Revenue Matters – Reimbursement Considerations for a Transaction: Lessons Learned (Part 2)

February 4, 2020

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.

Why an Acquirer’s Contracts Don’t Perform – Contract Pitfalls

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).

1. Case Mix/ Utilization Differences

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.

2. Contract Structure

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:

  • Percent of charge-based (“POC”) components – IP first dollar vs second dollar stop loss, POC based thresholds, IP & OP “all other” POC buckets, etc.;
  • IP per diem vs case rates;
  • OP ER level categorization & rates paid by level;
  • OP surgery case rates vs FS/ grouper rates;
  • OP surgery grouper rate differentials;
  • MPPR logic; 100% of first procedure only vs 100% of first procedure and payments for tertiary procedures;
  • Procedural carve-outs – different rates & carve-out thresholds;
  • Implant carve-outs – different rates & carve-out thresholds;

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.