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By Eric Logue and Richard Bajner
This is a sample article from HFMA's Payment & Reimbursement Forum, a subscription-based discussion community that encourages networking and sharing among reimbursement, managed care, and finance leaders.
Learn more and join the Payment & Reimbursement Forum
In our experience, unit reimbursements commonly vary by 30 percent or more between commercial payers within a single provider's set of payers. However, recent consolidation of smaller payers (with high unit reimbursement) with larger payers (with lower unit reimbursement) is putting financial pressure on many providers that have historically made their margins on these smaller payers.
How can providers minimize margin risk as payer consolidation continues? To fully answer these questions, we need to understand the following key questions:
For the purposes of this discussion, we will measure parity by comparing the prices paid by two payers for the same services.
The lack of parity within individual markets is affected by several dynamic elements, including:
To assess a hospital's market, it is often useful to use analytics to frame the hospital's posi-tion. One tool is the four-by-four matrix that shows varying degrees of market share concentration between payers and providers (see the exhibit below).
See exhibit:Four-by-Four Matrix: Market Share Concentration
Consider the example illustrated in the exhibit:
Hospitals in Quadrant 1 have the dominant market share within a relatively fragmented market. The central issue with this enviable hospital position is that the market is dynamic and can quickly change due to increasing competition from non-hospital sources, such as free-standing imaging, ambulatory surgery centers, etc. Hospitals that begin in the advantaged position of Quadrant 1 often quickly slip into Quadrants 2, 3, and 4, if the hospital does not develop an active parity strategy that aligns value with payments.
The greatest level of parity will generally be seen in Quadrant 3 because this quadrant has comparatively more choices for both the payers and the providers. Therefore, it operates more like a free market, where supply and demand determines price; however, few markets exist where the payer and provider markets are both fragmented.
Our research indicates that two thirds of the 87 markets that we have analyzed have a payer concentration level of "highly concentrated" (based on Federal Trade Commission guidelines) using the Herfindahl-Hirschman Index (HHI) score, a commonly accepted measure of market concentration.
The HHI score is calculated using the number of plans active in a given location and their relative market shares. The highest scores would be given to pure monopoly markets. Generally, the dominant payer maintains and increases its ability to keep its market share through advantageous discount rates to providers, which in turn, results in providers generating a disproportionate percentage of their margins from smaller payers through higher per unit reimbursements.
As shown in the exhibit below, the largest payer's net margin/charges factor is 0.68, while smaller payers account for more than three times their margin share. Healthcare finance leaders must be cognizant of the risk that these smaller payers may exit these markets, resulting in the additional lives being driven (now even more) to the dominant payer at a lower unit reimbursement.
See exhibit:Net Margin/Charges from Large Versus Small Payers
In our recent experience, the impact of a smaller payer exiting a market, and the majority of lives shifting to the dominant payer, resulted in an overall decrease in revenue from the two payers (now one) by more than five percent to 10 percent because of the lower unit reimbursement enjoyed by the dominant payer.
Due to this effect, providers that enter into contracts with payers that allow substantive discounts to select payers without receiving an increased level of tangible service are:
Managed care executives need to balance the optimal parity strategy with the realities of staying within budget, as well as recognizing that some payers drive a higher volume of business. It may not be feasible to instantly move all payers in a market to parity; however, managed care executives should implement a three-year plan to move closer to parity.
Step 1: Measure parity. Plot the difference between payers on a trend line using total charges and percentage of yield. The exhibit, below, represents the typical payer volume to yield graph where the largest payer has some discount advantage.
See exhibit:Example: Payer Volume to Yield
Step 2: Target outliers. Identify tier two outliers. (For example, see payer C in the exhibit Net Margin/Charges from Large Versus Small Payers.) Immediately negotiate rates upward, especially with those payers that have a history of denials, late payments, and a general lack of partnership with providers in the market.
Step 3: Consider targeted payer partnering initiatives. Open discussions with tier 2 and 3 payers and present shared cost reduction initiatives, narrow networks, and other methodologies for increasing overall yields. (It is important to note that partnering initiatives should be considered with all payers; however, smaller payers are frequently more motivated to consid-er alternative payment structures.)
Step 4: Measure and monitor. Review payment levels and market share on an ongoing basis to determine if targets are being met.
Many providers may look to drive even larger margins from smaller payers, especially in the short term, given decreased reimbursements from Medicaid, stagnant Medicare payments, and slow commercial enrollment growth. However, in doing so, providers may be setting the stage for continued payer consolidation. Providers that do not proactively manage their markets-by measuring parity and aligning value with payments-risk having parity forced on them through the consolidation of the payers within their markets.
Richard Bajner is an associate director at Navigant Consulting, Inc., Chicago, and a member of HFMA's Florida chapter (firstname.lastname@example.org).
Eric Logue is a director at Navigant Consulting, Inc., Chicago, and a member of HFMA's Georgia chapter (email@example.com).
Eric and Rich look forward to hearing from you. Feel free to post your thoughts or to contact them with any questions.
Forum members: Please share your comments, questions, and insights about this article on the Payment & Reimbursement Forum's Linked In discussion site:
Or perhaps you have another discussion starter?
Publication Date: Tuesday, April 19, 2011
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Mitch Morris, vice chair and global leader, healthcare, Deloitte, and Michael O'Rourke, senior vice president and chief information officer, Catholic Health Initiatives (CHI), share perspectives on the need for transformational IT in health care today.
Brian Kueppers, founder and CEO, Apex, discusses the importance of a robust patient payment strategy in boosting organization revenue and enhancing patient satisfaction.
Brian Grazzini, CFO, HealthPort, describes the importance of efficient and compliant information exchange and audit management in helping HIM staff spend less time on paperwork and more on mission-critical projects.
Cindy Matthews, executive vice president, Community Hospital Corporation, discusses how rural and community hospitals can use collaborative partnering to position for success through tough market conditions.
Rick Heise, senior vice president, revenue cycle, at Cerner Corporation, discusses the importance of integrating clinical and financial data to excel in health care’s changing payment environment.
Russ Graney, founder and CEO for Aidin, and John Laursen, head of business development for Aidin, share insights on how to improve care transitions between acute and post-acute care settings and incentivize high-quality patient outcomes.
Scott Elston, strategic accounts manager, GE Healthcare Services, describes how substantial cost reduction in health care requires rethinking business strategy and asset use.
Robert Williams, MD, director, Deloitte Consulting LLP, and Arielle Freiberger, product strategist, ConvergeHEALTH by Deloitte, explain how sophisticated retrospective, real-time, and predictive data analytics can inform decision making to reduce costs and improve care.
Stuart Hanson, director of business development (healthcare solutions) at Citi Retail Services, discusses how improving the payment experience can benefit consumers and healthcare providers.
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