Ask the Expert: Calculating Weighted Averages in Favored Nation Clauses
Q: My question concerns the interpretation of most favored nation clauses. I am unable to find a definition of how a weighted average is applied to each payer and the payer’s utilization. Our current contract is silent on the definition and how to calculate. Is there an industry definition?
A: Based our experience, there is no formula universally accepted by the industry for calculating weighted averages in a favored nation clause. We do not recommend that providers agree to a favored nation clause, and we strongly suggest that providers remove language in a contract, if the clause already exists. There are simply too many variables that come into play, making it difficult for a provider and payer to agree on an acceptable baseline and a reasonable formula for validation.
When payers choose to challenge a provider or audit reimbursement under such clauses, it is typically triggered due to personal changes among payer organizations or different reports that payers buy from third-party sources or from their own coordination of benefits data. This data tells only part of the story; therefore, calculations based on this data alone can lead to incorrect answers.
Furthermore, such calculations are subject to be challenged, and these challenges can go on for a long period of time and consume a large amount of resources. In the event that a payer makes the inclusion of a favored nation clause a deal breaker, an alternative may be to provide a brief statement (although we still cannot recommend acceptance). This brief statement should be apart from the actual contract, signed by the CFO or CEO, confirming the fact that the particular payer will not be disadvantaged in the market. A sample statement might read: “This letter confirms that the rates in place with PAYER do not disadvantage PAYER in the marketplace when compared to reimbursement rates offered to other payers contracted with HOSPITAL.”
Two Forum experts answered this question together: Dawn Boyd, director, managed care contracting, The Godbey Group, Irving, Texas, and Dan McAfee, senior managing director, payor contracting and reimbursement strategy, The Godbey Group.