How do payers know they are getting the best deal from providers?

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July 18, 2008

Payers want confirmation that their provider contracts with large-volume providers are the best available, but how can they be sure?

We asked Doug Proebsting to explain how to minimize the uncertainty and risk.

Q: What circumstances usually surround provider contract negotiations?

A: Some payers seek most favored, or at least equally favored, status in these projects. A provider's word that they have offered the "best" deal is not sufficient because the contracts are often complex and difficult to evaluate. Related financial dealings may result in a provider-payer clause that requires frequent comparison to other payers with competitive stipulations that the contract is favorable or similar. Payers and providers often perform this exercise, but each situation is unique. Typically, the results are compiled in aggregate; specific services may be more or less favorable than others by payer.

Q: How difficult is it to compare different payer contracts?

A: The degree of difficulty varies depending on the complexity and variation of the underlying payer contracts, along with the ability of providers to summarize data efficiently. Inpatient hospital claims are usually easiest to compare, given the low volume of claims. Professional contracts are typically straightforward as well. Outpatient hospital claims can be a challenge, but once the data source and contract language have been clearly defined, these claims can be modeled as well. Many variables, including case rates, per diems, stop-loss provisions, outliers, implants, and exclusions, for example, need to be separately recognized by payer contract. The level of precision required can also dictate the rigor needed to evaluate the contract (e.g., directional outcomes, which determine whether the contract is higher or lower than the market, require less rigor compared to calculating exact reimbursement rates).

Q: What is the actuary's role?

A: These projects can be very complex and require a skilled professional to sort though the details and nuances of multiple contracts and data sources. There is a benefit to having seen numerous provider contracts and understanding common contracting language. Actuaries are uniquely qualified to serve in this role. There are also instances where the payer/provider relationship is contentious and the primary role of the actuary is to act as an unbiased third party. These situations require the highest degree of professionalism to bring the parties together and establish consensus, while keeping data and outcomes confidential.

Q: What data is necessary to complete most projects?

A: Three key elements make these projects a success. First, it is critical to have a signed agreement or project outline that very specifically defines clear objectives of both parties, including services and providers to be included in the analysis, a defined time period, and other payers to be used to form the comparison (often several large payers). The second required item is the provider’s signed contracts with the comparable payers for the specific dates of service in question. Finally, credible claims data is needed. The data can be from one or multiple payer historical data sets. It typically comes from the provider, although the payer may provide data as a reasonableness check. We assign various payer contract terms to the same data set (i.e., a common mix of services) when using one payer to proxy all payer data. This approach has the advantage of keeping comparisons similar, but the provider data may not always support readjudication of other payer contracting terms because payer contracting terms can vary considerably. Most of these projects are forward looking, but some require a retrospective confirmation of competitiveness.

Q: How do you accommodate confidentiality issues related to both parties?

A: We typically sign an agreement stating that the data provided by the provider or payer is not available to the other party and only certain agreed-upon summary information may be shared by both parties. The consulting letter of engagement typically spells out exactly what will be provided by the actuary. As the trusted advisor, we see both sets of information and use our professional judgment to determine what can and cannot be shared, after consulting with each party and reviewing the contract.

Doug Proebsting, FSA, MAAA, is a principal and consulting actuary with the Milwaukee office of Milliman and has more than 18 years experience in the actuarial managed-care markets.