Medical management team discusses data and technology strategy in a conference room

The relationship between a health system and a managed care organization is one of the most important levers the system can use when looking for more revenue. As noted in our related article (“Hospitals, other providers struggle as reimbursement increases don’t address all economic challenges”) economic factors like the shortage of healthcare workers and high inflation driving up costs for basic supplies (in some instances, 40% to 50% higher costs) have helped drive increases in provider operating losses over the last year. While a 20% increase from managed care companies and other public and private payers would certainly help close the gap providers are facing, that’s not a likely result at the payer negotiating table. 

Providers, when negotiating with a managed care company, have to remember to focus on a “cost per case” and not “cost by department” or any other metric. Managed care companies are paying for discreet services (a colonoscopy, a medical surgical day, a maternity stay) and they want to understand a provider’s costs at that level. To get more than a cost-of-living increase from a managed care payer, a provider needs to do the right data analytics to increase their chance of success. 

Managed care payers may have a mindset that they are typically paying a 110% to 200% of what Medicare will pay to most healthcare systems, and will be surprised if a provider counters that this payment level still doesn’t cover their costs. Providers have to negotiate differently, noting that Medicare has, over time, been covering less of a provider’s total costs (down to only 70% of costs, by some estimates) so commercial payers have to make up the difference. 

Seesawing demand for services 

The pandemic had an odd effect on the healthcare system. In 2020, most demand for elective services disappeared, and providers focused on COVID-19 patients and maternity care and emergency care. In 2021 and 2022, demand for deferred elective services skyrocketed. This has made it more difficult for providers to model what their reimbursement needs will be as they enter into negotiations with payers. In addition, how providers offer care has changed; for example, telehealth and hospital-at-home options have become more popular and possible for providers and patients. 

At the same time, since the pandemic, payers seem to be holding the line on increases out of concern of setting a precedent of higher increases for one or two systems in a geography that could not be sustained if rolled out to all participating providers in a given area. 

While providers try not to get bogged down in specific service line payments when negotiating contracts with payers, it may become clear that certain service lines will remain a drag on the bottom line. Providers may look to sell off or eliminate some service lines to focus on the mission critical services for their patient populations. 

Challenge of value-based care 

Value-based care will remain part of the reimbursement portfolio for many providers. (See our article “Has the time passed for value-based care to show its value?”) The challenge for providers is carefully watching the metrics related to the number of patients covered by value-based care, the nuances in quality and efficiency measures by different managed care payers, as well as the overall costs of care. Again, accurately measuring those metrics has been affected by the wide divergence in the types of patients seen and the types of care provided in the last couple of years. 

From the payers’ perspective, in trying to limit reimbursement increases, they will note that they are trying to be good stewards of their customers’ – employers’ – money. While payers were willing to be more accommodating about some things in recent years – like providing free COVID-19 testing or vaccinations – that attitude is changing as patients, providers and society in general has adjusted to the reality of COVID-19. 

For more information on this topic or to learn how Baker Tilly’s healthcare specialists can help, contact our team. 

David A. Gregory
water drop with ripples in a calming outward flowing wave
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