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Evaluating the Performance of your Managed Care Contracts

Many organizations leave the task of ensuring compliance/evaluating performance of their contracts to automated contract management systems. Ultimately, do you really know what your contracted payers are actually paying?

By George Kelley, Chief Operating Officer

Hospitals and health systems devote a significant amount of time, energy and planning into the preparation and negotiation of managed care contracts. And rightfully so. Over the past decade, Medicare managed plan membership has grown more than 30%, and there continues to be an upward trend. In many states, Medicaid managed plans are following a similar growth trajectory. And let’s not forget the established strength of commercial membership. This all adds up to a significant portion of an organization’s net revenues tied to contracted payers.

Once the hard work of establishing a favorable contract is completed, what is the next step? Surely, the work is not finished. Many organizations leave the task of ensuring compliance/evaluating performance of their contracts to automated contract management systems that are not designed to ensure compliance with complicated contracts. The goal of many of these tools is to assist in valuing the receivable. Tangible feedback from contract management systems does often end up being distributed among various departments (case management, HIM) for follow up, especially as it relates to denials management, but rarely can a contract management system provide a true financial picture of the realized value – revenue associated with your hard-won fight during contract negotiations. Ultimately, do you really know what your contracted payers are actually paying?

The first step toward answering this question can be a simple one – calculating realizable revenue from your contracted payers. Once claims have been fully adjudicated and accounts have been written to a zero balance, you can calculate an average payment per case and per day for inpatient cases. (Inpatient is the easiest place to begin.) Do these two numbers (average payment per case and per day) look anything like your hard-fought contracted amounts? If so, great news – you have negotiated a manageable contract, and most importantly, the payer is living up to the terms of the contract. If not, well, join the club. Based upon our experiences, the former is rare; the latter is the more common finding.

In those instances where your payer does not pass step one, a robust approach should be employed to verify compliance with the contract and to provide detailed information where contract compliance is lacking.

Hospital information systems produce a significant amount of financial and clinical data and the usefulness of this data varies – especially when it comes to validating contract compliance. Getting a handle on contract compliance beyond a contract management system is almost always required; too often contract management systems do not arrive at a true expected payment.

Bottom line – hospital finance departments have a wealth of information that enables them to ensure that their facility is being paid at the agreed upon contracted levels, but too often they don’t utilize this information effectively.

CBIZ believes that the best method is to begin your analysis from the source – with the detailed models that were utilized to negotiate the completed contract. Next, it’s imperative to update the established models with current claims data to verify where payments meet contract terms and where variances exist. Here are some specific aspects of contract compliance that should be vital to your process:

  • Summarization of the specific issue – with dollar impact identified
  • Detail from the model and the agreed upon contract terms as supporting documentation
  • Patient-level information to present to the payer

This approach enables you to get right to the heart of payment variances by comparing paid claims data to priced data based on your negotiated model. It also eliminates “translation” issues that result from the contract being built in the contract management system, and enables you to apply the nuances of any terms negotiated that would be incorporated into your base model.

When variances are identified, having the modeled data and transaction data at a patient or encounter level enables you to drill down to identify the source of the variance. Often times, payers institute specific issues related to acceptable codes, or employ new policies that will impact net reimbursement. These issues often result in divergences from the original contracted terms.

The most effective way to review contract performance is to conduct this type of review on a quarterly basis, which provides sufficient time to address issues and still keep within “timely” windows, while allowing enough time for claims to be paid. If claims are not paid timely, your first issue with contract compliance is identified! Employing this process quarterly will help you to keep the verification process at a high enough level to identify performance while providing a clear picture of actual-to-contracted payment.

Following this approach will enable you to identify larger-scale issues to address with each payer – and will effectively move the discussion up the ladder, avoiding a back and forth discussion focused at the claim level.

Issues will almost certainly arise as you evaluate your organization’s contract compliance: payer processing issues, confusion implementing new contract terms, beneficiary process issues, and payer payment reduction initiatives. But that is to be expected. Resolving these issues will ensure that your contracts are working appropriately and compliantly.

As contracted payer membership grows, hospitals and health systems need to be proactive in their approach to contracting issues that arise. Staying in front of payment issues and having the detail to support your case is vital for your organization to achieve optimal contract compliance.

For additional information please contact George Kelley at or at 609-918-0990.

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