How the shift from fee-for-service is changing payer contract negotiations

Clinical analytics, benchmarks and patient experience data now just as important as financial metrics, insiders say.

As the transition from fee-for-service payment continues, hospitals are finding they need more information from a more diverse stable of sources to successfully negotiate with payers.

“Contracting strategies going forward will require more input from outside the financial offices,” said James Smith, senior vice president for The Camden Group in Rochester, New York. “You will have to add clinical analytics, benchmarks and patient experience measures as well as actuarial services to your financial analysis. Your preparation internally will have to consider if your systems allow you to manage the incentives built into payment for quality or assumption of risk contracts.”

Previously, a hospital’s negotiations with payers related to establishing costs of services. The institution figured out how much money they wanted, the payer came back with what they wanted to pay and eventually an agreement was reached. The hospital had a good idea of expected income over the life of the contract.

“The incentives built into newer contracts add an organizational risk that wasn’t there before,” said Smith. “Not only are the new incentives trying to contain costs, they also try to change clinical behaviors. You will need to know where your organization is, where your focus needs to be, and what investments you will need to make in clinical quality and patient experience to truly understand the risks and your ability to actually obtain savings and meet your quality and incentive goals.”

The governmental programs are leading the charge away from fee-for-service. This often means that Medicare and Medicaid may have a requirement that applies only to their patients.

“My doctors remind me that they treat patients and not payers,” said Mark Bogen, senior vice president and chief financial officer at South Nassau Communities Hospital in Oceanside, New York. “If they are going to be held responsible for outcomes as part of their compensation, they are not going to be able implement changes only for patients of certain payers.”

This is a concern because non-governmental payers are going to reap the benefits of changes brought about by Medicare and Medicaid requirements without sharing the savings. In a few years, when commercial insurers look for their own savings, there won’t be many left.

“I am trying to get into a shared savings program with my private companies sooner rather than later,” said Bogen. “If we manage to shrink the system over the next few years, we will have already squeezed out most of the savings. When the others finally come to the table, there will not be much left over to pay for the significant infrastructure required, which is the dilemma I am facing.”

This means the focus of the organization needs to change as these programs unfold. Unlike in the past, there may be times when your best response is to walk away.

“Institutions have to be willing and capable of walking away as much as you are to take them on,” said Smith. “Your gap analysis, where you want to go as an institution, and how fast the organization can make the investments needed to get to the next step are all important considerations.”