Looking Beyond Prices During Contract Negotiations


Tomas Mikuckis

5 min read

Economic pressure continues to mount on providers. Median operating margins were down -0.5% through October, a 2% drop from September. And it’s a 13% decline from October 2021 when operating margins were just above 4%, largely bolstered by federal COVID-19 relief funding. Many are also seeing cash reserves take a hit.

Soaring labor and drug costs; spikes in emergency care, especially as COVID, flu, and respiratory syncytial virus converge; inflation and fears of a recession causing patients to hold back on care are some of the factors impacting health systems’ bottom lines.

The downward trend on margins has a cascading effect on payers as health systems aim to either reopen contracts or seek higher reimbursements heading into a new round of negotiations. And that’s adding to the already tense status of provider-payer relationships. Historically, we’ve seen hospitals seek 3-6% annual increases. More recently though, we are hearing from payer clients that asks are coming in somewhere between 8-15%, or even higher in markets where providers have greater leverage.

It’s important that health plans head into negotiations with a targeted plan. Below are three key areas to focus on.

Leverage price transparency: Federal mandates that insurers and providers post negotiated rates create an opening for more informed contract negotiations. Putting aside questions surrounding compliance and the usefulness of the data for consumers, insurers can take advantage of the data by building better analytic tools. Technology companies like Turquoise Health are launching programs that promise to deliver concise information on provider and payer prices. Although comprehensive research is scarce, a recent study in the journal Radiology indicated that insurers are not using data effectively even when managing multiple plans at the same hospital. For instance, researchers found that on average the highest negotiated price for a service was 1.2 times the lowest price at the same hospital. We are still in the early innings of price transparency but investing in stronger analytic capabilities and bolstering competitive intelligence will be table takes for payer and provider contracting teams.

Go beyond prices: Payers should push negotiations on issues other than cost and prices. It’s about being strategic and finding ways to achieve greater operational efficiencies and bolstering member offerings. Payers need to find win-win negotiation opportunities by putting additional items on the table. For example, some plans are seeking commitments from providers on such areas as improving real-time data sharing on quality measures. Having actionable data will not only enable plans to develop more consumer-centric services but also make adjustments that impact Stars ratings. As my colleague Jim Fields pointed out in a previous column on this issue, plans could also use negotiations to ensure that providers are boosting support for such targeted programs as behavioral health or addressing social determinants. And plans could also seek to gain greater acceptance of value-based agreements across commercial and Medicare Advantage products.

Build smarter networks: Insurers will have to make some hard decisions, including carving out more preferred provider networks. This isn’t about increasing the number narrow networks though. To keep an eye on growth and profitability, plans will want to develop deeper relationships with providers that mirror their goals, for instance embracing virtual and retail care options or instituting innovative symptom checkers and scheduling platforms. This may also include “smarter” negotiations at the service-line level, focusing rate discussions on areas where payers are willing to use navigation tools and member experience to steer toward a preferred provider within the network. The goal here should be to ensure that providers are willing and ready to accept a differentiated model to enhance the patient experience.

To learn more contact Matthew Weinstock, Senior Editor, Health and Life Sciences.

  • Tomas Mikuckis