Payer Contract Modeling: How Providers Model Changes To Negotiate Better Reimbursement Rates
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Historically, payers have held significant leverage in contract negotiations, frequently making changes to rates and terms with minimal input from providers.
That imbalance is changing. And just in time, too.
A Boston Consulting Group study reported in HFMA recently shared,
“Hospitals that have traditionally just taken whatever rates payers will give them can no longer afford inaction. The typical health system needs a rate increase of 5% to 8% each year across all payers to break even by 2027.”
Healthcare organizations have “just taken” payer reimbursements because – overwhelmed with patient care and behind in the digital revolution – they can’t proactively manage their contracts closely.
Now closing the technology gap with payers, however, providers are finally adding the healthcare contract management tools and expertise to navigate the payer relationship with more confidence. Part of the proactive approach to contract management is contract modeling.
Review this post to discover how to use contract modeling to grasp the full revenue impact of proposed payer changes, get clarity on which payer has the best rates and terms, and back up your negotiation position with data.
What is payer contract modeling?
Payer contract modeling is a process to analyze and simulate the financial impacts of various contract rates and terms with payers. It involves:
- gathering and analyzing historical claims data
- benchmarking against industry standards
- using advanced analytics tools to model different reimbursement scenarios
This process enables providers to predict the financial impact of proposed contract changes, identify negotiation opportunities, and develop data-driven arguments to secure more favorable reimbursement rates and terms.
How payer contract modeling boosts provider revenue
Contract modeling boosts revenue because it:
- Models the impact of proposed changes on real revenue: Payers tend to downplay a 1% to 2% change but the impact on revenue could be millions. Modeling this impact upfront can shock providers out of their passive acceptance of unfavorable payer changes, getting them to advocate for fair reimbursement.
- Improves provider bargaining power in negotiations: Contract modeling provides insights into how payers reimburse and identifies areas for negotiation. With this information, providers can pinpoint where they’re being short-changed and improve their position in the payer/provider relationship. They can use data to demonstrate poor payer performance (when compared to competitors) and thereby win negotiation leverage.
- Back up your position with clear data: Backing up your rate and term proposals with data-driven insights gives payers less opportunity to exploit your overwhelm. For instance, contract modeling simulates an unlimited array of contract scenarios, including various reimbursement rates, payment structures (fee-for-service vs. value-based), and terms (carve-outs, stop-loss). Contract modeling frees you from accepting payer perceptions of your revenue cycle. Come back at them with concrete revenue impact to back them down.
Payer contract modeling 2 ways: manual and automated
You can bring contract modeling into your organization either by training staff to handle the tasks manually or using healthcare contract modeling software.
Manual payer contract modeling systems work in several scenarios
- Small practices with limited contracts: Healthcare practices with only a few contracts and minimal complexity could conceivably use manual systems. These practices may not have the resources to invest in automated software.
- Temporary situations: Should a provider be in the midst of a transition to a new automated system or lack immediate access to software solutions, using a manual system temporarily makes sense.
- Educational purposes: Sometimes providers need to teach students about the basics of contract analysis and negotiation. A manual, hands-on approach helps learners understand the underlying principles before moving to automated systems.
- Low-volume or specialized services: Providers offering highly specialized services with limited payer interactions might find manual systems sufficient if they have a simple contract structure and few variables to manage.
Steps in manual payer contract modeling
Manual payer contract modeling involves several steps
- Data collection: Gather historical claims data, including volumes and reimbursement rates for each CPT code. Collect contract terms and conditions from various payers.
- Data standardization: Standardize the collected data to ensure consistency across different payers and contract terms. Organize data into spreadsheets or databases for easier analysis.
- Benchmarking: Compare reimbursement rates against industry benchmarks, such as Medicare rates. Identify payers offering lower rates than competitors for key services.
- Contract Analysis: Review each contract to understand payment structures, such as fee-for-service, per diem, or case rates. Identify any carve-outs, bundling, or stop-loss provisions.
- Scenario modeling: Manually create "what-if" scenarios to assess the financial impact of proposed contract changes. Use spreadsheet calculations to simulate your own different reimbursement rates and terms.
- Reporting and analysis: Write reports to compare different contract scenarios and their financial implications. Analyze effective discount rates, stop-loss, and other factors affecting profitability.
- Negotiation preparation: Use data insights to prepare for negotiations with payers. Develop strategies to negotiate better rates and terms based on analysis findings.
- Monitoring and updates: Continuously monitor contract performance and update spreadsheets as new data becomes available. Adjust negotiation strategies based on changes in payer policies or market conditions.
Automated payer contract modeling
While a manual approach works in these situations, once a healthcare organization starts juggling more than five contracts, manual processes in contract management can become labor-intensive, error-prone, and time-consuming.
On the other hand, automated software reduces the time required for analysis from weeks to minutes by modeling thousands of reimbursement combinations quickly. Additionally, automated payer contract modeling software minimizes mistakes by using algorithms and machine learning to analyze data consistently, allowing for easy comparison of contracts against industry benchmarks like Medicare rates. This oversight not only helps identify areas where revenue can be maximized but also reduces revenue leakage by ensuring compliance with contract terms. Furthermore, software provides a centralized platform for contract management, enhancing overall efficiency in managing and negotiating contracts.
Software also empowers your team. Provider organizations that actively challenge payers during negotiations often rely on consultants to handle this task. However, instead of paying consultants fees that can exceed 20-25% of the revenue increase achieved, provider teams can leverage the payer contract knowledge and experience engineered into the software. Providers can then manage negotiations internally and retain more of the revenue gains they secure.
You can model exactly how proposed payer changes will impact your revenue. Experiment with your own changes in unlimited scenarios. Take a quick tour of efficient contract modeling in action here:
The two steps providers take to implement contract modeling software are:
- Integration of claims data
- Historical claims data collection: The software gathers historical claims data from various sources, including electronic health records (EHRs) and claims databases.
- Data standardization: The collected data is standardized to ensure consistency across different payers and contract terms.
- Data analysis: Advanced analytics tools analyze the data to identify trends, patterns, and potential areas for improvement in reimbursement rates.
- Simulation of payment scenarios
- Contract term modeling: The software models proposed contract terms, including payment methodologies, fee schedules, and discount rates.
- What-If scenarios: Users can create "what-if" scenarios to simulate different contract terms and assess their financial impact on the organization.
- Real-time feedback: The software provides real-time feedback on the simulated scenarios, allowing users to compare outcomes and identify optimal contract terms.
Key features of contract modeling software
- Flexibility and customization: Software solutions allow for customized modeling configurations and support various payment methodologies.
- Automated updates: Regular updates ensure the software reflects the latest regulatory changes and payment policies.
- User-friendly interface: Contract modeling solutions offer intuitive interfaces that enable non-technical users to model and analyze contract scenarios without extensive programming knowledge.
- Advanced reporting: The software generates detailed reports that help users compare different scenarios and make informed decisions during negotiations.
By integrating claims data and simulating payment scenarios, contract modeling software empowers healthcare providers to negotiate more effectively with payers, ensuring better reimbursement rates and financial stability.
4 Common Contract Gaps Payer Contract Modeling Catches
Contract negotiations are tricky. Watch out for these contract traps that limit your reimbursements. Remember, potential investors, lenders, and buyers want to see that you’re doing all you can to optimize reimbursements. Here’s where healthcare organizations get in trouble with their contracts:
1. Payers downplay rate increases, hiding revenue impact
Payers often downplay the significance of small reimbursement rate increases, suggesting that a 1-2% rise is minimal and should not greatly impact a provider's finances.
However, these seemingly minor adjustments can collectively have a substantial effect on revenue. By using contract modeling, providers can quantify the exact financial implications of such changes, both in percentage and dollar terms. This data-driven approach helps providers negotiate more effectively, ensuring they understand the true impact of proposed rate changes on their bottom line.
2. Providers overlook and lose rate and term updates
Manual contract management systems are often disjointed and inefficient, leading to overlooked or lost updates in rate and term changes. After surveying 522 contract managers in healthcare organizations, Black Book managing partner Doug Brown concludes,
"The majority of US health systems are struggling with manual contract tasks and fragmented contract processes."
Brown concludes that the lack of dependable contract systems costs the healthcare industry $157 billion annually. By automating the tracking and analysis of contract updates, software keeps track of all changes and implements them into reports.
3. Providers lack insight into their payer mix
Without clear contract data, providers struggle to understand the value of individual payers and how that value contributes to the organization. Contract modeling helps clarify the financial impact of each payer, enabling providers to prioritize negotiations based on the most significant revenue streams. Providers can then negotiate better rates with key payers.
4. Provider lack of oversight due to overwhelm
Providers often miss opportunities to increase rates, establish better contract terms, and update provisions. Contract modeling software helps identify these inefficiencies by analyzing historical data and simulating future scenarios, allowing providers to rectify overlooked issues and optimize their contracts for better financial outcomes.
By addressing these pitfalls, contract modeling empowers providers to negotiate more effectively, secure better reimbursement rates, and improve their financial stability
Payer contract modeling software and key performance indicators
Contract simulation tools also provide insights into healthcare revenue cycle key performance indicators.
- Revenue uplift: When contract modeling identifies opportunities for better reimbursement rates and terms, it improves revenue.
- Net Collection Rate (NCR): Contract modeling helps providers negotiate better reimbursement rates and terms, which can increase the net collection rate by ensuring that more of the contracted amount is collected.
- Revenue Realization Rate (RRR): By optimizing contract terms, providers can reduce adjustments and increase the percentage of charges that are collected, thereby improving the RRR.
- Days in Accounts Receivable (D/A/R): Contract modeling can help reduce delays in payment by negotiating more favorable payment terms, thus lowering the days in A/R.
- Denied Claims Rate: Analyzing contract terms can help identify potential issues that lead to claim denials, allowing providers to negotiate clearer terms and reduce denial rates.
- Cash Collections as a Percentage of Net Patient Service Revenue: By securing better reimbursement rates and terms, providers can increase cash collections, improving this metric.
- Bad Debt Rate: While not directly impacted, contract modeling can help reduce bad debt by ensuring that providers are paid correctly for services rendered, reducing the likelihood of uncollectible debt.
- Cost to Collect: Efficient contract management can streamline billing processes, potentially reducing the cost associated with collecting payments.
By impacting these KPIs, contract modeling tools empower providers to optimize their financial performance, improve operational efficiency, and enhance their negotiation capabilities.
Model your contracts with MD Clarity
When many physician groups and healthcare MSOs are only now getting their heads around proactive healthcare contract management, raising the prospect of contract modeling can seem ambitious.
Given how contract modeling improves reimbursement rates and contract terms, however, healthcare CFOs, revenue cycle executives, and MSOs are increasingly utilizing it. With access to the revenue impact of proposed payer changes, providers can confidently assert themselves during negotiations with payers.
MD Clarity’s contract management solution RevFind contains the contract modeling features that empower physician groups and management services organizations to assess the financial impact of potential rate changes on their revenue. In addition to simulating contract changes, RevFind enhances transparency across the revenue cycle by:
- Evaluating contract performance: Providing clear insights into how insurance contracts are performing.
- Identifying denials and underpayments
- Comparing payer performance: Allowing for comparisons of performance across different payer contracts.
This capability enables providers to make informed decisions, negotiate more effectively, and maintain a strong position in discussions with payers.
Don’t let your payers push an inadequate rate increase or unfavorable term past you again. Book a demo today to see how accurate contract modeling maximizes your revenue.
Get paid in full by bringing clarity to your revenue cycle
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