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How To | Contracting

Managing and Measuring Payer Performance

How To | Contracting

Managing and Measuring Payer Performance

Healthcare providers should have a contract management system as the framework for managing the four components of the governance/communication processes―contract analysis and modeling, payment calculations, variance monitoring workflow, and payer scorecard and reporting. 

Staff should understand the impact of proposed contract terms on the bottom line before new contracts are signed.


For healthcare financial staff, some cycles are so common they are taken for granted―day and night, seasonal changes, month-end close, year-end reporting. On one hand, there is the age-old adage, ‘the only constant in life is change’ and on the other hand ‘the more things change, the more they stay the same.’ When healthcare providers approach the task of monitoring payer payment, the doctrine of cycles certainly applies.

The ebb and flow of payer contract management is similar. It is circular in nature but there is also a hierarchical process. Similar to a circular stairway as a continuous rounding course, we are always moving forward taking a step above or below the prior step.

The Payer Contract Management Process


Payer contract governance is comprised of four distinct areas. This cyclical process occurs every day on multiple levels: at the account level, at the service line/department level, at the payer level, and at the organizational level as monthly and annual financial reporting occurs.

Adding an additional layer to the process, there are typically four parties involved in the cycle: contract negotiating teams and payment audit processing teams respectively for providers and payers. Efficient communication between all parties is critical.

To ensure efficient workflows, healthcare providers should use a contract management system as the framework for managing the four components of governance and communication processes.

Contract Analysis and Modeling

“Money is made when you buy, not when you sell.” The same holds true for contract negotiations. For providers to get appropriate payment from their payer contracts, staff should understand the impact that the proposed terms have on the bottom line before the new contract is even signed. The best practice is to model the impact of the terms with prospective contract modeling software using your organization’s actual account data.

A foundational principle should be to incorporate the amount of risk that you believe the organization can successfully manage. This risk is transferred in the form of various contractual payment methodologies that shift the cost and care management to the providers.

Modeling the effective discount rate of the various rates and terms using healthcare organizations’ historical billing data provides the ability to understand the net revenue impact on a side-by-side comparison of one proposed payer contractual arrangement to another. In summary, the different risk levels are as follows.

Discount from billed charges. This payment model offers providers the lowest risk level with payers agreeing to pay at negotiated discounts using providers’ standard chargemaster, which serves to track activity/usage and billing. Conceptually, this is the easiest to calculate, but payers often scrutinize the billed charges and there can be higher denial rates which can lead to additional audit/recovery work.

Fee-for-service. This model incorporates specific negotiated rates for procedures and/or services performed, but overtime, additional cost-controls/care-management components are included. For inpatient services, per-diems and defined or relative weight case rates are used by payers to promote shared cost/care management. Providers often negotiate stop-loss provisions and carve-outs for high-cost items as a means of balancing the risk. For outpatient services, fee-for-service started with simple rate schedules for individual procedures but this has been expanded to broader code groupings under pre-defined ambulatory payment classifications (APC, APG, EAPG, etc.). Additional levels of cost/care controls are often incorporated in negotiation processes including lesser-of charges or payments, observation or minimum stay criteria, multiple-procedure discounting, and modifier and bundling logic. However, there are often few controls on the number of procedures and/or preventive care strategies.

Value-based payment. This is a fairly new model. Providers are compensated under fee-for-service models that include quality and efficiency components. By tying the quality benchmark metrics to payment, there are additional incentives to help create positive outcomes, not just activity volume.

Bundled payment. In this model, providers are paid for specific episodes of care. The bundled payment model is much broader in the coordination of care than traditional case-rate payment models. The Centers for Medicare & Medicaid Services (CMS) Comprehensive Care for Joint Replacement (CJR) program is one example. The inpatient stay and all related providers are bundled under a single payment. This method encourages greater coordination of care and can prevent redundant or medically unnecessary services.

Shared savings. This model provides upside incentives and lowers providers’ risks to improve coordination of care and outcomes with identified patient populations. Pre-determined percentages of net savings may be further negotiated with providers as upside incentives. This approach is based on defining the methodologies and related benchmarks for determining shared savings.

Effective contract governance processes are built on the accuracy of the expected payment calculations. Ideally, the modeling parameters used during the payer negotiation phase should always be the same parameters for auditing the payer’s adjudication results. The expected payment calculations are the foundation. Accounts should be correctly valued per contractual rates and terms. Accuracy at account levels ensures accuracy of the entire cycle―denial appeal values, contractual underpayment recovery, payer scorecard reports and analysis, and month-end and annual financial reporting.

Variance Monitoring Workflow

Underpayments should be tracked because payers are contractually bound to pay accurately. All contractual provisions should be loaded for payers and variances should be tracked automatically. When variances occur, workflow processes should follow a hierarchy approach.

Slow or no-pay accounts along with soft denials should be identified and worked immediately by routing the accounts to appropriate billing staff for collection calls and/or resubmitting updated or corrected claims. Hard denials should be routed to utilization review or clinical team members for follow up. Prioritization and root-cause analyses are best done when claim values (the expected payment) from the contract management system are incorporated.

Contractual variances often appear in accounts that have not been resolved through normal collection efforts. A contract compliance individual or team should be dedicated to addressing this area. They should have special training in contract interpretation. They often work directly with payers regarding contract issues, interpretation, and enforcement. If issues remain unresolved there should be a defined escalation process to senior management.

For efficient workflow processes, false variances, which may come from calculation models or data, should be monitored as a part of the process. This is often overlooked. There are four areas in which hospitals can evaluate their overall success rates and identify specific underperforming areas (see exhibit).

Factors for Evaluating Contracting Models


To generate valuable insight into individual payer performance, a scorecard is an effective tool to measure payer performance across various payment methodologies. However, to be effective scorecards must be accurate. Several examples that can be used to evaluate revenue cycle and payer performance include the following:

  • Year-to-year performance
  • Collections by payer
  • Collections by month
  • Collections by service code

Look for signs such as market trends, sudden increases or decreases in payment, and compare that to the benchmark statistics to determine financial standing. These statistics are important to evaluate individual payers and will serve as the foundation for future negotiation processes.

A Continuous Process

The ebb and flow of contract management follows a rhythm. The components of monitoring payer payment should incorporate these metrics along the way. As a continuous cyclical process, these items will help ensure contract governance systems are always moving a step up and forward.


Greg Kay is senior vice president, PMMC, Charlotte, N.C.

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Greg Kay

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