Payment Trends

How to Really Know Your Payment Rates

August 13, 2018 12:24 pm

From Our Sponsor Kaufman Hall

Finance teams may not realize that the fee-for-service philosophy is lingering not just in traditional contracts, but in value-based contracts as well, including bundled-payment and shared-savings models.

Seven years have passed since Medicare launched an industrywide transition from fee-for-service (FFS) payment to a system that rewards quality over quantity. Despite the headlines touting the move toward value-based contracts, the majority of contractual payments are still FFS-based in most parts of the country. A 2016 report by Philips found that only about a third of the 346 respondents representing hospitals and systems of all sizes across the country were participating in some form of a voluntary value-based payment model (Transforming Healthcare to a Value-Based Payment System, Washington Post Brand Studio and Philips). The movement toward value-based payment slowed in 2017 in part because of decisions made by new leadership at the Centers for Medicare & Medicaid Services (Castellucci, M., “Road to Value-Based Payment Bumpy in 2017.” Modern Healthcare, Dec. 27, 2017).

But what finance teams may not realize is that the FFS philosophy lingers not just in traditional contracts, but in value-based contracts as well, including bundled-payment and shared-savings models. Many of these models use an FFS payment model as the underlying payment mechanism based on submitted claims, with a value payment calculated retroactively against a target during the reconciliation process. The payment amounts are generally a small percentage of the total payment and tend to impact future rather than current cash flow.

In addition, these contracts almost universally include a clause that states that the health plan’s provider manual or administrative guidelines are part of the contract by reference. While hospitals may have a contract section for payment along with rate appendices or attachments, the provider manual or administrative guidelines can and will supersede the terms in the base contract or amendments.

This contract clause typically provides health plans with options to modify the contractual provisions either directly by updating either FFS rates and value-based incentives or indirectly by adding preauthorization requirements, which may limit payments to specific locations, or by notification of new exclusive networks or carve outs for certain services.

Given the complexity of health plan contracting relationships—whether FFS or value-based—it is imperative that hospitals become better informed about the sophisticated modeling, analytics, and metrics health plans are using. This call to action is not a simple task. For example, one health plan was recently identified as using more than 1,600 distinct metrics between its contracts and regulatory reporting metrics.

Stipulations may be buried in contract language that set up scenarios where hospitals meet quality expectations but do not achieve the standards to qualify for shared-savings payments, thus leading to confusion about what payment the hospital will receive. In addition, payments often arrive one year to 18 months after the performance period, when finance teams are deep into managing the current fiscal year and may not have sufficient time to scrutinize the previous year’s data.

While these challenges are complex, the stakes are high, and money from incentives can be left on the table if hospitals are not fully engaged in monitoring data, understanding denials, and correcting the root causes of denials. It is not uncommon for health systems to leave between $50,000 and $500,000 in incentive payments on the table due to a lack of understanding of complex contracting and metrics language.

So What Can Hospitals Do?

Health plans are unlikely to delete or adjust contracting language that allows them to modify contractual provisions, so organizations must adopt a proactive approach to health plan-provider relationship issues. Key actions include the following.

Have a robust, regular process for reviewing health plan provider manuals, guidelines, and notifications. Providers must identify contractual changes, determine whether they have a financial impact, quantify that impact, and track changes by health plan. Robust data warehouses are needed for paid claims data, with experienced analytic teams maintaining data integrity.

Rigorously track, at the service level, what actual payment rates are being received from a health plan and whether there is a variance from expected payment. Declining payment may signal a policy change or an unexpected change in a payment level. When these variances occur, hospitals must determine and track the root cause and review and discuss the issue with the health plan.

Have regular meetings with health plans to review financial and operational issues. A regular cadence of meetings should include a discussion of health plan marketing plans and large employer renewal dates. One large employer terminating a contract and moving the covered lives to another health plan can disrupt hospital revenue projections. Aim to keep these meetings positive and collaborative. When predetermined triggers demand action, such as payments that appear to be incorrect, approach these discussions with the aim of reaching mutually agreeable solutions.

See related sidebar:  Why Fee-For-Service Remains Prominent

Understand the options. There are ways to mitigate possible negative financial effects when a health plan supersedes the terms in the base contract or amendments. For example, hospitals can request a periodic reconciliation with a true-up and make-whole process if revenues fall below a specific goal. A true-up or make-whole provision may be triggered when a health plan represents a specific payment amount but actual revenues fall short. Some contracts allow for a negotiation process to address this shortfall, which may result in a one-time payment to bring the provider to the represented rate. These types of provisions are getting more difficult to negotiate, particularly as the move to value advances and health plans are looking for ways to reduce costs (e.g., claims payments) rather than guarantee a specific revenue stream.

Understand how changes related to rates in an FFS contract may affect shared savings contracts. If hospitals have a target per member per month rate for a specific population for a specific performance year and a rate increase is negotiated, finance teams must understand how that change will impact the hospital’s ability to earn shared savings someplace else along the care continuum.

Be Vigilant

While the timing and pace of the movement to value-based contracting remains uncertain, hospitals must remain vigilant about the nuances of FFS and value-based contracts, and how each contract may interact with or influence a hospital’s ability to receive the payments and incentives it is striving to achieve. A deep understanding of active contracts, combined with proactive and purposeful performance monitoring and open communication with health plans, must be in place to ensure hospitals maximize payment and the incentives available to them.

Debra Ryan is a vice president with Kaufman Hall’s Strategic and Financial Planning practice and is a member of HFMA’s First Illinois Chapter.

Daniel Seargeant is vice president and product manager of Decision Support Solutions with Kaufman Hall’s Software Division and is a member of HFMA’s First Illinois Chapter.


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