Financial Survival: Healthcare providers are under increasing financial strain, driven by inequitable profit margins between payors and providers. For instance, United Health Care enjoys a 6% margin on revenue, translating to $22 billion, while hospitals operate on razor-thin 3% margins. Physician practices often face even more precarious financial circumstances, struggling to stay afloat. This imbalance highlights the urgent need for hospitals, health systems, and physicians to renegotiate payor contracts that adequately cover costs, ensure competitive salaries, and allow for reinvestment in technology and facilities.
The severity of the situation is underscored by the fact that health systems lose over $200,000 annually for each employed physician. To address this, renegotiating payor contracts must become a strategic priority for 2025. Encouragingly, payors have shown some willingness to set physician rates at the 70th percentile. Success in these negotiations often depends on following a disciplined and strategic approach.
Steps to Successfully Renegotiate Payor Contracts
Conduct a Thorough Market Analysis
The first step involves analyzing high-volume Evaluation and Management (E/M) and Current Procedural Terminology (CPT) codes. Comparing these codes against regional rates can help providers identify discrepancies and build a compelling case for fair compensation. Financial Survival
Establish a Formal Board Policy
Health systems should implement a board-approved policy that sets minimum acceptable rates for payor contracts. If payors fail to meet these standards, going out of network should remain a viable and strategically sound option. This policy not only provides leverage during negotiations but also safeguards the financial health of the organization. Financial Survival
Educate Payor Representatives
Before negotiations, providers should meet with payor representatives to present a clear justification for increased rates. Key points to highlight include achieving financial targets at the 75th percentile, aligning rate increases with payor trends, and offering competitive compensation to attract and retain top-tier providers.
Prepare for Negotiations
Preparation is critical. Providers should submit a detailed request for rate increases by E/M and CPT codes, spanning 24 to 36 months. Quantifying the financial impact of proposed payor rates on the group’s overall performance further strengthens the negotiating position.
Be Ready to Send Termination Notices
If negotiations reach an impasse or fail to produce satisfactory terms, providers should be prepared to send a notice of termination. This signals a willingness to go out of network, emphasizing the seriousness of their stance. During this phase, clear communication with employers and patients about potential out-of-network implications is crucial.
Monitor and Enforce the New Contract
Once a contract is finalized, continuous vigilance is necessary. Providers must ensure that the agreed-upon fee schedule is correctly implemented in the billing system and that reimbursements match the negotiated rates. Any discrepancies should be promptly addressed to maintain financial integrity.
Proven Results and Lessons Learned
By following this structured process, many provider groups have successfully secured rate increases of 20% to 25%. Moreover, payors are increasingly aware of the importance of maintaining positive relationships with providers, especially after high-profile disputes, such as the recent United Health Care controversy in New York City.
This strategic renegotiation approach not only ensures financial sustainability but also strengthens the foundation for long-term provider-payor partnerships, ultimately benefiting the entire healthcare ecosystem.
For more insights on navigating the complexities of healthcare contracts, visit Stanford Physician Advocate.
Jeffry A. Peters is a healthcare executive. This article was originally published in Zócalo Public Square.