Hospital contracting Part 1: Change your attitude

Contract negotiations between health insurers and hospitals have always been difficult, but these days they include a significantly higher level of tension as both sides deal with the lingering effects of the recession and the potential impacts of impending health reform. Payers can improve contract negotiations by implementing two basic steps, Kerry McDonald, a health plan veteran and CEO at the New York-area consulting firm Strategic Healthcare Alliances LLC, tells me. This week, he shares Step 1:

Go in with the attitude that you need a "win-win" contract.

All too often, payers enter negotiations with a win-lose perspective, looking for a windfall: "I am going to get everything I can, and I don't care what happens to you," notes McDonald. "But both sides have to make money on the contract. I think that's doable. There is still enough money in the premiums that health plans get paid by Medicare, the state or employers to make it a profitable operation. So going in with a different attitude goes a long way to making the provider feel like you care about what is happening with them and having them work with you."

Several years ago, McDonald conducted an analysis of five different hospitals in New York. The average commercial insurance payment that these hospitals received was 65 percent of Medicare. "How did these commercial plans get these 65 percent of Medicare rates? By playing hardball," he says.

All five hospitals "are now bankrupt and out of business," says McDonald. "They had to close their doors because they didn't understand how to negotiate." The health plans involved "put that money on their bottom line and made profits."

However, these insurers might have done themselves a disservice long-term. "Where are those patients going?" he asks. "They are going to some other hospital that may or may not have a contract with the health plan and that may or may not have higher rates. Some of those patients from the bankrupt hospitals are now coming into big hospital systems in Manhattan that I know have significantly higher rates for the health plans. So basically, the health plans put the little guys out of business, and now all of their patients are going to the big guy, and they're paying more money. Is that what you want to do as a health plan? At the end of the day, are you really saving money, or now are you paying more money to the hospitals that are left standing? So health plans have to figure out a way of making their contracts win-win. It is not sustainable if you force rates down on hospitals and put them out of business."

In addition, while the five bankrupt hospitals appeared to take whatever rates they were offered in contract negotiations, they had an out that they failed to use, points out McDonald. "The data showed that more than 80 percent of the admissions to those hospitals came through the emergency room. If that's the case, and a hospital doesn't have a contract with the health plan, then they can simply go after you for their charges, which are significantly higher than 65 percent of Medicare." More hospitals seem prepared to "go to war" in this type of scenario, he notes. Most recently, HCA Health Services of Tennessee, part of Nashville-based hospital chain HCA Inc., filed suit against BlueCross BlueShield of Tennessee in Chattanooga claiming that the insurer is "unilaterally applying a large discount on the hospitals' bills" for certain non-network patients.

However, health plans have to make sure that a contract isn't a loss on their side either. "Some hospitals will try to use their leverage to increase the rates, and when they do that, giving on the rates is not the right way to go," advises McDonald. Health plans sometimes will compromise without "doing the analysis they need to do to determine the utilization from that facility and how it's going to affect their bottom line," he says. "One way around that is to begin to look at hassle factors. For example, you could let the hospital not have to call for authorizations for certain services. But try to find some other way in the language and the management of the contract rather than giving on the rates. When you put your cards on the table with providers, I have found that they will work with you. Show them your analysis and let them see that the rates they are asking for will cause you to lose money. If they don't care about that, there are a lot of ways to play the game to get them to begin to change their view of that contract. For example, you can peel away a couple of their large admitting practices and get them to use a different hospital." - Caralyn