Same with your RAF – this is an operations issue, but the health plan wants you to have as high a RAF as possible, as it benefits them as much as it benefits you. In previous blog posts I’ve focused a lot on the adversarial parts of group-payor relations, but looking at how MA revenue is calculated showcases just how important partnership is to making these relationships effective and profitable for everyone involved.

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Leadership: Building a Better Team

I’ve been a job seeker, applying to an unreasonable number of jobs in the hopes of getting a handful of callbacks, a couple of interviews, and if I was lucky, an offer that wasn’t too bad. I’ve also been a hiring manager, sifting through resumes looking for the right fit, asking open-ended questions during interviews and watching candidates squirm, and hoping that I’ll feel good about the choice I made six months from now. Then, during my most recent job hunt, I found myself in an interesting position – in my industry, the demand for people with my skillset and my skill level were in much higher demand than the available supply of candidates. In addition to my usual attempts to convince the interviewers that I was worth consideration, I found I was also interviewing them to see which company I liked the best, which boss I most wanted to work for, and which offer was the most attractive. This isn’t unique to my situation or even to my industry – I see stories in the news and anecdotes online about how hard it is to find people willing to take available jobs, leaving many businesses short-staffed. Combine that with the large-scale shift to remote work that became a necessity as a result of the pandemic, and we find ourselves facing a vastly different hiring landscape that what we saw pre-pandemic. And many HR departments, hiring managers, and businesses are falling behind, stuck in the mistaken belief that the world will go back to the way it used to be. It never does.

With this new landscape in mind, I have a few thoughts.

  • Hire for Talent: If I have a choice between someone with a lot energy, drive, and intelligence, or a candidate with more education and experience, conventional wisdom tells me to go with the latter. But I’ve had a lot of success going with the former. Often it comes down to a choice between talent and specific knowledge. My suggestion – hire for talent, every time. You can always teach specific knowledge (more on that later), but you can’t teach talent. I once had an employee who could, as the lowest ranking person on a project, run the meetings and get everyone else to do their part (which they didn’t want to do) and bring the project to completion. Sure, she didn’t have as much formal education as other candidates at her level, but she was effective. Another employee of mine was smart, even smarter than me (and I’m someone who considers himself pretty smart). She didn’t know a lot about contracting, so I made a point of teaching her everything I knew. She learned it fast. Within a few months she was taking an active role in negotiations. In a couple of years she was leading negotiations. After I left that job, she was being considered as my replacement (which I heartily endorsed). If I could combine the talents of those two employees, they’d put me out of a job. The point is, each of these star employees had qualities that made them successful, and those qualities were things I couldn’t teach. The intricacies of payor contracting, contract law, and negotiations? They didn’t know much about those when they started on my team, but that kind of specific knowledge is something I can teach. A more “qualified,” but less talented, candidate might have been more valuable on day 2; by day 30 that gap would start to diminish; and by the 6 month mark, the more talented employee is bringing more value to the organization than the alternative candidate. Hire smart and talented people – they’re the better investment in the long run.
  • Invest in Your Employees: I’ve worked for bosses who jealously guarded their expertise, hoarding knowledge to maintain their superiority. I’ve worked for bosses who took pride in being a mentor, helping their employees to grow to their fullest potential. Obviously, I much preferred the latter, and that’s the model I choose to follow as a leader. I know more about payor contracting and healthcare operations than my employees, so my job as a leader is to teach them everything I know. One of my initiatives when I first had direct reports was to schedule regular and aggressive training. Parts of the contract. Contract language. Dispute resolution. DMHC regulations. Negotiation strategy. Some of my bosses questioned whether the time and effort was worth it; a couple strongly suggested that I had “better things to do.” Six months later, I had more than tripled the bandwidth of what my department could handle, and that included the kind of complex work that they originally brought me in to do. Did I put myself out of a job? Hardly. My methods got exported to other teams and other parts of the company, I got promoted, several of my employees got promoted, and the company was made more effective. This is that specific knowledge I was talking about earlier – I shared this knowledge with some talented people, and got the pleasure of watching them shine.
  • Remote Work: The pandemic changed this from a rare perk into and expectation. There are certainly jobs that cannot be done remotely – clinical staff and anything requiring face-to-face customer interactions come to mind. The surgeon should probably be there in person, though the technology for making even that remote is coming soon. But look at my job – I sit in front of a computer all day (writing emails, redlining contracts), interrupted by the occasional phone call (getting yelled at for the presumptuousness of my latest email or redline edits). For a lot of jobs on the administrative side of the healthcare industry, there’s just not a good justification for forcing people to come into the office. The most common argument I’ve heard is that “people are more productive in the office,” but I haven’t seen any strong evidence to back that up, and we all just spent the last two years proving that it can be done. There’s a lot of money to saved in real estate and hardware you don’t need when your workforce is remote. But that’s not all…
  • Geography is Your Enemy: If you subscribe to the notion that your workforce must be physically present in the office, you’re severely limiting the available pool of talent you can recruit from. Recall in my (meandering) opening statement about how demand for good talent currently exceeds the supply? If your office is somewhere like Los Angeles, there’s plenty of talent to be found – and also a lot of competitors trying to attract that same talent. But if you’re headquartered in a rural area (because that’s the geography you serve), you’re likely to find there’s no talent to be had at all. You can try to attract talent from other markets, but if you require them to relocate for this job, you’re going to find it a hard sell, because your competitors are offering remote work. If all you need is warm bodies to fill a seat, any half-trained teenager might do, but if what you need is talent and expertise, you’re going to find that pickings are slim. But if you’re open to remote work (again, for positions where that makes sense), suddenly you can recruit talent from anywhere. If you’re a rural health system in the Midwest who wants to get into managed care (a market that’s still new to this), good luck finding local talent with any useful experience. But if you can recruit experienced talent from a more mature market (and they don’t have to move), you might just find yourself a ringer who can give you an edge against the local competition and bring some much needed expertise and a different perspective to the team.
  • You Get What You Pay For: Labor is a significant expense for any business, often the largest expense. Employers are always looking for ways to reduce this expense. However, when it comes to attracting and retaining talent, you get what you pay for. Some organizations have a practice of bringing in young and inexperienced people at below-market wages and working them relentlessly. This cadre of workers will split into two groups. The first group will learn as much as they can until they can get a better job and leave the organization – congratulations, you just trained your competitor’s workforce, on your dime. The second group are those who aren’t capable of getting a better job, due to lack of either talent or motivation – these are the people who are left in your workforce. I’ve occasionally seen my own HR department post a position demanding 10 years experience in that job/title, but offering 30% below market rate. A year later and I heard them lamenting how it was impossible to find a suitable candidate. At that salary?! No surprise at all. If you’re going to pay below market, your target candidate should be someone young and hungry (relative to the position), new to the role and willing to take below-market wages for an opportunity to advance. Just remember that they won’t stay for long; once they’ve built up enough experience, they’ll jump to a competitor, working the same job/title but for market salary.

Anyone in HR who’s still reading this is itching to tell me “yeah, we know all this.” Then again, I’ve worked in HR (briefly), so maybe not. But really, my target audience is hiring managers and senior leadership who are making decisions about the future of their organizations – are we going back to the office? Or staying remote? Hopefully this gives you something to think about as we move into a new work environment.

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Negotiation: Adversarial, Collaborative, or Both?

The short answer is both. If the other side doesn’t push back on some of your asks, it means you didn’t ask for enough. At the same time, if you try to force a deal with unacceptable terms, you’ll end up with no deal at all, or at least a deal with someone who has serious buyer’s remorse and is looking to get out of it at the earliest opportunity. While negotiations are by their nature adversarial, ultimately the goal is to build a lasting contractual relationship that both sides can live with. Over the year, I’ve compiled a small bag of tricks for successfully navigating these complex discussions.

  • Be Prepared: This one seems obvious, and yet I’m astounded at how many times I’ve shown up to a meeting or a call and the opposing side tells me “I haven’t had a chance to read through this yet.” How are we supposed to have a meaningful dialogue when one side hasn’t prepared? Prior to each live discussion, I write out notes on what I think is likely to come up that day – which sections we’re likely to touch, what are the arguments in favor of our position, what arguments is the opposition likely to make in favor of their position, what’s my response to their arguments. This has two effects: first, it makes it easier to keep the discussion focused on moving forward; second, it makes me look like I’m smarter than I really am, since I have answers ready to go. If you’re prepared and the other side isn’t, you’re going to run circles around them during the ensuing discussion, and I’ve observed that over the coarse of a call, the difference in preparation levels has a profound impact on the other side’s confidence in their position. This goes both ways – you need to give the other side the opportunity to be prepared. If you send a proposal two minutes before your scheduled call, be prepared to accomplish nothing during the call that ensues, especially if the person you’re negotiating with needs to clear anything with their superiors.
  • Be Respectful: This one can be tricky, especially when negotiations get contentious. Keep in mind that the negotiators on both sides are professionals, zealously representing the interests of their client/employer. Heated arguments may happen, but the arguments should be about the contract, not about the person. Making things personal is a quick way to shut down any forward progress and jeopardize the future of the relationship between your organizations. You’ll need to work with this person tomorrow on this negotiation once the present issue has been resolved, and you’ll need to work with them in the future to manage whatever contractual relationship you settle on. Sometimes that person may become your teammate (if either of you changes employers); sometimes that person may become your boss (it’s happened to me twice already). The healthcare industry is a small world (as are many other industries), and developing a negative reputation can have long-term consequences on your career and your employer’s business prospects if no one wants to work with you.
  • Teamwork: Whenever possible, I always like to negotiate as part of a two-person team, one lead negotiator and one secondary negotiator. If I’m acting as the lead, I’ll often include a junior member of my team to get them hands-on experience in negotiations; there’s no better training tool that to be in the thick of it, but this way there’s a safety net for both the junior negotiator and your organization. The secondary negotiator serves several functions during a negotiation – taking notes on what’s been discussed and agreed upon (so the lead can focus on talking); feeding you information about the contract during a discussion via Skype/Teams/etc. (this one really makes you look good, like you have the contract memorized); handling communications that further the negotiation (following up on documents needed, sending answers to questions that were posed, etc.); and, if they’re ready, taking over the role as lead negotiator when needed (if you’re out sick or on PTO but you don’t want the negotiation to lag). Working with a partner also sets you up to use the “good cop-bad cop” strategy when appropriate (there’s a reason it’s a trope – it works). Sharing the load with a partner helps make the team more effective than either person would be individually, and some of the most efficient negotiations I’ve conducted have been when both sides did this.
  • Be Flexible on the Details, But Firm on the Destination: Too often I’ve seen negotiations where each side had their ideal/template language that they kept insisting needed to be included in the contract, with both sides blindly bashing each other with mutually-exclusive language while the negotiation ground to a halt. If your primary goal is to get the exact language your legal team says you need in the contract without alteration of any kind, I have two observations – first, that you’re going to have a long uphill battle and may not get the deal done; and second, I wonder what purpose you serve during the negotiation if you’re just repeating someone else’s words ad nauseum. Rather than focusing on the specific words, focus on the issue those words are trying to address. Material change language is intended to protect the integrity of the contractual terms – how does the other side plan to do that without protections in place? There are concerns about third parties accessing the rates in this contract to get around paying the higher rates in their direct agreement with us – what protections can you offer against that? Rather than forcing a prepackaged solution down the opposition’s throats, tell them what you’re really after, and then engage them on creative problem solving for how to address your issue in a way that they find palatable. And be prepared to do the same when the other side insists something is necessary – ask them what their real concern is, and see if you can offer a solution that addresses their specific concern in a way you can live with. I most often encounter this with language that’s written too broadly, but a discussion of what each side’s real concerns are leads to more narrowly tailored language that addresses the concerns of both sides.
  • Priorities and Trades: Not all contract terms are created equal. Some are so critical that I won’t sign a contract that doesn’t properly address them (anything where the other side gets to make unilateral changes to the contract). Some are nice to have, but not worth killing a deal over (I don’t like formal notices via fax or email, but there’s a limit to what I’ll give up to get that concession). At some point during the negotiation you’ll hit the point where both sides have given up all the concessions they’re willing to make for “free,” and you’ll need to start trading if you want anything more. “If I can get X, that’ll reduce my concerns about Y.” Knowing what to prioritize and what to trade is highly subjective, but if you get it right you’ll end up with a great contract and the other side will think they won some key concessions from you too. Each side believing they came out ahead constitutes a win-win in my book.
  • Leverage: Before starting a negotiation, ask yourself “what does the other side have to lose if they say ‘no’ to my proposal?” If the answer is “nothing,” then prepare to receive a hearty “no” from the other side. If you want someone to give you more money, weekends off, or some other concession they don’t want to give, you need leverage to make them consider your proposal and discuss the terms under which they’re willing to give you what you want. In healthcare, one of the most common strategies is the “term with intent to negotiate,” in which the alternative to negotiation is that the current agreement terminates. How much leverage that gives you depends on several factors including your market share, how much of the plan’s population is assigned to PCPs they can’t get through other IPAs, and how their clients (employer groups) will react to a particular medical group’s termination, just to name a few. Proper application of leverage is the only way you’re going to get the other side to agree to anything, and the trick is to ask for just enough that the alternative is still worse.

Negotiations are difficult. You need to be organized, detail-oriented, and not mind getting yelled at every so often. These practices can help stack the odds in your favor. Always remember that the goal of a negotiation isn’t to “win,” it’s to come to an agreement.

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Payor Contracting: Boilerplate – The Lawyers’ Playground

You’ve negotiated your rates, your DOFR, and your delegated services. All of these details live in the exhibits and attachments to your base agreement. The base agreement is, of course, industry standard boilerplate, nothing to see here. And it’s been approved by the regulators, so we can’t change anything even if we wanted to. And everyone else accepted this contract as written, you’re the only one asking pesky questions.

Hogwash. All of it.

How much are those hard-earned rate concessions worth if one side can unilaterally amend the material terms of your agreement? Are you out of compliance because the required notices were emailed to someone who stopped working at your organization six months ago? What happens when (not if, but when) one side breaches the agreement? Answers to these questions and more live in the language of your agreement, all those pesky words that have little or nothing to do with your rates.

There’s more to this subject than I could possible cover in a single blog post, so I’ll hit some of the highlights. Moreso than the previous posts in this series, much of this is applicable to just about any contract.

  • “It’s regulatory”: I hear this one all the time. Sometimes it’s about the contract as a whole – “DMHC has approved this template, so we can’t make changes” (false – DMHC or another regulatory body may need to approve any changes, but that doesn’t mean you can’t make them … unless you’re contracting directly with a government agency). Sometimes it’s about specific clauses in the agreement – “CMS mandates we include this language in our contract” (sometimes false – contract drafters often expand on what’s required by regulation to their organization’s benefit, or their regulatory language could be out of date). Anytime you hear that something is regulatory, demand a citation for the source of that authority. If they can’t provide one, chances are it’s not actually regulatory. If they provide one, scrutinize it to make sure they’re not adding requirements that aren’t actually part of the provisions, or that the provision hasn’t changed since the contract was drafted. If it actually is regulatory, you’re stuck, but if the other side can’t support their argument with a clear and compelling citation, then you can and should push back.
  • “This is our standard template”: So what. Form contracts are useful when you’re buying Carnival Cruise tickets or a new TV from Best Buy – an off-the-shelf product or experience where it doesn’t make sense to negotiate the terms with each individual consumer. Healthcare payor agreements, particularly risk/capitated agreements, are complicated contractual structures built between two sophisticated parties; anyone who signs one without reading and negotiating the terms is failing to do proper due diligence. Dispense with this notion early in your negotiations; if a payor really wants to build a partnership with your medical group, they need to be willing to negotiate terms so that both sides can live with the agreement.
  • Material Changes & Amendments: The whole point of the written contract is to memorialize the terms of the agreement between the parties. However, if one of those parties has the ability to unilaterally make material changes to the agreement, then all that negotiating was for nothing. The two places where this comes up most often is with Policies/Provider Manuals and with Amendments. Regarding the former, it’s fairly standard language in a contract that health plans require their delegated groups to follow the terms of their published policies and in their provider manuals. Nothing wrong with that, makes total sense. But what happens when they make changes that have a materially adverse financial impact to your organization? And what happens if these policies and manuals contradict the negotiated terms of your agreement? The answer to both of these is to put guardrails in place – language stating that in the event of a conflict, the agreement controls; and language requiring the health plan to provide prior notice of any material changes to their policies and/or manuals with an opportunity to object, possibly invoking any dispute resolution language. Regarding the latter, unilateral amendments only make sense where necessary to bring the contract into compliance with applicable laws and regulations. For anything else, mutual written consent (signed amendments) should be required. Sometimes drafters will include unilateral amendment language with the opportunity to object, but oftentimes your only recourse is termination and/or the amendment still goes into effect while your objection is still being discussed. Make sure you’re going to prom with the date you agreed to, not the friend you get passed along to once you arrive.
  • Dispute Resolution: Please allow me to describe all the contracts I’ve negotiated that didn’t require some form of dispute resolution eventually … [crickets] … you get the idea. Sooner or later one of the parties is going to do something the other side doesn’t like, and lawsuits will be threatened and filed. How do you handle such disputes? If the contract is silent, you’re likely going to civil court, a long and expensive process. Most modern healthcare contracts by default contain provisions requiring disputes to go to arbitration, which has the benefit of (usually) being shorter and less expensive, with different (usually less strict) rules. This is fine, so long as the entity arbitrating the dispute is truly independent – AAA and JAMS are commonly named in agreements, but others can work just as well (if you don’t recognize the entity, do some research). Many times contracts will also requires some form of pre-arbitration process, such as informal dispute resolution (“meet & confer”) or mediation. These are fine too, and if disputes are resolved through those means it’ll save both parties a lot of time and money. Some agreements also limit how much time you have to file an arbitration, which can work to both parties’ advantage to prevent someone from litigating ancient history. Each of these items individually is reasonable. BUT. Taken together, you can accidentally bar yourself from filing legitimate grievances. Take this example: 1) disputes must first go through health plan-mandated grievance procedure as set forth in their provider manual (which they can drag out as long as they want); 2) if unresolved, the dispute must then go through mediation, with the parties having 60 days to resolve the dispute before filing for arbitration is allowed; and 3) arbitration must be filed within 1 year of the incident/occurrence or be considered waived. If you take too long bringing the issue to the health plan, or they drag out the initial procedures, what happens then if you start mediation less than 60 days before your arbitration filing deadline? Are you barred from filing timely? As with other contracting issues, ambiguity is your enemy here. Work out the timeline, put language in that allows you to file arbitration before deadlines pass, and keep an eye on this timeline when you encounter an issue – don’t wait to file.
  • Reciprocal Language: Confidentiality, indemnification, and other contractual terms are often written for the sole benefit of the drafting party. However, except when context indicates otherwise, you should always argue for these sorts of protections to apply equally to both parties. Does the health plan require you to keep their confidential information (trade secrets) safe? They should do the same for you. Are you required to indemnify and hold harmless the health plan, their officers, employees, etc. etc.? They should be required to do the same for you. Bilateral protections encourage both parties to play fair, which in turn leads to better long-term contractual relationships.
  • Term and Termination: How long does your contract last? Forever sounds nice, but in reality you should always be contemplating when and how the agreement might end, or at least, when you might want to renegotiate the terms you agreed to in light of an ever changing environment. Initial terms are often one to three years; if your rates are PMPMs (capitated) or case rates expressed in dollars (fee-for-service), you probably want to build in rate escalators to ensure your revenue is keeping up with the rising costs of healthcare. If your rates are a Percent of Premium (capitated) or percent of current CMS fee schedule (fee-for-service), this is less necessary since the MA bids and CMS fee schedules get updated regularly. Evergreen contracts (automatic renewal) are common as well, with additional 1-year extensions being most common; be wary of multi-year extensions, as it means missing a renewal deadline locks you into old rates/terms for a longer time. Understanding the conditions for termination without cause can be critical if you’re looking to get out of a bad deal (no breach necessary) or if you’re trying to use the threat of termination to leverage better terms (works well if you have strong leverage, but can backfire spectacularly if you don’t). Like with dispute resolution, you need to keep a close eye on this timeline or you may find you missed your window to term (or threaten to term), leaving you stuck with the same deal for another year (or longer). Term for cause should include an opportunity to cure. Watch closely for the conditions that trigger immediate termination – some are regulatory (if you lose your license to practice medicine, or have opted out of Medicare) – but often there are conditions lumped in here that are properly classified as a material breach, and thus should be handled by the term for cause language.

I have often seen organizations that focus on the financials of a deal so intensely that they consider these language issues to be inconsequential. Let me assure you, they are not, and the cost of ignoring these items during a negotiation can be uncomfortably high.

This brings this particular series to a close, though I may revisit the topic if I find I have more to say (I always do). Please subscribe to make sure you don’t miss any new content as it’s published.

Payor Contracting: The Hole In Your Pocket

Now that you’ve got that sweet, sweet revenue coming in, it’s time to spend it. The bulk of your costs will, of course, be medical expenses. Controlling this cost is largely the province of operations – a strong utilization management program, aggressive and proactive care management to keep members healthy, automation of claims adjudication systems, creating a lean provider network, etc. But what can a contract negotiator do to help mitigate these costs?


  • Scope of the Agreement: I’ll get into some specifics, but as a general rule, you want to avoid ambiguity about your responsibilities under the contract. A line I’ve heard from more than one health plan is “you took global risk, so that means you’re responsible for everything” (that’s not what global risk means). Or “it’s regulatory” (often it isn’t, or if it is, the regulations don’t specify which party is responsible). Something you want to be on the look out for is any language that deals with defaults – it some responsibility isn’t explicitly enumerated in the contract, who’s responsible for it? The health plans will say it’s the delegated group, and may even include language to that effect (especially common in DOFRs). I’ve always argued that anything not explicitly delegated to the medical group is retained by health plan; be prepared to argue that point often.
  • DOFR: The Division of Financial Responsibility (“DOFR”) lays out which party is financially responsible for various medical services (usually some combination of a delegated medical group, partner hospital, and health plan). Deciding where to take risk and where to say no can be tricky. Each line item you carve out to the health plan comes with a deduction to your revenue, and often the deduction can be greater than the savings you get from giving up that item. The right answer here is going to depend a lot on your individual network, what services you have good downstream rates on and how well your care management team can manage populations with certain conditions. Transplants are a common carveout, as not every community hospital can perform this service and the relationship you have with tertiary facilities can make or break your contribution margin on this one; this can be further complicated if your contract mandates that you use their centers of excellence which may not be in your network. Solid financial modeling to determine your cost for a particular line item will help you make that determination if a carveout is the right choice, and how much of a reduction you can agree to.
  • New Technology, New Benefits: Related to the DOFR, what happens when something new comes out that wasn’t contemplated by either party when you signed your agreement? We saw this during the early days of the COVID pandemic when everyone was trying to figure out who pays for testing. Health plans often took the position that “testing” was already in the DOFR and was thus the delegated group’s financial risk, while medical groups took the position that no one foresaw a once-in-a-century global pandemic and that the financial terms of the agreement didn’t contemplate this new significant expense. In some markets like California, there are some regulatory protections in place to help with this sort of unpleasant surprise, but even then it’s often an uphill battle to get the health plans to admit that the Provider Bill of Rights applies to your situation. Language that explicitly addresses how financial risk will be apportioned for new services can help resolve that ambiguity.
  • Out-of-Area: Out-of-area (“OOA”) risk is another tricky one, in part because it’s often not well defined in payor agreements, and in part because there’s often a difference between financial responsibility (paying claims) vs. administrative responsibility (utilization/care management) for OOA services in the same agreement. My caution against ambiguity holds true here as well – if you’re going to take any level of OOA risk, make sure you have a clear definition of where your financial risk lies. DOFRs often include OOA only in reference to urgent and emergent services, and perhaps ambulance, but more than once I’ve encountered a health plan that believed it extended to any OOA services even though there was no explicit support for that in the DOFR; this definition needs to be clear about which OOA services you’re taking risk for. In addition, you’ll want to clearly define the service area (OOA being defined as anything outside that area), and you may want to consider additional guardrails for how far out of your service area you’re willing to take risk. If my medical group services the Los Angeles area and someone hits the ER in Sacramento, that seems reasonably OOA. But what about someone in Hawaii? Mexico? Quarantined on a cruise ship with a bunch of COVID patients? The further afield you go, the harder it is for a medical group to manage that OOA risk, and the more likely that the health plan has a preexisting relationship that would better serve the patient. It’s important to cement how much risk you’re willing to take here before you get an ER claim for one of your MA members from an international hospital at billed charges because they’re not bound by the Medicare fee schedule (yes, I’ve had this happen, and thank goodness it was the health plan’s problem).
  • Delegated Services: There are certain delegated services that naturally come with a capitated agreement – usually claims, credentialing, utilization management, and care management. While there are certain common functions within these lanes that you can reasonably expect to take on, the devil’s in the details – the health plans have a financial incentive to push as much administrative work onto their delegated groups as possible. Health plans will often do so with the explanation that “it’s a regulatory requirement,” and to be fair, oftentimes it is. However, even when the regulators dictate that certain activities must be performed on behalf of members, they don’t always specify who is responsible for performing the activity – that’s the province of your contract. Model of Care (for Cal MediConnect and D-SNP members) is a common pain point as the administrative requirements can be quite burdensome – initial health assessments, creation of an individualized care plan, implementation of that plan, and the annual training required for all clinical staff who might touch that member. While each of these needs to be done, nothing in the regulations states who has to do it, so there’s room to negotiate this with the health plans. I strongly recommend working with the relevant operations team who actually implements these administrative activities to determine where to accept and where to push back. Are we doing this already? Is it really a regulatory requirement? How burdensome would this ask be? Pushing back on unnecessary and burdensome administrative requirements can help save your organization a lot of administrative expense.

Clearly defining the scope of your organization’s responsibilities under the contract can help save you from significant unexpected costs over the lifetime of the contract. Avoid ambiguity, avoid language that defaults unknowns to your risk, and – just like with revenue – make sure to model the financial impact to ensure you’re making an informed decision.

Another post or two left in this series before I move on to another topic, perhaps negotiation strategy. If you want to make sure you don’t miss any content, please make sure you subscribe.

Payor Contracting: Show Me The Money

I’d like to expand a bit more on the revenue side of payor contracting. As I said in my last post, it’s more than just rates, even when we’re talking about revenue. There’s a lot to consider when planning for a payor negotiation, and knowing what to look for, and what to ask for, can help ensure that you’re getting the best deal possible.

  • Rates: What should your POP be? How much PMPM do you ask for? These questions will vary significantly based on your geography and the amount of leverage your organization can bring to bear against the health plan. Market rates in Los Angeles are not the same as in Miami, and organizations with significant market share can leverage better rates than smaller groups, especially in densely populated urban environments where alternative providers are plentiful. A solid financial analysis is critical here to determine your current contribution margin, estimate growth in costs, and determine how much your need to ask for to maintain a healthy profit. Even for non-profit organizations who aren’t concerned with appeasing shareholders, a healthy contribution margin helps your organization build new hospital facilities or weather a bad flu season (or a multi-year global pandemic).
  • Deductions: An important distinction from costs, as deductions aren’t based on your operations or administrative capability; deductions directly reduce your revenue before it ever reaches your bank account. Sequestration is a common deduction, so much so that it’s often not even mentioned in payor agreements. However, Medicare Advantage, the Exchange (or whatever the Affordable Care Act marketplace is called in your market), Medicaid, and other products often come with a myriad of taxes, fees, and other deductions that reduce the dollar value of the rates you negotiated. A critical part of managing deductions is to understand what specific deductions apply to the product you’re contracting for, building those into your revenue model, and memorializing it in your contract (this is a theme I’ll touch on several times throughout this series and post). To avoid surprises, work out with the health plan what deductions apply and list them in the agreement, with language stating that these, and only these, deductions apply; new taxes/fees/deductions are outside the scope of this agreement and require an amendment if the health plans want to pass them through to you. You want to future-proof your contract against whatever new deduction comes downstream from CMS or other regulators, because you can be sure the health plans are going to try to pass that expense on to their delegated medical groups.
  • Premium Definition: This is specific to Medicare Advantage (“MA”), but it plays on a common theme of increasing specificity and reducing ambiguity in your contract. Most MA agreements are based on a Percent of Premium (“POP”), so if the “Premium” is $1000 and you’re getting 85%, your cut is $850. Simple enough – but how do we define “Premium”? Your POP defines how the pie is cut, but the Premium definition sets how big the pie is before cutting. In many agreements, this definition is maddeningly ambiguous, something akin to “funds received from CMS.” Sounds fine, but in my experience there’s all sorts of funds the health plans receive from CMS that they don’t include in this definition, though what’s in and what’s out tends to vary significantly from one plan to another. Outside of the basic Part C premium, there’s also rebates, supplemental payments, payments for mandatory supplemental benefits, premium reduction rebates, premium paid by members, premium paid on behalf of members by employers or other entities, and future amounts CMS might come up with one day (again, future-proofing). You might not get all these in your premium definitions, but you should definitely know which ones you’re getting, those should be spelled out in the contract, and your model should reflect the financial impact of how the premium is defined.
  • Quality: A former employer had a standing committee called “ABC” – Anything But Cap(itation) – which focused on capturing as much additional revenue as it could from its health plan agreements. Outside of your regular capitation payments, there can often be significant dollars to be earned from the health plans, most often through various quality programs. For MA plans, your rates may include an inflator for achieving a higher STAR rating, calculated based on the medical group’s performance on HEDIS measures or whatever quality measures the plan is including in their calculations, often raising your POP retroactively by 0.5-1% if you hit your benchmarks. Many commercial plans have similar Pay-for-Performance (P4P) programs available to encourage their delegated groups to improve their quality/performance measures, often with a per-member per-month (“PMPM”) or per-member per-year (“PMPY”) bonus. If your organization can meet the performance benchmarks, this can add significantly to your revenue on top of your negotiated rates.

In summary, you need to understand the various components of revenue in your contract, avoid ambiguity about what’s included in your revenue, and make sure you’re modeling the financial impact of every decision you make (no surprises!).

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Payor Contracting: More Than Just Rates

Payor contracts are the source of revenue for managed care medical groups, and thus are rightly considered a critical priority for success. These agreements define the group’s relationship with the health plans, and yet with many clients I’ve seen such a focus on the financials/rates that many material aspects of the agreement are neglected. Sometimes this comes from a lack of knowledge – people don’t always know what to ask/look for, especially in new organizations or those just getting into managed care. Sometimes this comes from a (perceived) lack of leverage – the health plan gives you a “take it or leave it” contract, or invokes vague regulations/policies that prevent them from making changes (this is what we in the Royal Navy call a “lie”). There are a lot of variables to keep track of during a payor contract negotiation, but you’ll find that properly addressing each of these issues will pay dividends in better financials and fewer operational surprises.

  • Revenue: Despite the headline for this post, rates are still the starting point for discussing payor contracts. In a Medicare Advantage deal you’re looking at POP (percent of premium); in Commercial or Medicaid contracts, you’re looking at PMPMs (per-member, per-month). But there’s more to revenue than just those base rates. In an MA agreement, what’s your CMS revenue definition? Are you getting rebates? Can the health plan pass through taxes and fees to the medical group? There’s also quality incentive bonuses/P4P (pay-for-performance) that can result in significant payouts outside of your regular capitation. You need to understand all the available dollars on the table to negotiate the best possible compensation.
  • Costs: Managing utilization and creating an efficient network are rightly seen as the primary method of controlling healthcare costs, but these are part of operations. What can you do in the contract to control costs? You can manage your Division of Financial Responsibility (DOFR) – what services can your network provide efficiently, and which are better carved out to the health plan? Consider your out-of-area risk – how far outside your core geography are you willing to accept responsibility for? Look at your delegated services – something like Model of Care (MOC) carries significant administrative costs, and health plans often push it onto their delegated groups with the explanation that “it’s a regulatory requirement” (hint: it’s required that someone does it, but it’s only delegated to the medical group if they accept it in the contract). Understanding and negotiating the scope of your agreement can help limit your exposure to unexpected costs.
  • Boilerplate Language: I often hear the term “boilerplate” in reference to the large volume of contract language not directly related to revenue or costs. The term makes it sound like this language is standard, unimportant, hardly worth your notice. Keep this in mind – health plans write their contract templates to favor themselves (which is both obvious and often underestimated). This is actually where I spend most of my time during a contract negotiation, and the place where health plans most often insist that they can’t make any changes (they can). Critical issues here include dispute resolution (is there a time limit to file arbitration, and can the health plan tie you up in mediation until the deadline passes?); amendments (if the health plan can make unilateral changes, everything you negotiated becomes meaningless); and conflicts between the contract vs. health plan policies (in the event of a conflict, which one controls? if it’s not the contract, the health plan effectively has unilateral amendment authority). There are a lot of topics here to consider, and if you’re not doing your due diligence you can find yourself facing some very unpleasant surprises.

Over the next few posts, I’ll be exploring these topics in more detail (along with whatever other topics I think are relevant and worth exploring). My goal is to share some of the “secret sauce” I’ve learned from generous mentors and painful mistakes, to provide a roadmap that leads to better payor contracts.

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Managed Care and the Art of Contracting

As a kid, I always wanted to be a doctor when I grew up. My mother told me I should be a lawyer. As usual, she was right.

It was a long and odd road getting here, following first in my mother’s footsteps (teaching), and eventually my father’s (healthcare executive). While healthcare contracting isn’t where I expected to end up, once here I discovered two things:

  1. This work is doctor-adjacent. I may not treat patients, but I get to help keep the lights on, make sure the doctors and hospitals get paid, and occasionally make a difference in ensuring patients get proper care. This makes my work meaningful – I’m helping to make sure people get the medical care they need.
  2. I like doing this work. Building relationships with physicians and hospital administrators to create a network that doesn’t just see patients, it creates value and better health outcomes. Building relationships with health plans to create a cooperative relationship that’s focused as much on patient care as it is on financials. Making sure the lights stay on and the doors stay open.

Enough with the personal stuff. Weren’t you going to talk about Managed Care?

Managed care has been around since the late 1920s in one form or another, but managed care today is really about population health. Managed care financials are built on the idea of revenue being steady, but costs being what medical groups have direct control over, so you make your money by controlling costs and maximizing the difference between your revenue and expenses. When I explain this to my friends outside the healthcare industry, they invariably ask the question “doesn’t that just incentivize the medical groups to withhold care?” You can try that in the short run, the eventually that patient gets sicker and sicker, and eventually ends up in the emergency room, the most expensive place to received medical care. What would have been a $100 claim for a physician office visit (less, if they’re subcapitated) has now blossomed into an ER visit and inpatient admission costing thousands, if not tens of thousands, of dollars.

Enter the concept of population health. Healthier people cost less to take care of, so it’s in the medical groups’ financial interests to keep people as healthy as possible. A difficult task when you have patients with chronic conditions, co-morbidities, or people who just never go see the doctor (me). Care management, an integral part of managed care, helps ensure that patients go to the right place for medically necessary treatment, and that care is proactive to prevent those patients’ health from deteriorating (and becoming more expensive). This creates a system where you have a strong financial incentive to get people into the doctor’s office regularly, treating proactively, and keeping people as healthy as possible, all while keeping the cost of healthcare down. Win-win for everyone.

Sounds great. What does that have to do with “the Art of Contracting”?

Contracts are the glue that holds this whole system together. It’s what defines the relationship between the physicians/hospitals/ancillary providers and the RBO, creating your network. It’s what defines the relationship between the RBO and the health plans, connecting patients to their doctors. Contracting can be incredibly complex, and you can spend your whole career mastering it and still discover something new on the next contract that comes across your desk. I’ve picked up a neat bag of tricks over the years, some learned from mentors who were kind enough to impart their wisdom, and some learned the hard way by making mistakes and then doing better the next time.

So that’s what this blog is about. Things I’ve learned that others might find helpful, about how managed care operates and how to successfully navigate contracts in this industry. Applying what I learned as a teacher to show you what I know about being a healthcare executive.