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Modeling Payer Proposals to Maximize Return and Cash Flow
Blog Feature
Matt Goss

By: Matt Goss on April 25th, 2023

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Modeling Payer Proposals to Maximize Return and Cash Flow

Contract Modeling

Over the last several years, hospitals and healthcare groups have been ravaged by pandemic-related revenue losses. According to the American Hospital Association, in 2021   alone, U.S. hospitals lost approximately $54B in net income. Despite that, hospital leaders strive to achieve an economic resurgence by reducing operating expenses, streamlining operations, and perhaps most importantly, restructuring payer proposals to maximize their returns.

Achieving the latter has historically proved difficult, as payers typically have access to robust tools and extensive staff through which they can analyze and strategize numerous "what if" scenarios. The insights gleaned from this analysis have long allowed them to structure contracts that benefit them, often at the expense of the hospital's cash flow.

Fortunately, recent healthcare I.T. spending trends indicate that hospitals are investing billions in new technology. While many of these funds are focused on streamlining the delivery of care, some are undoubtedly allocated toward enhancing revenue cycle management and facilitating more accurate modeling. The latter will prove especially valuable as hospitals work to maximize their revenue via payer proposal terms.


Do Hospitals Understand the True Value of Pay Proposals?

Yes, generally speaking, hospital systems and their managed care personnel understand the value of pay proposals and the terms they contain. Whether we are discussing a standalone regional hospital or a huge, multi-state hospital system, that holds true. 

However, hospital decision-makers are fighting an uphill battle when negotiating pay proposals. For years, payers have had access to highly sophisticated modeling technology they could use to estimate the impacts of every proposed contract term accurately. Though the largest hospital systems have access to similar resources, small to mid-sized entities have relied on payer's modeling data, putting them at an instant disadvantage. 

The second factor undermining hospitals' pay proposal negotiations is federal legislation requiring hospital price transparency, according to the Centers for Medicare & Medicaid Services. Now that payers can see their hospital fee schedules, hospital leaders have few cards to play during negotiations. 

According to Deloitte Insights, some payers are partnering with other providers and working with third-party vendors to deploy "as-a-service" solutions. As a result of these newly emerging trends, some hospitals may find that they are negotiating with fewer individual payers and more groups overall.   

4 Factors Hospitals Must Consider When Negotiating

Although hospital decision-makers often start payer proposal negotiations at a disadvantage, they can put their organizations in a position to succeed by considering four key factors, which include the following:

1. Payer Performance

Analyzing payer performance will help decision-makers identify opportunities to improve profitability and support a stable cash flow. However, it is essential that they use a standardized system for assessing payer performance. An effective practice involves using payer scorecards, which enable decision-makers to drill down to the claim level to evaluate payers.

2. Policy Shifts

During each new negotiation period, decision-makers will undoubtedly encounter payer policy shifts, and even seemingly insignificant changes can considerably impact profitability and cash flow. That being said, hospital leaders must not only identify these shifts but also analyze how they will affect revenue. If a particular change has significant negative impacts on revenue, hospitals can lobby against it or work with the payer to find some common ground.

3. Negotiated Rate Transparency 

Now that payers can see hospital fee schedules, negotiating proposals has become more complex than ever. Unfortunately, there is no real workaround through which hospital leaders can circumvent transparency mandates. As such, decision-makers must seek out other ways to prepare for negotiations. One of the most effective approaches involves creating their own models to explore the impact of contract terms and conditions. 

4. Pricing Correlation 

One of a hospital's key goals during payer proposal negotiations is to achieve better net revenue alignment. To achieve this, decision-makers must ensure that negotiated rates and gross charges correlate with one another to promote healthy revenue. Failing to consider the relationship between gross charges and negotiated rates in conjunction with one another can lead to costly oversights during payer proposal negotiations.

Best Practices for Modeling Payer Proposals

Hospital decision-makers can regain some control during payer proposal negotiations by leveraging a few established best practices. The most pragmatic approach involves using analytics and modeling tools to negotiate more favorable pricing structures. The largest, most successful health systems are already using sophisticated modeling tools to obtain better contract terms, but smaller entities are relying on spreadsheets and other antiquated tools.

Entities attempting to negotiate using spreadsheets quickly become inundated with data they cannot model or analyze. There are far too many pricing codes and variables to consider, so spreadsheets are not a viable negotiating tool for modern hospitals.

Hospitals that lack practical modeling tools can take one of two approaches.

  1. The expedited solution involves utilizing pre-packaged reporting tools from a provider like PMMC. Health systems can implement these tools quickly and begin exploring the revenue cycle using comprehensive modeling. Organizational leaders can analyze numerous what-if situations and obtain actionable insights to guide negotiations. 
  2. The alternative approach is to invest in custom solutions. Hospital decision-makers interested in managing their own modeling and reporting processes prefer this strategy. Still, both pathways significantly enhance hospital leaders' ability to negotiate favorable terms when creating payer proposals.

Explore the Unknown with PMMC

In the COVID-ravaged world, your organization must maximize revenue through savvy payer proposal negotiating tactics. In order to do so, however, you need access to robust reporting solutions that provide detailed insights into a multitude of "what-if" scenarios.

PMMC can level the playing field at the negotiating table by providing you with high-value modeling solutions. Our pre-packaged reporting and modeling tools allow you to explore various scenarios and examine how proposed price points will impact your bottom line. 

In addition to pre-packaged solutions, we can empower your organization to conduct its own reporting and modeling, enabling you to examine the effects of payer proposal terms further. This strategy will ensure that you understand the potential impacts of any contract stipulations. 

Contact PMMC to schedule a consultation or to learn more about our modeling solutions. 

About Matt Goss

Matt Goss, Vice President of Revenue Strategy has a diverse professional experience that he brought to PMMC in 2021. Matt brings a history of healthcare experience and works to help clients improve their margins and better serve their communities.