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Coming to Terms With Payers


How do you negotiate with managed-care payers? If you're wise, very carefully.

How do you negotiate with managed-care payers? If you're wise, very carefully.

Recently, I was responsible for turning around a failing emergency department (ED) practice in a community hospital. One of my major tasks was to negotiate a variety of arrangements with insurers, who used what I considered "dirty tricks," either as part of the negotiation itself, or afterward in the course of billing and collections. So before you sit down to negotiate with managed-care payers, be aware of some of the "tactics" they use, and plan your response.

The first payer tactic is to "lowball" the fee rates as a starting point for negotiation, then imply that you are greedy or unreasonable if you challenge their norms. Insurance marketing is primarily directed at large employers who are interested in low-priced products. Competition among insurers for employer customers - and physician panels for these customers - forces rates toward an industry average of compensation. This can be used as a starting point to detect inordinately low proposals and help reconcile the negotiating parties' positions.

There are two ways to discover this information without running into antitrust issues. One is to be part of an Independent Practice Association (IPA) where a "talker" surveys price points in the community. And while this has been subject to occasional legal challenge, in my opinion, the major drawback to belonging to an IPA is that you limit yourself to a fee structure established outside your control. The second method is to obtain normative, or average, data from third-party vendors. Both methods require some investment of time and money but are preferable to the prohibitive time and cost of using trial and error.

I caution you to be careful about using Medicare allowable fees as a benchmark. This is a favorite tactic for setting unreasonably low fee expectations. This error is magnified if an outdated fee schedule is used. For my group, the Medicare fee schedule was five years out of date. Whether you accept Medicare as a standard depends on your competitive strength in your marketplace. However, be aware that fighting for market share based on price alone is usually unproductive and potentially harmful to your practice's viability. In my case, we were a single hospital market in a hospital-based specialty, so there was no reason to accept fees by IPA or insurer mandate.

The next payer tactic I call "passive-aggressive," in the sense that insurers may have one contractual obligation but covertly, by design or negligence, reimburse at discounted rates. Check your revenue reports. We found one cross-state commercial insurer paying us based on a contract rate - even when we had refused the contract. Their statements contradicted our billings, and patients were being balance-billed. Angry patients are bad for risk management. Be sure to monitor payers for compliance with contract terms.

Of course, another payer tactic is to refuse direct payment to you unless you accept contract terms. This is legal on their part, as their obligation is to the patient they insure, not to you. Don't lose sight of this fact when weighing whether to accept a contract rate.

Finally, payers can deny payment outright. While it's obvious that a patient going outside managed-care provider panels and referral systems will have payment denied, there are more subtle ways insurers attempt to deny doctors payment. The two major ways are to bundle services and to deny certain tests as "not indicated."This is a difficult area to address.

In the first case, certain types of bundling are defined by regulatory fiat on the part of Medicare and it's probably not worth fighting the insurers on this. Denial of payment for laboratory tests is another matter. There are software packages that purport to identify "unnecessary tests" and justify penalizing the physician or laboratory. This is a tactic I encountered when the hospital billing office used it as a "Medicare compliance tool." Our physicians never had any trouble justifying their own test orders, but the bureaucratic hassle of bouncing bills back for further documentation was burdensome, and is a common practice for some insurers to extend revenue cycles.

What's your best alternative?

The best way to combat dirty payer tricks is to take the high ground from the beginning and define the principles that both parties agree to adhere to. It's also essential that you know your "BATNA," a negotiation term meaning "Best Alternative To No Agreement." I offer two examples that highlight the importance of this and how our group benefited from it.

In a particularly thorny exchange with a large commercial insurer, we discovered through billing audits that they were paying us at the discounted contract rate - even though we had not signed a contract because their conversion rate was too low. We were faced with either agreeing to an unacceptably low fee schedule, or taking the risk that patients who were billed would not pay the balance. In this case we needed to know what our BATNA was: How much money would we lose relying on patients to pay their bills? At that point we had six months of historical data that showed definitively that the losses from patient delinquency would be less financially damaging than agreeing to an unfavorable contract.

The second case was that of a local Medicaid HMO that wanted us to accept a monthly capitation on all ED payments. There was a history of this HMO denying all ED payments as unnecessary visits and the hospital had been unable to turn the situation around. My approach was to establish three principles for negotiation: first, that doctors deserve to be paid for services rendered; second, that neither side should game the system for personal gain; and third, that the law must be complied with.

While these seem obvious, putting them in writing to the HMO medical director put him in the hot seat. Since he was a practitioner in town it brought to bear the threat of loss of face with his peers if he violated these principles.

However, I also offered a carrot: In exchange for the payer not denying payment for emergency visits, we agreed to the state customary Medicaid rate. Depending on your state this may or may not be financially worthwhile to you, but in our case this improved our bottom line substantially. Going from no payments of undiscounted fees to 100 percent payment of a discounted fee structure was preferable.

This resulted in our ED practice being the only one in the state that year to have no managed-care denials from the local Medicaid HMO. Modest reimbursement combined with not having bills bounced back and taking up administrative overhead was more than worth the nominal "paper" cost of a lower fee structure.

Finally, while you may have a practice manager to deal with administrative and operational details, don't leave your medical expertise out of the equation. In many cases, the only way to resolve an issue is to have the medical director explain clinical justification for a certain test or treatment plan. With clinical facts and the truth on your side, you're likely to prevail in circumstances that might otherwise be bureaucratic impasses.

Healthcare is under tremendous cost pressures that will only get worse as baby boomers age. While there will be no easy answers to revenue maintenance, vigilance to payer tactics, principle-based negotiations with set timelines, and a clear understanding of your BATNA will go a long way toward improving your bottom line and peace of mind.

G. Steve Rebagliati, MD, FACEP, assistant professor of emergency medicine and clinical risk investigator at Oregon Health & Science University in Portland, OR. He can be reached at or via

This article originally appeared in the April 2003 issue of Physicians Practice.

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