Commercial Payer Contracting Considerations

June 10, 2024

Contract negotiation

Ronald Hirsch, M.D., is vice president of the Regulations and Education Group at R1 Physician Advisory Services. Dr. Hirsch is a member of the Advisory Board of the American College of Physician Advisors, and the National Association of Healthcare Revenue Integrity, a member of the American Case Management Association, and a Fellow of the American College of Physicians. He is co-author of the Hospital Guide to Contemporary Utilization Review.

A case for going beyond the numbers

Contracting with payers is a crucial part of hospital operations. Without a contract, the hospital will lose access to patients and when care is provided, payment will be delayed and at an unknown rate. Although negotiating payment rates is one of the principal issues to discuss, there are other aspects of the contract that can have significant impact on revenue, operations and quality of care.

Amber Smith, a nurse denials and appeals analyst at Ascension Wisconsin, saw a need for her input into the contracting process and asked for advice. She saw many of the same issues encountered on a regular basis by her hospital case management and utilization review teams. To optimize commercial payer contracts for quality care delivery and clinical outcomes as well as earned reimbursement, hospitals and health systems should always seek the input of the case management and utilization review teams prior to contract negotiations. Here are the key clinical-oriented factors to consider in contracting:

Assess criteria used for determining inpatient admission

As of January 1, 2024, all Medicare Advantage plans must follow all provisions of the Medicare Two Midnight Rule. This change is an opportune time to readdress any contract provisions that are contrary to this regulation and insist that commercial payers use this same admission criteria for all their products, not limiting it to Medicare Advantage. Having one set of criteria for all patients would greatly simplify processes and ease the burden placed on physicians and utilization review staff who must often use different criteria for different insurance products. That confusion leads to an increased risk of denial and a prolonged and costly appeal process. It makes no sense that two patients in the same room with the same illness receiving care from the same staff would have a different admission status simply because their health insurers have different rules.

Prior authorization should mean payment authorization

Insurers commonly use prior authorization processes to ensure the medical necessity of services provided. While it seems inherent in the name, services that are provided after obtaining prior authorization still get denied for payment when claims are submitted. Contracts should be written or modified to indicate that if prior authorization is obtained, the payer cannot deny payment for the service at the approved status unless there are credible accusations of fraud. Likewise, the contract should specify that if prior authorization is not obtained and the service is provided, the provider should be permitted to provide proof of medical necessity and have the service approved for payment. While surgeons do their best to anticipate what surgery will be necessary, a change in plan during a surgical procedure should not require contact with the insurer to get a new authorization.

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Readmissions must follow CMS policies

CMS has a comprehensive program to reduce readmissions, the Hospital Readmission Reduction Program (HRRP), that calculates a hospital’s expected 30-day readmission rate for specific diagnoses, compares that to the actual readmission rate, and imposes a penalty over the next three years if the actual rate exceeds the expected rate. Contrary to common belief, every readmission, except those occurring on the same calendar day for the same reason, are paid as a second full admission payment. Many payers claim to follow the CMS program but then deny payment for every readmission within a specified time period, often that same 30 days. Contracts should specify that all readmissions will be paid in full, excepting those where the hospital is clearly at fault for the readmission, such as if the patient was discharged in an unstable condition or discharged without an appropriate discharge plan.

Delays in discharge caused by payers should be paid

Finance often works closely with hospital staff to optimize length of stay.  Yet every case manager can tell stories of patients who have a safe discharge plan but whose insurer has not approved transfer to the nursing facility or provided approval to the home care agency to provide home health services, with the insurer reporting they have 72 hours to provide approval. Many of these payers will not accept a case for approval until the patient is stable for discharge, again extending their length of stay and exposing the patient to continuing risk of complications and increasing the boarding of emergency department patients. Contracts should address this by requiring a rapid turn-around time for such approvals and providing an added daily payment to the hospital for all days the patient remains in the hospital when approval for post-acute care is pending, with a clear process to bill for such delays.

Defining diagnoses is not the domain of payers

Clinical validation audits, questioning the validity of the principal and secondary diagnoses on claims, is a common method used by payers to downgrade the inpatient claim and pay a lesser amount. In many of these cases, the payer has developed their own definition of these diagnoses. These diagnosis definitions often differ greatly from those developed by professional societies or medical experts and seem to be designed to make meeting the criteria more difficult, thereby allowing the payer to pay less for the admission. Contracts should require that clinical validation audits be based solely on definitions accepted by professional medical societies or consensus definitions published in the peer-reviewed medical literature, forbidding proprietary definitions developed by the payer.

Don’t let payers downgrade your reputation

Hospitals are measured by multiple organizations, both governmental, as with the many CMS quality programs, and private, as with LeapFrog, US News and World Report and Healthgrades. The results of their scoring can lead to negative payment adjustments and harm the hospital’s reputation. Yet many of the less-than-optimal ratings received by hospitals are due to factors outside their control. For instance, Medicare Advantage payers have contracts with specific providers of services such as durable medical equipment, home care services and skilled nursing facilities. These providers must be Medicare-certified but there is no requirement that these providers meet a specific quality standard. If the patient is unhappy with the care received from the post-acute provider who is contracted with their Medicare Advantage plan, their dissatisfaction is likely to be reflected in their rating of the hospital because they may not understand the hospital had no role in choosing the plan’s contracted post-acute care providers. As a result, hospital contracting staff would be wise to get feedback from their case managers on the quality of the plans’ post-acute network to be able to anticipate the negative consequences of contracting with that payer.

Understand billing mischief to inform negotiations

Two common areas of provider and patient frustration are the arbitrary downgrades of emergency department facility fees by payers using their own algorithms, with most assigning a facility billing code based on the final diagnosis and not the presenting diagnoses or the services provided to the patient. This is illogical and contrary to code assignment rules but happens far too often. In addition, payers set arbitrary rules for bundling of services to reduce their financial obligations, coming up with increasingly creative ways to reduce payments. For instance, billing for an accommodation code for an intensive care unit bed will prevent additional payment for ventilator services as they claim that service is bundled into the ICU bed charge. Unless billing staff relate the new ways that payers are downcoding and bundling, there is no way for the contracting staff to address these abuses in the contract.

Prevent audit overload with clear contract terms

While payers have a right to audit claims to ensure that the charges were appropriate, they should not have the ability to overwhelm every provider with an inappropriate volume of appeals, many of which have unjustifiable requirements and are ultimately overturned. For example, one payer requires every appeal of a denial to be accompanied by the complete medical record along with a notarized statement from the medical records staff who prepared the records attesting that they are of “sound mind.”  The type and volume of audits, along with reasonable timelines both for the provider to appeal and the payer to respond to the appeal, must be specified and monitored. The contract should also forbid additional audits by third parties which are now more aggressively contracting to perform audits going back years.

Final thoughts

A hard-fought battle to get a good payment rate for inpatient admissions is of little value if the provider can never bill for that admission, or when billed the claim is denied, or when the claim is paid but then recouped months or years later. Likewise, the many provisions that payers insert into the contract process can easily sabotage all other efforts to provide excellent care and maintain an operating margin.

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