Do it like a Pro: Managed Care Payer Contract Analysis

Contract modeling, or analyzing potential scenarios of reimbursements to understand financial outcomes, provides a proactive approach to financial management by analyzing the impact of different elements such as methodologies, rate changes, pricing, payor mix shifts and ever changing regulations on margins, rather than net revenue alone.

To determine current and future performance, contract modeling can be applied to current contracts and various “what-if” scenarios.

Various Modeling Approaches

1. Medicare break-even computation

A simple way to evaluate the current state of contract performance is to conduct a basic Medicare break-even analysis. This analysis determines the financial impact if payment for all patient populations were according to Medicare rates. A Medicare break-even analysis is a way to benchmark how well commercial payers pay, and a way to evaluate the performance of key service lines, because it takes the payor mix out of the equation and instead uses a consistent reimbursement approach.

2. Assessment of performance of current contracts.

This straightforward analysis determines whether payment is in accordance with the terms of the commercial contract. The analysis will, for example, determine which service lines have the greatest variances between expected and actual payment.

3. Assessment of proposed contracts

This “what-if” analysis determines how changes in the rate and terms of a proposed contract would affect the yield. Changes in clinical services, types of products (i.e., HMO vs. PPO), or even payers can also be modeled. This provides an understanding of, either in actual dollars or percent, whether the proposed contract will result in shortcomings or whether it will improve the bottom line.4.

4. Comparison of traditional and non-traditional reimbursement methodologies.

Value-based payment models represent a new approach for providers. Many of these models put the provider at financial risk for meeting quality/outcomes targets, so understanding the financial implications of such methods before entering into a contract is critical. Likewise, modeling can help determine how implications of potential decreases in Medicaid funding resulting from changes or repeal of the Affordable Care Act, along with increased self pay and bad debt, will affect the bottom line.

5. Assessment of pricing changes.

Contract modeling can be used to better understand the impact of chargemaster pricing changes. For example, if the charge for a procedure increased by 10 percent, the modeling can show how reimbursement would be affected.