A contract renewal letter arrived at a cardiology practice from one of their largest commercial payers. Inside was a proposed fee schedule showing rates that had not changed in four years. The practice manager signed it and sent it back the same week. Nobody ran the numbers. Nobody compared the rates against Medicare. The fact that no one had asked if there was room for negotiation, however, has occurred repeatedly throughout all sizes and specialties of medical practices each and every year. Payers’ contract renewals happen quietly; physician reimbursement rates remain unchanged or rise by just 1-2% annually; and physicians who would never agree to be reimbursed at a level below their market salaries will happily accept sub-market (below their usual) reimbursement levels simply because the contract was sent in an envelope and they didn’t know what to do with it.
Negotiating payer contracts represents one of the highest return opportunities available to a medical practice. An increase of 10% in reimbursement rates through a practice’s major commercial contracts can equate to over $100,000 per year in additional net revenue without increasing patients, procedures or employees. However, this does not occur unless providers have access to actual data regarding their reimbursement history, understand their negotiating leverage and are willing to wait until the final terms of the contract have been defined prior to agreeing to the initial offer.
This guide will provide information relative to how payer contracts function, provide details on how to prepare for negotiations, identify true leverage areas and detail why many practices leave so much money “on the table” due to lack of knowledge about the applicable rules governing the process.

How Payer Contracts Function & Why They Are Important

Each time an insurance carrier makes a payment to a networked provider, the payment amount is determined based on the applicable fee schedule contained within a previously negotiated contract with that provider. This fee schedule is not equivalent to the Medicare Physician Fee Schedule. Rather it is a separately negotiated private agreement between the provider and payer which establishes the private fee schedule for each specified service included within that contract.
Some carriers utilize their fee schedules by establishing them as a multiple of Medicare and express these fees as a percentage of Medicare. For example, if a carrier indicates its fees are 120% of Medicare, then the carrier agrees to reimburse the provider 120 cents for every dollar Medicare would reimburse for the same service.

Other payers use entirely separate fee schedules with their own internal rates. Either way, what was agreed upon in the original contract is what gets paid until somebody renegotiates.

Here is what makes this matter so much: most contracts auto-renew unless one party acts. A contract signed five years ago, with a rate structure that made sense at the time, may now be significantly below market because costs have risen, Medicare rates have been updated, or the practice has grown in ways that change its negotiating position. The payer is not going to call and offer better rates. The practice has to initiate that conversation.

The Preparation That Has to Come Before Any Negotiation

Walking into a payer negotiation without data is how practices end up accepting whatever the payer offers. The preparation phase is where most of the real work happens, and it determines whether the negotiation is a conversation between two informed parties or a one-sided rate-setting exercise where the payer controls all the information.

Know What You Are Currently Getting Paid

The starting point is a complete picture of current contracted rates. For every payer the practice contracts with, the fee schedule should be on file. If it is not, request it from the payer before doing anything else. A practice that does not know what it is currently being paid for its highest-volume CPT codes has no baseline from which to negotiate.

Once the fee schedule is in hand, run it against the Medicare Physician Fee Schedule for the same codes in the same geographic area. Express each rate as a percentage of Medicare. A code that pays 95 percent of Medicare from one payer and 130 percent of Medicare from another payer tells you where the floor and ceiling are in your market. Rates that fall significantly below Medicare are the first target for negotiation.

Also pull twelve months of actual paid claims data from each payer. The fee schedule shows the rates. The claims data shows what was actually received after modifiers, bundling edits, and downcoding. Sometimes those numbers differ significantly, and the discrepancy itself becomes a negotiating point about payment accuracy and contract compliance.

Know Which Payers Are Worth Negotiating With

Not every payer represents equal leverage. Start by ranking your payers by revenue contribution. The top two or three commercial payers typically account for the majority of non-Medicare commercial revenue. Those are the contracts that, if improved by even five or ten percent, move the practice’s financials meaningfully.

Payers also vary in how actively they negotiate. Some regional Blue Cross Blue Shield plans have a long history of negotiating with provider groups. Some national payers have relatively rigid fee schedules that do not move much for smaller practices. Knowing which payers have historically been open to negotiation in your market saves time and helps set realistic expectations.

Know Your Market Position

Leverage in payer negotiations comes from the payer’s need to have the practice in their network. A practice that treats a high volume of that payer’s members in a geographic area where few alternatives exist has real leverage. A practice that is one of twenty similar groups within five miles of each other and treats a small share of the payer’s members has less.

Before entering negotiations, understand what the practice’s market position actually looks like for each payer. How many of that payer’s members are seen at the practice? Are there access issues in the area that would result in member dissatisfaction if the practice were not in network? Is the practice the only or one of very few providers of its specialty covered by that plan in the relevant service area? Each of those factors changes the leverage equation.

What Can Actually Be Negotiated

Most providers think of payer contract negotiation purely as a rate discussion. Rates are certainly the most important financial element, but contracts contain many other provisions that affect revenue and practice operations.

Base Fee Schedule Rates

The fee schedule is the core of the financial negotiation. The goal is to get each code’s rate as close as possible to or above the market benchmark for that specialty in that geography. When asking for a rate increase, come with specific numbers. Not a general request for better rates. A specific proposal: a list of high-volume CPT codes, the current contracted rate for each, and the requested rate with the percentage-of-Medicare comparison.

Payers respond much better to specific, well-supported proposals than to general requests. A proposal that shows the practice’s rate for CPT 99214 is at 88 percent of Medicare while the regional average for similar practices is 112 percent of Medicare gives the payer something concrete to respond to.

Carve-Outs for New Services

When a practice adds a new service line or procedure that is not well-represented in the existing fee schedule, a carve-out rate can be negotiated specifically for that service. New procedures, new diagnostic technologies, and new care management programs that were not in the original contract often get paid at default rates that are lower than they should be. Negotiating a specific rate for those services at the time they are being added to the practice’s capabilities is far easier than trying to renegotiate after the fact.

Timely Payment Provisions

Most state insurance regulations require payers to process and pay clean claims within a specific number of days, typically 30 to 45 days. The contract should include language that holds the payer to these standards and specifies what happens when they fail to meet them, including interest on late payments. Many standard payer contracts include this language already. The question is whether the practice is actually monitoring payment timeliness and enforcing the provision when payers fall behind.

Audit and Recoupment Provisions

Payer contracts include language governing the payer’s right to audit claims and recoup payments they determine were improper. These provisions can be quite one-sided in the payer’s favor in standard contracts. Negotiating the audit lookback period, the process for disputing recoupment demands, and the timeframes within which recoupments can be initiated are all reasonable asks in a contract negotiation. A recoupment provision that gives the payer a rolling seven-year lookback window with no dispute process puts the practice in a very vulnerable position.

Network Participation Terms

Most in-network contracts include most-favored nation clauses or similar provisions that affect how the payer can be charged compared to other payers. the actual negotiation, understand how to write your initial proposal and know what the response cycle looks like.

Start Negotiations With A Written Proposal

Practice-to-payer (payer-practice) negotiations generally succeed much better when they begin as a written proposal from the Practice. Verbal meetings about rates between the Payer and Practice prior to receiving a written proposal generally do not achieve success because the verbal meeting does not provide the practice with an opportunity to anchor its prices. A written proposal establishes specific numbers, communicates to the Payer that the practice has prepared a serious and professional submission, and provides a base-line reference point for the Payer’s response.
The written proposal should include:

a list of all CPT Codes that the practice wants to have increased; each Code’s current rate;
each Code’s new rate; and a few sentences justifying why each code should have a higher rate compared to the national average.

Limit your submission to one-two pages, as submissions that contain lengthy explanations tend to demonstrate a lack of confidence.

Know The Response Cycle

In most cases, Payer-Practice negotiations occur over multiple exchanges. Each exchange consists of submitting a proposal, allowing the payer to evaluate and forward it to their Contracting Department for evaluation and recommendation, submitting a counter-proposal from the payer, continuing to engage in discussions until a mutually acceptable agreement is reached, and executing the negotiated Fee Schedule. In general, this entire process can take anywhere from 30-120 days (or longer depending on complexity).
Begin reviewing your payer contracts at least 90 days prior to expiration. Ideally you want to give yourself enough lead-time so that you don’t feel pressured into accepting unfavorable terms. If you’re unable to negotiate favorable terms prior to the expiration of your contract, the Payer will know that you need access to them for continued participation in their network, and will use that knowledge to create a “take-it-or-leave-it” type offer.

Document All Communications

Each communication with a Payer regarding a negotiation should be documented. Email communications, letter communications, Meeting Notes, etc. All communications regarding negotiations should be saved. Once a final contract is executed, save a copy of the executed contract. The executed contract should be retrievable when you’re contacted by a third party (i.e. patient representative) when a billing dispute arises two years after the last payment was made. A Practice that cannot provide evidence of their executed contract(s), loses significant leverage when contesting disputed claims.

Know When To Get Help From Specialists

Most large medical practices and hospital systems hire legal counsel or specialize in working with payers/contracts for negotiation purposes. Smaller practices however, may find retaining a lawyer or consultant beyond their financial capabilities. However, for those smaller practices who wish to renegotiate their contracts for significantly improved fees or have issues with existing contracts, it would be well worth hiring such help.

Common Mistakes in Payor Contract Negotiations

• Signing renewal contracts without reading them. Payers sometimes add new provisions, change rate structures, or modify audit rights in renewal documents. Reading the renewal as carefully as the original contract matters.
• Not tracking contract renewal dates. A contract that auto-renews before a renegotiation can be initiated locks the practice into the same rates for another contract term.
• Negotiating without market data. Asking for better rates without showing what market rates are for comparable practices gives the payer no reason to move.
• Accepting the first offer. Payers build negotiating room into their initial proposals. The majority of the time an agreement (contract) is accepted immediately, it will likely represent one of the lowest possible rates the provider can agree to.
• One of the biggest mistakes providers make is to focus solely on all new contracts and ignore the fact that many providers also need to renegotiate the older contracts. Many times the largest increases in reimbursement rates occur by renegotiating contracts which have been in effect for several years and do not reflect current market conditions.\
• Another mistake providers make is not verifying if the negotiated rates are actually being applied to each claim payment. If a provider has negotiated a rate increase in writing, this rate should be reflected in each of the claims paid after the rate was changed. Verifying what rates are being applied to each claim after a provider has increased its contracted rate verifies that the system used by the payer was properly adjusted to reflect the new contracted rate.

Final Thoughts

Negotiation of payer contracts is a skill set, not a personality trait. Negotiation does not necessarily mean you have to be aggressive or confrontational. Preparation, valid data, reasonable requests, and the willingness to take your time during the negotiation process are key components. Providers who include contract management as part of their daily/weekly/monthly business operations, develop clearly defined written proposals based upon real numbers, and communicate with payers regularly, instead of just before renewing a contract, will generally achieve better reimbursement rates then those who simply view contracting as signing on paper and filing away.