Your Payer Contracts: Money Makers or Money Drains?

A 2014 TMA survey of Texas physicians revealed that Texas doctors have a median of six preferred provider organization contracts and one HMO contract, and a majority are contracted with at least one of the five major payers. The question is: Is each of your contracts profitable for your practice?

“Don’t just accept every health plan contract you are offered without evaluating its impact on your practice,” warns Donna Kinney, TMA’s director of research and data analysis. “Determine which contracts are profitable and which are not. For existing contracts, it may be prudent to terminate or renegotiate those that are unprofitable.”
 
Here is a simple way to start your evaluation of existing contracts:
 
1. Calculate your practice’s total cost (including physician compensation) as a percent of charges:
 
Cost as a percent of charges = Total cost ÷ Total charges
 
2. Calculate the yield for each contract as a percent of charges:
 
Contract yield = Total contract payments ÷ Total contract charges
 
3. Compare the yield for each contact with your result in No. 1 above.
 
Say, your practice’s total charges for a given period are $16,000, and your costs are $10,000. This yields a cost as a percent of charges of 63 percent. When you calculate the yield for each contract, you discover that two of your contracts pay you less than 63 percent of your charges under that contract. Those are unprofitable contracts!
 
A lot of factors need to go into your final evaluation of a contract, such as how much volume it represents, your overall payer mix, and information about each contract’s performance. You can use your practice management system to track such traits and the number and reasons for claim denials and appeals, the average time for claims payments, coding and fee changes, and requests for additional information. Ask staff to rate payers in terms of administrative hassles, as well.
 
The data may reveal that one or more payers demonstrates consistently poor performance or creates additional administrative burdens for the practice. Documentation of delays and payer challenges can put you in a better bargaining position during contract negotiation, if you decide to go that route. 
 
The TMA survey said in the previous two years, 49 percent of respondents had attempted to negotiate the terms of a health plan contract. Of those who tried, more than half (55 percent) were “sometimes,” “often,” or “always” successful in getting changes in a plan’s contract language, payment terms, or both. 
 
For new contracts, evaluate the contract rate offered against your most frequently billed CPT codes, and consider the insurer’s policies regarding prior authorization and other potential hassles that could affect your commonly provided services.
 
“Although most businesses will sometimes sell goods or services at below their cost, that strategy is generally a limited or temporary one designed to build customer base or to reduce excess inventory or capacity,” notes a white paper from TMA’s Division of Medical Economics. “Any business that consistently sells goods or services at less than their full cost will eventually become insolvent.”
 
Visit TMA’s Contracts webpage for more information. In addition to the white paper, Physician Prices, Fee Schedules, and Managed Care Contract Offer and Acceptance, you’ll find analysis of typical contract clauses and more. If you want help evaluating a contract, consider using a contract evaluation service, such as the one offered by Michael Z. Stern, JD, who offers a special price for TMA members.   

Published Sept. 24, 2015

Last Updated On

September 24, 2015

Related Content

Contracting | Managed Care