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!).
Make sure to subscribe so you don’t miss the next installment of this series.
Healthcare Contracting Guru 