By quantifying the effect of the lesser-than and greater-than provisions in payer contracts, healthcare organizations can preserve revenue and avoid serious financial ramifications when restructuring prices, says William O. Cleverley.

Almost all commercial and government payer contracts contain “lesser-than” and “greater-than” provisions. Sometimes overlooked, these caveats can affect a healthcare organization’s revenue, especially if the organization is looking to alter its prices. “Without taking these provisions into account, a seemingly small price adjustment could result in a significant revenue hit,” says William O. Cleverley, chairman and founder of Cleverley & Associates in Worthington, Ohio.

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What Are Lesser-Than and Greater-Than Provisions?

In short, these provisions protect payers and providers from payment situations that fall outside the norm. According to Cleverley, there are three kinds to be aware of:

Line-item lesser-than provisions. These state that an insurer will pay an established amount for a certain test or service unless the organization charges less than the predetermined price, in which case the payer will reimburse the “lesser-than” amount. For instance, if a payer contracts to pay $1,200 for CT scans, but the organization only charges $1,000 for a patient’s scan, then the insurer will pay $1,000. Imaging procedures (CT scans and MRIs, for example), laboratory work, and some emergency department (ED) charges fit into this group.”

Claim-level lesser-than provisions. These provisions state that an insurer will pay an established amount for a category of charges, such as an inpatient case payment based on MS-DRG. The compensation would cover all charges involved in the encounter, including any lab work, X-rays, imaging, and anesthesia.

“If the healthcare organization’s charges are less than the payer’s agreed-on payment, the insurer will pay the lower price,” says Cleverley. “For instance, if the payer contracts to pay $5,000 for a specific outpatient surgery, but the charges for a particular patient’s encounter are $4,000, then the payer would pay $4,000.”

Greater-than provisions. “You can’t talk about lesser-than provisions without discussing greater-than provisions as well,” continues  Cleverley. “This is where an insurer agrees to pay a provider more than the contracted price—if the provider’s charges are multiple levels beyond the previously set payment. Sometimes referred to as outlier payments, these provisos kick in when a healthcare organization treats a patient who substantially surpasses the expected care. In this situation, the payer may agree to pay a certain percentage of charges.”

While there are both line-item and claim-level greater-than provisions, the line-item caveats are not very common (high-cost drugs and implants may fall into this category). Far more frequent are claim-level greater-thans, which may include inpatient cases, outpatient surgery, and some ED claims. “The primary purpose of these stipulations is to provide risk avoidance for the healthcare organization,” says Cleverley. “Let’s say a patient is admitted for an inpatient stay and remains in the hospital for 250 days. This care episode may be considered an outlier, and most likely the hospital will receive a ‘greater-than’ payment.”

Why Are These Provisions Important?

“Until a few years ago, lesser-than provisions had little bearing on a healthcare organization’s revenue because most organizations set prices well above payers’ fee schedules,” comments Cleverley. “However, as organizations consider dropping prices in response to increasing competition, these provisos are coming into play.”

In certain markets, for example, free-standing providers—i.e., imaging centers or lab facilities—are lowering their prices on commodity products and services, such as lab work, imaging services, and basic outpatient procedures (endoscopies, mole removal) where patients don’t perceive a meaningful difference between suppliers. “To remain competitive, healthcare organizations are also starting to lower their prices for these items,” says Cleverley. “However, without careful examination, this action could have wide-ranging consequences.”

For instance, if an organization drops its prices for particular procedures below existing line-item lesser-than provisions, then the organization stands to lose revenue. In addition, if the price drop causes the claim-level lesser-thans to dip below established payments, there could be additional financial impact.

For example, a hospital may have competition from an ambulatory surgery center for endoscopies, and the hospital may decide to lower it’s pricing to $1,200. If a commercial payer has an outpatient fee schedule that pays $1,900 for a colonoscopy, the hospital would experience a $700 payment reduction for each colonoscopy performed for that payer’s patients.

“One further area organizations often forget is the effect on outlier payments,” says Cleverley. “By dropping your line-item pricing, your claim-level outlier may dip below the threshold and become a standard reimbursement, causing you to lose further money.

“For example, assume a commercial payer has a fixed payment of $24,000 for MS-DRG 470-lower joint replacement. The plan also has an outlier threshold of $100,000 with payment at 60 percent of billed charges. Given a hospital’s current prices, a MS-DRG 470 patient has a total charge of $101,000, and the hospital is paid $60,600. However, if the hospital reduces its imaging prices, it may lower the total charges to $99,500 at which point the hospital would be paid $24,000.”

This represents a reduction in payment of $76,600 from a very small change in charges,” Cleverley explains. “If the hospital is a tertiary facility that deals with a large number of outlier patients, then any loss could add up quickly.”

Revenue and Pricing Implications

While organizations contemplating price decreases should definitely examine all lesser- and greater-than provisions, this is also a helpful exercise for those facilities that want to optimize revenue.

“To fully appreciate the consequences of these stipulations, healthcare organizations should review payer contracts, identify any provisions, assess current prices in relation to those caveats, calculate the potential loss, and examine areas where they could lift or reduce charges,” says Cleverley. “Basically, you want to model the different scenarios to see what effect raising or lowering certain prices would have, keeping in mind line- and claim-level lesser-thans as well as claim-level greater-thans.”

Access related tool: Checklist for Reviewing Lesser-Than Provisions in Payer Contracts

“After this investigation, should you decide to raise your prices in particular areas, make sure there are no negative consequences to your competitive position,” comments Cleverley. “Consider the organization that discovers it has an ED procedure that is well below the line-level threshold and moderately below the claim-level threshold. In order to surpass these marks, the organization must raise its prices by 300 to 400 percent. This would put the organization in a bad place competitively as well as from a PR perspective. So, in this instance, raising the price might not be a good choice. Organizations must look at the whole picture when doing these analyses. Getting a few dollars back may not be worth the risk.”

A Prudent Endeavor

Ensuring your organization is holding prices at appropriate levels while encouraging market share growth can be tricky. In some cases, working with a third party that has experience modeling this kind of exercise can be beneficial. These organizations can even make recommendations on alternate pricing scenarios that increase revenue while maintaining competitive position.

While it may seem like examining lesser-than and greater-than provisions is just one more task on the growing to-do list, taking time for this work can be valuable, especially as the healthcare marketplace becomes increasingly competitive and organizations scramble for every inch of the bottom line.

Kathleen B. Vega is a freelance healthcare writer and editor who contributes regularly to HFMA Forums. 

Interviewed for this article: William O. Cleverley, Ph.D., is chairman and founder of Cleverley & Associates, Worthington, Ohio, and a member of HFMA’s Central Ohio Chapter.

Related article: Pricing Commodity Outpatient Procedures: Assessing the Impact (for subscribers to HFMA’s Strategic Financial Planning)

Discussion Starters

Forum members: What do you think? Please share your thoughts in the comments section below.

  • How often do you review lesser-than and greater-than provisions?
  • What impact do these have on your pricing decisions?

Publication Date: Monday, July 20, 2015