As mentioned in Part 1 of this article, contract reimbursement is a critical component of revenue for healthcare service businesses, as is understanding the impact an acquirer’s managed care contracts will have on a target’s revenue. A “black box” reimbursement analysis can assess the overall impact to revenue; however, the black box analysis can also provide insight into why an acquirer’s managed care contracts perform favorably or unfavorably when applied to a target’s utilization.
There are several reasons an acquirer’s contracts may not perform advantageously when applied to a target’s utilization. Often we hear expectations like, “we know our rates are better,” but there is far more to it than that – Two primary reasons are case mix/ utilization and contract structure (payment logic).
An acquirer may believe their contracts perform based on their current book of business; however this may not necessarily apply to a target’s utilization. Payor contracts are typically reviewed and negotiated considering various items, such as, services provided, case mix by specialty, and patient population/ demographics. This can yield mixed results when testing an acquirer’s contracts against a target’s utilization. For example, a target and acquirer may provide similar services; however an acquirer’s contracts may underperform due to lack of implant or procedural carve-outs, etc. for services not typically provided by the acquirer.
An acquirer’s contracts on may also underperform at a target facility due to various reimbursement logic differences in each party’s contract. Some overall structural differences such as fee schedule (“FS”) vs percent of charge (“POC”) are more obvious; however understanding the reimbursement logic details for each parties’ contracts will provide a solid foundation when identifying reasons for variations in overall contract performance. Some examples of where reimbursement logic details differ between two parties’ contracts include:
To summarize, there are several reasons why an acquirer’s contracts may not perform on a target’s utilization data beyond simple rates, particularly case mix/ utilization and contract structure. Details within these items matter as they can all contribute to a negative impact to revenue.