Contracting Strategy

March 1, 2003

Many practices are (finally) developing a long-term strategy for dealing with managed-care contracts. The physicians are happier, employees are happier, and patients are happier.

Many practices are (finally) developing a long-term strategy for dealing with managed-care contracts. The physicians are happier, employees are happier, and patients are happier.

But is this really possible? Absolutely.

The improving practices are using sound business (rather than emotional) criteria for deciding which payers to work with. Instead of getting mad, they're evaluating financial and operational issues related to contracts, renegotiating or exiting from bad contracts, and marketing to preferred patients. In some cases, these practices are able to reduce staff levels because they no longer must deal with troublesome payers.

Negotiating contracts and deciding whether to participate in commercial and government programs has never been easy. In fact, most practices have been making these decisions emotionally, following the crowd, or joining an association to let someone else do it. We cannot begin to estimate the money lost by employing these methods. Instead, use a logical business approach, apply a sound business strategy to the process, and take control of your business.

It is not uncommon for our clients to have 20 to 30 PPO and HMO contracts while participating in several government entitlement programs. Most practices don't even know the collection rate for each plan. They see patients, unaware of how much they are making - or losing - on each encounter.

Knowing what you're getting from your payers is the first step to developing a strategy for dealing with them. That goes for both commercial carriers and government payers. Some of your patients are subsidizing others, but without knowing which is which, how can you take control of your business?

Measure payers' value

How does a practice evaluate carriers? When it comes to understanding a payer's overall value to your practice, you probably know that the contracted fee schedules are only the tip of the iceberg. There are two pieces of data to consider - money and effort. How much money does the practice receive for services provided? And how much physician and staff effort is required to collect the money owed to the practice?

First, the money issue. There are many ways to compare carrier collections. One good method is to calculate the average total dollars received per patient visit over the course of at least six months to a year. The data are generally easy to pull from the billing system. Calculate the total amount collected for each signed contract and government program, then divide that total by the number of patient visits over the same time period. This works for all specialties.

This method is especially useful because it accounts for volume. Although your contracts spell out how much you're to be paid for each service, they don't take into account the volume of procedures. Because practices usually provide a few services frequently, reimbursement for those services should have more weight in deciding which payers to contract with.
We recently developed these data for a family practice located in Colorado Springs, Colo. The range was from $62 to $232 per visit. (Remember, we are calculating collected revenue, not billed revenue.) We also estimated that, based on overhead cost, the break-even amount was about $75 per patient visit. That means the practice was losing money by being associated with the half-dozen carriers that were paying below $75. Does it make sense that the practice should continue associating with those payers under those circumstances?

The value of your work

The data related to effort - that is, the amount of work it takes just to get paid for the clinical work you've already done - are more subjective. To make this kind of evaluation, physicians and staff must accumulate the data on, for example, the number of appeals required, the time spent on the phone handling preauthorizations, and the telephone time on hold following up on claims.

One physician explained it this way: "PacifiCare patients represented 10 percent of our revenue but one-third of our billing effort. Therefore, we were losing money on every PacifiCare patient." The practice decided to withdraw from their PacifiCare contract.

When collecting legitimate claims from a particular carrier requires an inordinate amount of effort, the practice should adjust the break-even point. For example, the family practice in Colorado Springs might conclude that the break-even point for some carriers is $90 collected per patient visit. This is subjective, of course, but important. Time is money.

Time to part ways?


Also important is to review each carrier near or below the break-even point. The solution may be simple - drop the contract. If the number of patients associated with a carrier is large, develop a list of specific problems and attempt to negotiate with the carrier. But remember that the more patients you're seeing from a money-losing payer, the more money you're losing.
When you enter negotiations with less-lucrative payers, use the data gleaned from your analysis. When we show fair-minded carriers legitimate reasons for wanting to change the contract, they tend to be more receptive. (Although some bottom-line oriented carriers reject our logic - and we reject their contracts.)

Of course, physicians cannot negotiate with government programs like Medicare and Medicaid. Those are take-it-or-leave-it. But keep in mind, no law requires you to take it.

Some practices will keep a contract for "political" reasons. For example, a radiology group decided to keep a losing contract because the hospital the group was associated with had a contract with the same carrier. However, when we shared the data with the hospital negotiators and urged them to make it an issue in their negotiations, they reminded the carrier that it had to be fair to the physicians, or the doctors would drop out and the hospital could not provide facility services. Again, real data helps the communication process at all levels.

Once you've determined those carriers that are below the practice's acceptable limits of revenue and effort, develop a plan. Drop the worst ones first; don't cut them loose all at once. And consider how you handle the change with patients, including your timing. When leaving a carrier, address a letter to all covered patients and post notices in the office in the fall during the enrollment period. Explain that the practice cannot provide quality care based on the administrative requirements and reimbursement of the stated carrier, and will not see those patients after the new year. Include a list of carriers the practice is keeping, and suggest to patients that they can stay with the practice if they change to one of the carriers on your list during their company's open enrollment period. This technique works particularly well with primary-care practices.

Keep the good ones

Alternatively, figure out which carriers pay better, and with fewer hassles. Market your services more aggressively to patients in those plans. Advertise in the newspaper and post a notice in your office declaring that you are "Now accepting new Acme patients." Your own database will tell you which local employers provide benefits through the better carriers. Send a stack of your practice brochures to the human resources office of those employers and let them know you are accepting new patients. Employees often go to their human resources office complaining that they can't find a doctor on the plan and looking for someone else to turn to.

We have observed an interesting long-term effect of this strategy: when a practice gravitates toward working with carriers that pay better and require less effort to collect, the practice does not have to see as many patients to collect the same amount of money. The billing staff does not have to do as much work to collect the same amount of money. Physicians can spend more time with patients - or go home earlier - the pace in the front office is slower, and the piles of claims to be reworked in the billing office are smaller. Often, fewer staff altogether are needed.

We've also noticed that while revenue may be a little lower at these practices, lower expenses more than make up the difference, and so profits are higher. The physicians take home a bit more money and get home on time more often.

Often, new practices cannot get on the better contracts for some time - even years. Therefore, new practices take any and every available contract. New practices should start gathering carrier data at the beginning. As they get busier, they can begin to drop the bad ones.

Legal issues

As if low reimbursement rates and bureaucratic hassles aren't enough incentive to be more proactive, emerging legal issues are also forcing some practices to change how they work with payers. The Federal Trade Commission (FTC) has recently taken action against several independent practice associations (IPAs), alleging antitrust violations.

For example, the government recently announced settlements of two complaints that alleged fee-fixing by physician groups that were accused of collectively negotiating fees and other contract terms with payers - a violation of antitrust law. These practices settled with the FTC by agreeing not to negotiate contracts as a group.

Many attorneys feel that these settlements are a deathblow to IPAs across the country. Some are shutting down, others are ceasing to negotiate contracts on behalf of physician members. If physicians in an area, while negotiating "independently," ask for the same or nearly the same reimbursement, they are likely to attract scrutiny from the FTC.

If their reimbursement demands are viewed as arbitrary, it will be difficult for these physicians to defend themselves against price-fixing allegations. But if they use the logical business approach described here, they can use their analysis and resulting strategy as a defense because it simply makes good business sense.

Paul Angotti is president of Management Design, LLC, a company that helps physicians to establish and maintain financial and operational control of their practices. He can be reached at angotti@management-design.com or via editor@physicianspractice.com.

This article originally appeared in the January 2004 issue of Physicians Practice.