Your Payer Contracts: Money Makers or Money Drains?

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 former 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. 
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.
Visit TMA’s Contracts webpage for more information. 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.   


Last Updated On

March 21, 2022

Originally Published On

September 09, 2015

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