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Effective Contract Negotiation

The art of letting the other side have it your way...

Managed care contracts affect a hospital's bottom line; yet CFOs may sometimes sign on the dotted line due to a limited availability of resources or sufficient time to truly analyze a proposal. When a careful and comprehensive review of payer contracts is not done, a hospital's bottom line may potentially be put at risk.


1.  Focus on having a full working understanding of the payor.

2.  Keep your financial goals firmly in perspective.

3.  Don't undersell yourself; Negotiate a Smart Rate.

  • Always start with a higher number than you expect to receive.

  • Never agree to the original proposal.

  • Always negotiate above your break-even point.

4. Accept compromise as a necessary component.

Although you may eventually have to accept rates just above your break-even point to get the contract, never start there during the negotiation process. If you start low, payers will do their best to keep you there.


1.  Know Your Market and Your Competition.

  • Using EHR system reports of health outcomes can be an effective negotiation strategy.

  • Highlight the value that you bring to place yourself in a position of strength.

2.  Complete a cost analysis.

  • Understand your raw costs and profit margins.

  • Establish charges based on the combined costs for Materials, Overhead, Staffing and Labor.

  • Establish a desired profit margin.

  • Compare actual costs vs contracted rates then decide which contracts should be: Kept, Re-negotiated or Discarded

3.  Determine and analyze your Key Procedures.

  • Spend time & effort upfront to analyze your key codes. (These are the top 20% of your codes that drive 80% or more of your revenue).

  • Always use weighted averages.

4.  Audit your Charge Master quarterly.

  • Insure that codes and changes to Medicare and payor rates for existing codes are current.

  • Focus on your Key Codes (usually about 15-40 codes total).

  • Monitor actual revenues to ensure payments are consistent with contracted rates…Review Integrity.

5.  Generate a complete payor profile.

  • Always keep in mind the payor's goal for the negotiation is to limit exposure and minimize their cost to the hospital.

  • Determine what new products they plan to promote.

6. Scrutinize internal claims data.

  • Review a year of claims history before negotiations

  • Determine how much revenue the payor brings to your organization

  • Find out how that breaks down by: Inpatient care, Outpatient care, and Various service lines

7. Engage in Denial Management.

  • Review denials to reveal recurring negative patterns the payor should address.

  • Survey your revenue cycle staff to uncover useful information about current payor issues.


1.  Avoid:

  • Provisions that allow the payer to arbitrarily adjust and pay claims at a lower level than submitted.

  • Provisions that allow for unilateral changes, allowing payers to do anything they want. (Unilateral changes regarding compliance issues are acceptable, but not with regard to financial issues. Any payer refusing to remove these provisions is revealing evidence to potential future problems.)

  • "Lesser of billed charges" clause.

  • Provisions that allow for unlimited overpayment recovery or “take backs” except for fraud or abuse.

2.  Watch for contract terms that could cost you money.

  • Access to other networks or products attached to this contract

  • Timely claims filing

  • Time frames for filing appeals

  • Network fees

  • Patient billing requirements

3. Be aware of any contract termination provisions.

  • Early termination penalties

  • The ability to terminate without cause

  • The length of notice required when terminating a contract

4.   Include Auto inflators in reimbursement.

5.   Identify any charge increase limiters.

6.   Avoid vague contract language.

7. Take note of discounts provided to “affiliates” in your contract.

  • Ensure that your contract includes an addendum listing all affiliates included as parties to your contract to prevent the network from being “leased” or subject to blind or silent PPO activity.

  • This listing requires regular updates to remain current and must be requested by the provider (which is rarely done).

8.  Know When to Walk Away

  • Some national payors begin contracting at rates as low as 40% of Medicare fee schedules.

  • Don’t be afraid to reject contract rates offered below your break-even point.

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While successful negotiating managed care contracts takes a lot of patience, determination, drive and perseverance, it offers you an excellent opportunity to potentially increase revenue without adding to your workload or that of your staff.


For more information, contact Medical Recovery Services

(816) 229-4887

Medical Recovery Services is a full-service revenue cycle company assisting

hospitals and surgical centers in achieving their full earning potential since 2004.

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