Managing Payer Contracts

November 15, 2003

How to identify and solve payment problems

Does your practice need to get a better handle on its payer contracting process? If the following scenario sounds familiar, it may be time to take a closer look at how your contracts develop and evolve.

Say your practice, like many others, employs someone you think of as a "billing and payment expert." This is the individual who runs back to the managing physician in the middle of the day, waving a payment voucher from a payer who allegedly shortchanged the practice. This usually brings forth praise from the physician, and gives him a false sense of security that the practice is catching payment irregularities. But guess again. If this is the only contact you are having with payers, you may be missing out on some opportunities to improve your reimbursement.

Gone are the days when physicians could simply trust that they were getting paid fairly, or in accordance with their payer agreements. Payers are becoming increasingly sophisticated in their ability and willingness to deny, bundle, or reduce payments. Payer errors can be equally damaging to a practice's revenue.

CIGNA, for example, is expected to settle a lawsuit worth an estimated $500 million to reimburse doctors whose claims were inaccurately processed as the insurer converted to a new data processing system. Similarly, United HealthCare and Aetna have settled similar class action suits. Unless your practice has a systematic means to identify these payment problems and resubmit your claims, you may be out of luck.

Know the cycle

The fact is, physicians leave money on the table all the time. How can you prevent this from happening in your practice? The first step is to recognize that contracting with payers is not just a one-time event. Contract management is a cycle involving these components:

  • Setting your reimbursement and contracting goals
  • Negotiating terms and conditions
  • Monitoring and administering the contract
  • Auditing the contract for compliance

Begin this process by identifying where your contract management efforts will be most rewarded and what you are trying to achieve. Practices that I work with are moving back to a fee-for-service mode, so it is important that groups understand the need for appropriate rate targets.

Set reimbursement goals

It's important to set goals -- but before you can decide what your practice needs in terms of reimbursement, you must first understand what you are currently getting. Start by identifying your top five commercial payers and consider the following questions and possible action steps:

How are these payers currently reimbursing you? Make a table that provides an overview of these agreements, including a quick summary of the terms and vital information.

What is your volume by patient visits and revenue by payer? What percentage of your total business do they constitute? This is your payer mix.

What is it that you don't understand about a payer's reimbursement methodology? What terms haven't been fully disclosed? Ask for full disclosure on these.

What are the sensitive areas for reimbursement in your practice? In particular, review how you are paid for ancillaries and supplies if they represent a substantial portion of your production.

Are you at capacity in your practice? If not, how do you want to influence the growth of an improved payer mix? If your practice is at capacity, what would be the impact of not renewing certain payers? What kind of patients would they be replaced with?

How are your charges set? RBRVS (resource-based relative value scale) or based on the local market? Are there any payers paying 100 percent of your fees for certain code? If the answer is yes, it's time to review your charges.

Many practices calculate their expenses by dividing them by the total charges per year in the practice (excluding physician salary) expressed in RBRVS units $/units = conversion factor expense. This gives you an idea of what it costs as a conversion factor to cover your overhead. In some practices, expenses may be higher than governmental conversion factors. In that case you have to add the difference back into your expense conversion factor.


What are the administrative rules used by payers for processing your claims? Do they follow CMS's correct coding initiative guidelines? If not, ask what the payer's bundling and modifier rules are --  they are often full of surprises.

Do you have any unique advantages or leverage with payers, such as unusual/uncommon services or geographical coverage?

Thoroughly answering these questions will help you define the reimbursement and contracting goals for your practice, and evaluate each payer's reimbursement offering. Set a minimum threshold payment level for all payers, rather than a percentage increase to existing rates. For example, simply asking for a 5 percent increase on a poorly paying contract is not progress.

Do your homework

How much time should you spend reviewing the body of the agreement? First, realize that contract language hair-splitting is generally not time well spent. If the financial terms aren't acceptable, then the contract language is a moot point anyway. However, you should understand the contract clauses containing: termination, medical necessity, indemnification, utilization and case management functions, amendments, and claims payments. If you have come to terms on the financial issues, then you can return to any language or conditions that concern you. If you have the time and resources, have an attorney review important agreements before you sign.

Ask your staff to run a reimbursement report, sampling payments from the top 20 codes used in your practice, by the top five payers. Include codes from ancillary services and higher priced injectables, if relevant to your practice. This provides a quick reference on how your major payers compare on codes for which you receive the bulk of your payments. Taking this information a step further, calculate the paid conversion factors for each payer by dividing payments by the RBRVS units for each CPT code. If your agreement is based on an RBRVS fee schedule, then you can also determine if the payments have conformed to your current agreement.

Even if your agreement is not based on an RBRVS schedule, compare that payer's schedule to Medicare's conversion factor, a known benchmark. Many practices have been unpleasantly surprised to discover that the payer's proprietary fee schedule employs rates that convert to less than Medicare's. (You can also purchase a number of RBRVS calculators available as either stand-alone products or add-ons for spreadsheet programs. See the Tools section of www.PhysiciansPractice.com for an RVU productivity calculator.)

With this information, you now should know what your specific goals are for each payer.

Make time for negotiations

Before you begin negotiations with payers, have a clear idea what the two or three most important outcomes are to your practice. Focus on these issues during negotiations, without getting sidetracked.

If you find that you are not getting close to your contract goals with a payer, but are still willing to continue the agreement, consider:

  •  Limiting your practice to existing patients for this payer.
  • Shortening the time you have to cancel the agreement.
  • Asking for an earlier implementation of the contract terms.
  • Eliminating all evergreen clauses (those termination clauses which automatically renew your contract). You want to be able to get out when you are ready, not when they allow you to.

After the ink is dry

After you successfully negotiate a new or renewal contract with a payer, make certain your staff understands any administrative responsibilities your practice has assumed. Practices often fail to integrate terms of an agreement into the daily routines of their business office and reception desks. Your staff should be aware of all these conditions:

  • Is there a pre-authorization requirement? If so, for what procedures?
  • How long does the practice have to submit claims and disputes? Pay particular attention to how the payer handles secondary insurance payments. Practices pay the price for tardy primary payments, finding that they have exceeded the submission deadline for the secondary payer.
  • What are the copay provisions under this contract? Reception and check-out staff should be able to readily access this information.
  • Who is the claims representative for this agreement and to whom should the practice address payment disputes and questions?
  • What are the expected reimbursement terms and when will they be effective?

 It's key to share these components of the agreement with your billing staff. Many practices aren't getting paid because they are disqualified by some simple contract requirement that their staff was unaware of.

Auditing completes the cycle

In the final step of the contract management process, ask yourself, "Am I making sure this payer will pay in accordance with the terms in our agreement?" Most practices rely on their billing expert to monitor this.

Larger groups are now using contract compliance software that tracks each payment made in their practice management system back to the terms of a contract. If the payment does not conform to the terms of the contract, then the software produces variance reports, documenting each violation. They will also generate dispute documents facilitating the re-billing of the underpayment. This
type of software has been used by hospitals for years, and has been documented to return 3 percent to 8 percent of gross revenue just by identifying disputable payments.


In smaller groups the same rate of underpayment errors probably exists as well. Some groups use their practice management systems, which may have a built-in payment audit feature. These are useful tools, but they can be time-consuming to monitor and keep up-to-date.

Finally, payers are notorious for not acting on the terms of new agreements in a timely fashion. Your contract may be effective starting on January 1, but due to vague language the payer may have a 60- to 90-day grace period before you get paid on the new terms. This is preventable if you specify in the agreement when the new terms will take effect.

Physicians are among the very few business that don't systematically audit what they are paid for their services. Yes, you can trust, but also verify. Think of it this way: if you analyze your agreements closely, you will ask better questions during negotiations. Asking better questions leads to increased disclosure. That usually results in better-performing agreements --  and sounder business practices.

Philip W. Armstrong is a medical group consultant and former group practice administrator with PWA and Associates near Portland, Ore. He has more than 15 years of experience managing physician groups and providing services concerning management issues, ancillary services, contract analysis, revenue source development, and physician and administrator recruitment. He can be reached at philipwarmstrong@comcast.net

or via editor@physicianspractice.com.

This article originally appeared in the November/December 2003 issue of

Physicians Practice.