High-Stakes Contracting

June 24, 2011
If you've ever felt that negotiating or renegotiating a managed care contract was more like a high-stakes poker game than a business deal, you're

If you've ever felt that negotiating or renegotiating a managed care contract was more like a high-stakes poker game than a business deal, you're not alone.

Rather than practicing the fine art of negotiating, a lot of CFOs or their directors of managed care try to out-wit or out-bluff the payer's representative whom they view as an opponent.

If that's your strategy at the bargaining table, you really are taking a big gamble, says Maria Todd, vice president and senior project leader at Brooklyn, N.Y.-based HealthPro Consulting. "You can blink first. You can be impatient. If you don't do your due diligence beforehand, you can leave a lot of money on the table."

An outspoken critic of the way managed care negotiations are typically handled, Todd says CFOs need to take a more active role in negotiating managed care contracts. "The CFO is so involved in compliance, Medicare and cost-containment that they're stretched too thin," she says. "I think, for the most part, they don't see it in the realm of what they have to do."

How big a role CFOs play in these negotiations often depends on the size of the institution, says Ellen Stuart, a partner in the Denver, Colo. law firm, Berenbaum Weinshienk & Eason. "In many smaller hospitals — 200 beds or less — the CFOs are involved." But in larger hospitals, there's usually a managed care department staffed by more than one person who will read the contract and participate in the negotiations, she says. Additionally, larger hospitals often have clinical department heads read those parts of the contract pertaining to specific services offered by those departments in order to gather more feedback before formal negotiations begin.

Nathan Kaufman, managing director of San Diego, Calif.-based Kaufman Strategic Advisors LLC, agrees. "The smaller the hospital, the more likely negotiations will be relegated to the CFO. But CFOs are generalists and this requires subspecialty expertise," he says.

If the CFO is not personally involved in the negotiations, Todd suggests that each contract has a "cheat sheet" or "answer sheet" that summarizes the salient points of the contract which then can be reviewed by the CFO.

There also should be a written contracted reimbursement strategy that is signed off by the CFO, CEO and board of directors, she says. Within this strategy should be a set of parameters such as, "If it has this, we're not signing. If it has this, we'll sign," she explains.

Todd does not advise calling in a third party to actually do your negotiations. "A hired gun can never defend your money as good as you can," she says. Plus, having someone from outside the hospital doing your bidding "makes the hospital look weak."

But she also notes: "Many CFOs have not had formal training in negotiations. Analyzing the contract prepares you for the contract. But you need negotiating techniques."

If a CFO needs to hire a consultant, Todd says their role should only be that of a coach or someone who "quietly sits with them during negotiations and gently kicks them under the table."

However, help also can come from within the hospital, she says. "Board members generally come from business, so the CFO can use their expertise. That's not showing weakness. That's showing resourcefulness."

Kaufman also recommends hiring an advisor. "It could cost them $20,000 to $50,000 for their expertise, but with $1 million to $2 million on the table, it's worth it."

Building relationships

One way to avoid confrontational politics at the negotiating table, says Stuart, is to develop a sound relationship with each of your payers.

That strategy appears to be working for Len Dryer, CFO of Children's Hospital in Denver. At 250 beds and with net revenues of over $500 million, Children's Hospital has over 50 managed care contracts, Dryer says. But he stresses that negotiating the best terms is easier if a relationship exists between the parties.

"You've got to spend time together," he says. "They need to understand your institution and vice versa. If we know what they're selling, we can adjust our contracts. What I've done is make sure we've developed good partnerships. I've spent years building partnerships because we really are partners."

But Dryer admits that he often will nurture these relationships "above the level of the contract." Meeting for lunch or playing a round of golf together is not out of the question, he says.

As for his own role in negotiations, Dryer says it depends. "I have a staff of five in the managed care department who do contracting. But that doesn't mean I don't get involved if we're stuck on price or structure. The more I stay out of it the better. When I have to come in, I can either be the good guy or the bad guy."

Sticking points

Consultants advise CFOs or their designated representatives to read the fine print. "Most CFOs focus on the figures but not on the language," Todd says. "Many health plans give you a rate but hide the 'gotchyas' in the language of the contract. All too often the loopholes are buried in the language."

Dryer knows that from experience. "We've had some payers recently who ratcheted-down on radiology tests. And it was in the language."

Dryer's response to the payers was simple and straightforward: "If it's medically necessary, we'll do the tests and you'll pay."

Another problem associated with language is that there can be "cross communication" between negotiators because each views certain terms in the context of their working environments, says Stuart. One example is basing payments on DRGs.

"Each managed care company, for example, has their own DRGs which are not necessarily the same as Medicare's DRGs," she says.

And that's something CFOs need to consider when balancing reimbursements from Medicare and managed care companies, says Randy Cook, senior medical practice consultant at State Volunteer Mutual Insurance Co. in Brentwood, Tenn.

"You need to know what you're getting paid on a net basis," he says. "You need to do an analysis for net rates for all payers including Medicare and Medicaid. And part of that analysis should look at what your cost is for every service, because costs not paid by Medicare must be shifted to commercial payers."

Stuart adds: "Because you're budgeting your revenue, you need to know where your revenue is coming from and what revenue you can anticipate, depending on the percentage of your managed care."

Dryer says he's found it easier to spread contracts over the year, anticipating the percentage increase of each at time of renewal when he's drafting his annual operational budget.

But Kaufman says, "The rule is you're not going to get any increase in rates until you terminate the contract. If you're looking for a significant increase over 5 percent, you need to terminate the contract and renegotiate."

But a hard and fast rule here won't work, says Dryer, noting, "It all depends on your relationship with the payer."

Richard Rogoski is a contributing writer based in Durham, N.C.

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