Lesser-of Clauses in Payer Contracts: How to Negotiate and Win

A recent AMA article explains that the drop in physician-owned private practices is in large part due to physicians’ perception that they don’t have the resources to renegotiate contracts. They assert payers do not hear their points and just steamroll over their demands and objections. It may surprise the independent owners that larger healthcare systems have the same complaints. 

One major objection on the part of all providers is the lack of flexibility in terms, according to HFMA, and one of the most aggravating terms is the lesser-of clause. This provision could be costing your organization significant revenue. Let's explore how the lesser-of clause impacts your bottom line, and how to address it.

What is a lesser-of clause?

A lesser-of clause is language appearing in many healthcare payer contracts that gives insurance providers the right to pay the lesser of the billed charges or the negotiated rate appearing in the contract. At many organizations, rates listed in the chargemaster may be lower. When a biller uses outdated chargemaster rates without checking the contract, the organization is vulnerable to the lesser-of stipulation. 

For example, if the biller charges $200 for a service, but the contracted reimbursement amount is $250, the payer is well within its rights to only reimburse $200. On the other hand, if the biller charges $250 for a service, but the chargemaster rate is $200, the payer still only pays $200. 

The threat of the lesser-of clause 

Given healthcare organization burdens during a revenue cycle staff shortage, contract review and management get only cursory attention. An MGMA survey reveals that one-third of providers fail to review their contracts annually, with 17% admitting they never review them and 16% only doing so every two to three years or less frequently. We've encountered clients who haven’t looked at their contracts for five years. 

Healthcare Financial Management Association worked with a healthcare system that had $2 billion in net revenue, more than 15,000 employees and 1,500 beds. Its contracts were, on average, 12 years old. 

Securing fair reimbursement from payers can be a challenging and resource-intensive process, requiring time, expertise, and persistence. Because payers typically draft these contracts and have substantial legal resources at their disposal, providers often feel they have limited sway.  

When contracts do get reviewed, the focus tends to be on the fee schedule. But payers have ways of depriving providers of revenue aside from fee setting. Our payer contract negotiation post reveals all the terms payers manipulate to retain the maximum revenue. 

The cumulative effect of lesser-of clause triggering can be substantial. If a single CPT code triggers it 500 times a year, resulting in a $50 loss each time, $25,000 in revenue is lost from just one code. MSOs – who often multiply a loss like this across several locations and payers – are particularly at risk. 

Taking control of your contracts may require investment in a staff member or outside consultant, but doing so will reinforce your revenue for years going forward. Beyond immediate revenue rewards, proof of contract oversight and optimization also impresses healthcare investors and buyers. Given that most PE-backed management services organizations sell within three to five years, robust contract management should be evident. 

Steps to limit lesser-of clause execution

1. Identify lesser-of clauses in contracts

“The first step toward change is awareness,” according to psychologist Nathaniel Branden and general common sense. Becoming aware of which payers’ lesser-of clauses have language that heavily favors them, and then amending these is a simple endeavor. 

Watch out for "lesser of" clause language that reads: 

"Reimbursement will be the lesser of (1) the provider's billed charges, (2) the contracted rate, or (3) [X]% of Medicare allowable." 

These words give the payer three options to choose the lowest payment amount, potentially leading to reduced reimbursement for providers. Such clauses often lack exceptions for high-cost services and may not account for the provider's actual costs or market rates.

On your next contract renewal, propose lesser-of language more like this: 

 "Reimbursement will be the greater of (1) the provider's billed charges, (2) the contracted rate, or (3) [X]% of the provider's usual and customary charges." 

This approach establishes a floor for reimbursement and prevents underpayment when billed charges are lower than the contracted rate. Providers can also include language that excludes certain high-cost services or procedures from the "lesser of" provision, ensuring fair compensation for more complex care.

To really dig down into how lesser-of clauses can range across your payers, create a table and enter every one. Compare them to those listed above. 

2. Quantify the Financial Impact

To justify the time you spend examining contracts and proposing lesser-of clause changes, make a full financial case to peers and managers. 

Use these steps:

• Analyze claims data to identify instances where the "lesser of" clause was applied. You’re likely to find several commonly underbilled CPT codes where the billed charge was lower than the contracted rate, triggering the "lesser of" clause.  Analyze claims data to determine how often and where lesser-of clauses are being triggered. This helps prioritize which contracts or services to focus on.

• Calculate the difference between billed charges and actual reimbursement in these cases. Length of stay (LOS) cases are particularly vulnerable to lesser-of executions, denying providers amounts in the tens of thousands. 

• Project the annual revenue loss across all affected services and payers. 

By quantifying the impact, you can justify the need for changes to lesser-of language in the contract internally and to payers as well. 

3. Update your chargemaster

Only a clean chargemaster can help a healthcare organization accurately assess its revenue gaps and opportunities for improved reimbursement. 

If you’re like many healthcare organizations, you go a year or more before you optimize your chargemaster. This oversight leaves you open to lesser-of losses. The manual way to update your chargemaster is to compare prices listed there to those listed on each payer contract. If you’re short on time, focus on your most profitable procedures and increase charges so you can maximize revenue where it counts.

One caution: As you rebalance your chargemaster rates, consider how price changes might affect your competitive position and affordability. If your prices far exceed your competitors’, word will travel fast in the patient community. It's essential to balance potential revenue gains against community perception and possible business loss.

Watch out for aggregate claims

Should you notice aggregate-level claims trigger lesser-of clauses and subsequent revenue loss, tread carefully when manipulating chargemaster rates. Fixing aggregate-level claims, like those for heart surgery presents a more complex challenge. These claims often include numerous individual services, and significant price increases may be needed to address the issue. However, such large increases could be unreasonable and might only solve part of the problem. The most effective long-term approach is typically adjusting contract terms through negotiations. Providers should be prepared to discuss fee schedules in other areas and consider the impact of price transparency on negotiations. It's also important to recognize that rate changes may affect relationships with other payers.

 This manual exercise won’t tax organizations with limited services and CPT codes too much, but it will bury a bigger operation with multiple departments and locations. 

Larger operations can depend on contract management software which automatically compares chargemaster rates to fee schedule rates in your contracts and alerts you to discrepancies. For MSOs and physician groups with multiple locations, this feature saves significant time and analysis. It also guides your team in making the updates that achieve fair reimbursement. When updating your chargemaster, however, keep the payer’s overall charge increase limits in mind. Put that constraint on your list of items to be negotiated. 

Take a quick, self-guided tour through a powerful contract management solution and payer underpayment identification tool:

3. Negotiate better contracts at renewal time

As mentioned above, historically providers have signed payer-originated contracts with little push-back. Times are changing, however. Larger healthcare systems hire professional contract negotiators or temporary contract specialists. Contract management software has alerted providers to just where payers are taking advantage. 

Our payer contract negotiation post covers how best to prepare for, negotiate, and track contracts from origination to termination. 

For lesser-of clauses specifically, follow these steps:   

• Prepare to barter something in the contract to get the lesser-of language changed or removed. Payment methodologies, claim submission timeframes, underpayment restitution, and payment terms are all on the table. 
• Explain to your payers the difference between their lesser-of language and that in the payer contract giving you the most favorable term. Raise modifying or even removing "lesser of" language altogether.
• Use your contract modeling tools to forecast revenue based on contract changes. Present this data to the payer. 

You can model exactly how proposed payer changes will impact your revenue. Experiment with your own changes via unlimited scenarios. Take a quick tour of efficient contract modeling in action here: 

Make the most when negotiating lesser-of contract clauses

Addressing lesser-of clauses in payer contracts is crucial for healthcare providers to prevent revenue loss and ensure fair reimbursement. By identifying unfavorable contract language, quantifying the financial impact, updating chargemasters, and negotiating better terms, providers can significantly improve their revenue capture. The process requires diligence, data analysis, and strategic negotiation, but the potential benefits are substantial.

 As the healthcare landscape evolves, providers must take a proactive approach to contract management, leveraging technology and expertise to optimize their agreements with payers. 

Our advanced contract management and analysis platform, RevFind, identifies top and underperforming payers, recognizes payment patterns, and flags claims where lesser-of charges could arise. This comprehensive data helps you pinpoint which payers depend on those clauses, which CPT codes face the most denials, and which locations underperform in revenue generation. Its powerful modeling capabilities allow you to simulate proposed payer changes and new contracts, providing clear insights into potential revenue impacts.

The RevFind system centralizes all contracts in a digital format, featuring automated alerts for critical contract dates such as expiration, renewal, and termination deadlines. This ensures timely compliance with all contractual obligations. Users appreciate the flexibility to set custom advance warnings, such as 90-day reminders before key dates.

Schedule a demo to see how RevFind can alert you to the contract v. chargemaster rate discrepancies that trigger revenue-draining lesser-of clauses and so much more.

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