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Contracts: Who Works for Whom?


Evaluating a payer contract requires more than a working knowledge of the fee schedule. If you want to negotiate a better deal when it's renewal time, you need to know how each payer does business.

Perhaps you’ve had occasion to glance at the “explanation of payment” statements sitting in a stack on top of your biller’s desk.

If you never have, take a few minutes to do so. What you find may have you wanting to seriously reexamine the rationale of your payer contracts.

As you thumb through that stack, you may discover a form describing a recent patient office visit. You glance at the rate, and it seems low in comparison to your expectations. Next you spot several forms with no payment recorded. Perhaps it’s because your new associate physician isn’t yet credentialed, a procedure you performed wasn’t preauthorized, or a payment is being held pending review.

After an exhausting day of seeing 30 patients, your cursory review of these documents will leave you wondering: Am I working for myself - or for my payers?

What you should be asking is: Do my contracts work for me or for my payers?

Answering this question will take more than a cursory look through some documents. Following these suggestions will help ensure your contracts are benefiting you.

Supply and demand

Reading those payer contracts exposes the basic economic principle of supply and demand. What is the balance of provider supply and patient demand for your specialty in your market? While that sounds like a complex question, you may be able to answer it in less than an hour.

First, determine the amount of time a new patient has to wait before receiving an appointment with you. Then call your competitors to ask them the same question. Since more offices have caller ID these days, you may want to call from a home or wireless phone, or ask a friend to call. You don’t have to reveal your real purpose - just say you are new in town and are shopping for a physician. Ask the operator to tell you when the next new available appointment is. Or hire a consultant to do your homework for you.

If you and your competitors can see new patients in less than a week, it’s unlikely that you will have much leverage to bargain with your payers. They know there is a plentiful local supply in your specialty and will move on to another practice if you won’t accept their contract terms. But if you’re flooded with patients - that is, if your demand exceeds your supply - your practice may have a leg up on your payers.

Of course, payers may have another compelling leverage point. If they cover a large percentage of the local population, you may have no choice but to agree to their terms.

It’s important to understand the strength of your leverage when you negotiate and evaluate your contracts. Kathi Potts, now a technology consultant for medical practices, describes a specialty practice in which she served as the billing manager. The specialty practice was the only one of its kind in its community. Potts discovered that one payer reimbursed at a less-than-desirable rate. So the practice asked to renegotiate the contract with a better reimbursement schedule.

“Rather than agree to the increase, [the payer] accepted our letter of resignation and then paid billed charges,” she says. “The mind-boggling part to me was that they were willing to push the envelope in not negotiating to the point that it cost them far greater to say ‘no’ than to negotiate.”

The lesson is that if you have leverage but your payer doesn’t, you can expect more from your contracts. Unfortunately, many physicians don’t even know what to expect from the payers they have.

To understand the impact of your contracts on your practice, let’s look at two major factors related to payer contracting: reimbursement and administrative burden.

What’s your reimbursement?

Every payer reimburses you based on an agreed-upon reimbursement schedule. But it’s your job to ensure your payer pays what your contract states. Most practice management systems allow you to enter expected payment rates from each payer with which you contract, and to default to your full charge for any other payers. Loading these rates into your system takes time, but to ensure you are being paid according to your agreed-upon terms, it must be done whenever a payer changes its reimbursement schedule.

It’s worth it. As payments are posted, your staff can identify an unexpected low payment and contact the relevant payer to readjudicate the claim for correct reimbursement.

For your staff to accurately input expected reimbursement rates into your practice management system, however, you must know the rates to which you have agreed. To correctly determine the rates you receive from different payers, look at the procedural codes representing 80 percent - at a minimum - of your practice’s business based on volume and dollars. Then compare the rates for those procedures among your various payers.

But don’t stop there. Dan Cole, chief operating officer of Internal Medicine Associates of Northern Kentucky, also determines his payers’ inclusion policies, which are often referred to as “bundling services.” Internal Medicine Associates performs a host of ancillary services, so Cole knows it’s important to negotiate what’s “bundled into office visits, procedures, and accompanying ancillaries - and what’s not.”

Steve Deas, executive director at Georgia Neurological Surgery, says he once discovered a problem with how a payer reimbursed the practice for spine surgeries. “We realized that the payer was including thousands of dollars worth of instrumentation in the surgeon’s fees,” Deas says. Identifying and clarifying bundling issues put a stop to that payer’s policy.

Modifiers are another source of unrealized discounts. For example, you should know if a payer reimburses for separately identifiable evaluation and management services that are billed on the same day and denoted with a -25 modifier.

Administrative burdens add up

The cost of doing business with payers is different for each one. Although most practices focus solely on reimbursement, the indirect costs of dealing with a payer can quickly erode any profit you attain from higher rates.

Consider this scenario. Your practice is pleased to realize that Alpha Payer reimburses you an average of $100 per visit. That same payer, however, also requires your staff to process referrals for every test you order and every specialist to whom you refer a patient. Moreover, that $100 is paid on the last day of your state’s legal limit for prompt payment. Additionally, more than one-third of the services you perform for the payer’s covered patients are returned with no payment “pending medical review.” The payer has no Web site from which you can inquire about claims status or rejections, and your staff spends an average of 17 minutes on the phone to get through to someone each time they inquire about a claim. Totaled up, it costs your practice an average of $25 per visit to deliver a service to a patient covered by Alpha. So you are actually receiving $75 per visit rather than the $100 you contracted for.

Get a handle on the administrative costs of working with each of your payers by evaluating the following factors:

  • Denials: When you submit a claim, a payer will either pay it or respond with a denial. When a claim is denied, you receive no payment. The payer provides a reason for the denial in its correspondence to you.

The denial may be made in order to transfer financial responsibility to the patient, as the case is in a “deductible not met” denial. Or, the denial may be the result of a coding error, such as “diagnosis code does not match with procedure code.” Finally, it could be a more vague reason, such as “pending medical review” or “need additional information.”

Some denials are valid; if your patient hasn’t met her deductible, she should be held responsible for the balance. But some physicians are plagued with payers that deny a large percentage of their claims for what are arguably invalid reasons. Frequently, these are just delay tactics. If you participate with a payer that you feel often denies claims for invalid reasons, then recognize the administrative burden that dealing with that payer places on your staff. Tell the payer about your concerns. Work to meet its requirements so you submit complete and accurate claims every time. If these steps don’t work, or if the payer won’t cooperate, reevaluate your relationship.

  • Applications: When you join a payer, you must apply to become a member of its network. The application process includes sending supplemental documents, such as proof of licensure, medical staff privileges, and so forth. For new physicians, gathering these documents can take months after they’ve joined a practice.

For example, a newly graduated resident may not receive his residency program certificate for several weeks after his training is over, or a physician who relocates to another state may apply for licensure in the state but not receive it for months after submitting her application. Even when all documents are submitted, some payers take six months to approve applications. A six-month delay means that you cannot submit claims to that payer because your new physician is not yet part of its network. To avoid these problems, Cole tries to negotiate the application process.

He asks payers to make the effective date of new physicians the day they receive the application packet, not when they finish processing it. Cole says that if Internal Medicine Associates has to put charges on hold for patients seen by physicians pending approval, he makes sure the patient’s payer agrees to adjudicate any charges placed once the application is received. If you find you are losing money with a payer every time you hire another provider, then focus on negotiating the application process with that payer.

  • Submission timeframe: Every payer outlines a timeframe in which it expects to receive claims - and after which it won’t pay. Many payers allow up to 18 months, but some have narrowed their timeframes to 60 days or less. You may be surprised to know that your staff can’t always submit claims within 60 days.

Consider this scenario: You consult on a patient at the hospital on a Friday night. You turn in your hospital charges the following Monday. Your staff obtains the registration information about that patient from the hospital on Wednesday. Your staff prepares your charge, reviews it, and submits it the following Monday. Forty-five days later, the payer responds with a denial, saying, “the subscriber is not eligible on this date of service.” Your staff calls the payer later that week and learns that the patient on whom you consulted is no longer a beneficiary of that payer. In fact, the patient’s coverage terminated the week before his hospital stay. After two phone calls, your staff finally reaches the patient, who provides the correct insurance information. The correct claim is submitted 61 days after the consult. If that second, correct payer has a 60-day submission timeframe, your staff will have to write off that consult. And that $200 consult fee is down the drain.

To escape this timeframe trap, renegotiate claims submission timeframes as well as limits on appeals of payer decisions with which you disagree. An administrator of a southeastern pathology group successfully negotiated increased timeframes with most of her payers. “We explained why we are challenged to meet their timeframes, and they have agreed to give us another 30 to 60 days to submit,” she says.

  • Infrastructure: A payer’s administrative infrastructure can affect the relative efficiency of your staff. Look for payers that offer electronic payment remittance and funds transfer, which can significantly reduce the number of staff required to post payments. Working with payers that offer Web sites through which your staff can inquire about the status of claims and denials will greatly reduce the time they must spend on the telephone. Some payers even allow for the electronic submission of claims, appeals, and attachments. The better a payer’s infrastructure, the easier it is for your staff to work efficiently.

  • Compliance: Some payers aren’t compliant with their own policies. It’s not unusual to learn that after a payer agreed to a certain fee schedule it failed to pay those rates. Usually the payer does not have bad intent; it is more likely experiencing administrative glitches. But if the glitches become a constant source of frustration for you and your staff, it may be time to evaluate the impact of this payer’s noncompliance on your practice.

  • Communication: Like physician practices, all payers face administrative challenges. In this age of automation, one wrong keystroke can mean hours of work on your part to rectify a mistake - even one the payer caused. Although payers do make mistakes, some are good partners. They own up to problems they cause, openly communicate about them, and rectify them. But consider the efficacy of the communication channels you have with your payers. If they are difficult or nonexistent, it may be time to reevaluate your relationship with them.

Merging your evaluations of your reimbursement from each payer and the administrative cost of working with them can help you to develop a “payer scorecard.” Use this scorecard to rank how much payers work for you based on their relative contribution to your practice’s bottom line. (See example



Use a standard scale to evaluate the reimbursement provided and the administrative burden connected to each payer. Identify the relative values of the reimbursement and the burden as compared to your average contract.

Elizabeth Woodcock, MBA, CPC, is a professional speaker and consultant specializing in practice management. She can be reached at Elizabeth@elizabethwoodcock.com or via editor@physicianspractice.com.

This article originally appeared in the June 2006 issue of Physicians Practice.

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