Strategic renegotiation of managed care contracts - Managed Care

Healthcare Financial Management, Nov, 2001 by Dennis J. Scotti, David A. Gregory

Given the myriad revenue and cost pressures faced by today's organizational providers, it behooves healthcare financial managers to identify opportunities to improve the terms of their managed care agreements when renewal time is near. Selection of a contract renegotiation strategy should be preceded by a focused analysis of situational variables and followed by conscientious performance monitoring. Through careful consideration of the compatibility of their goals, core values, and operational capabilities, health care providers and managed care organizations can craft agreements with the potential for sustaining meaningful long-term partnerships.

Most experts agree that the contractual relationships between healthcare providers and managed care organizations (MCOs) have not matured as expected from a strategic, financial, or operational perspective. In fact, the integrity and longevity of many managed care contracts actually have deteriorated due to the incompatibility of the parties that initially entered into the agreements. Both providers and MCOs share the blame for this trend and need to recognize the possible negative consequences of poorly constructed agreements.

Through careful reconsideration of the compatibility of their goals, core values, and operational capabilities, providers and MCOs can forge meaningful, long-term partnerships.

The following four-phase process can be used as a guide to conducting appropriate contract due diligence and composing an effective managed care contract portfolio:

* Phase 1: Situational analysis (external and internal).

* Phase 2: Contract-fit assessment.

* Phase 3: Contract renegotiation strategy selection.

* Phase 4: Contract maintenance and monitoring.

Phase 1: Situational Analysis

Whether preparing to negotiate a new managed care contract or renegotiate an existing contract, it is critical for any provider seeking to improve the performance of its managed care contracts to perform a brief, but focused, situational analysis to identify its strengths, weaknesses, opportunities, and threats (SWOTs). A priority for this SWOT analysis should be to review the product lines and financial condition of regional MCOs, relative market share of competing providers, health plan requirements of local employers, and service expectations of consumers. It also is important to assess the potential impact of legal and regulatory trends on the renegotiation process.

The organization's current and desired market position also should be established. A comprehensive profile of market objectives should be defined in terms of geographic coverage, market share, payer mix, and scope of services. Conscientious definition of market-position objectives will help ensure that these key parameters receive the attention they deserve during the fit-assessment and strategy-formulation phases of the contract-renegotiation process.

Internal organizational issues also should be examined. Management should appraise the terms and conditions of the organization's existing contracts, operational capabilities for administering these contractual covenants, and the ability of MCOs to do the same. This appraisal includes asking questions such as:

* Can the organization identify when an MCO has breached the terms for claim-payment timeliness?

* Is the organization able to bill the MCO for the cost of implantable devices and reconcile payments it may receive for these devices?

* Does the organization's patient accounts department know when the utilization management area concedes a claim appeal?

To obtain answers to these questions, it may be necessary to visit the departments involved in administering the organization's managed care agreements, gather the views of staff, and identify those operational issues for which the impact of change would be greatest and for which improvement is probable within the context of the organization's culture.

Phase 2: Contract-Fit Assessment

Using results of the SWOT analysis, the organization can begin to assess the fit of its contracts at the portfolio and individual levels. This is the most critical phase of strategically preparing for contract renegotiation. An effective review of contract fit will permit the organization to prioritize and attain its strategic goals while minimizing operational stress.

Although many organizations would assert that they do perform such reviews, the structure and focus of the review often is not aligned with the strategies and operational realities of the organization. For this reason alone, the contract attributes of goal compatibility, operational compatibility, flexibility and durability should be assessed to evaluate the true value of a particular contract to the organization.

Goal compatibility. A review of goal compatibility should take into consideration the following factors:

* Profitability--Does the contract support the profitability goals of the organization's contract portfolio or undermine the attainment of the organization's goals?

* Market share--Does the contract contribute to the organization's competitive advantage in targeted markets?