Imagine two managed care contracts with essentially the same reimbursement rates. Under the first, claims generally get paid accurately and on time. Under the second, the payor routinely downcodes claims, makes post-payment adjustments, delays payment, requests additional documentation, or forces the provider through multiple rounds of appeals to collect what the contract says it is owed.
Those contracts do not have the same economic value.
That seems obvious when you put them side by side. Yet providers still spend enormous amounts of time negotiating contract rates while many of the behaviors that determine what they actually collect are managed somewhere else, usually after they become a revenue cycle problem. We’re separating two things that belong together.
The rate is what you negotiate, but the yield is what you actually get. A rate is only worth what survives adjudication.
A payor contract review should look beyond rates
A managed care contract can carry an attractive negotiated rate and still underperform once claims begin moving through the payor’s systems. Denials, underpayments, downcoding, recoupments, payment delays, post-payment audits, and the expense of appeals all affect what the provider ultimately realizes from the agreement.
Most provider organizations track these issues across different functions. Revenue Cycle watches denials while managed care negotiates rates and contract terms. Finance watches cash, and clinical teams get pulled into appeals and documentation requests. A thorough payor contract review requires bringing all of that information together. A contract yield assessment asks whether the organization received the economics it negotiated.
A 5% rate increase looks very different if the associated revenue requires more appeals, arrives months late, or never arrives at all. Changes in payment policies, coding reviews, and documentation requirements can make the negotiated amount more expensive to collect.
Some of that erosion is easy to see in underpaid or denied claims that are never recovered. It is less obvious when the provider eventually gets paid after three rounds of review, months in accounts receivable, or significant staff intervention. The payment may ultimately match the contracted amount, but its value has already been eroded by the investment it took to collect it.
Cost to collect belongs in the evaluation of the contract. If one payor consistently requires substantially more staff and clinical time, outside vendor expense, or delayed cash to produce the same reimbursement as another, the economics are different.
Payment uncertainty changes the value of expected revenue
Healthcare organizations already recognize this principle in their financial reporting. Public healthcare companies estimate what they realistically expect to collect from payors, including retroactive adjustments from audits and reviews.
One of the nation’s largest healthcare companies, for example, accounts for those adjustments when estimating patient-service revenue. Other healthcare organizations use historical collections and appeal experience to estimate realizable revenue.
The accounting reflects the economic reality. Expected reimbursement carries uncertainty until the provider knows what it will collect. Money sitting in accounts receivable is not money in the bank, and across thousands of claims, differences in payment amount and timing affect cash flow and forecast reliability.
Prior authorization shows how far payment uncertainty can go
Prior authorization is a particularly clear example because providers incur the administrative cost before care is delivered in exchange for greater certainty about coverage and medical necessity. Yet an approved service can still face a later challenge to the level of care, a downcode, a payment reduction, or a recoupment. Whatever label the payor gives the second review, the provider is back to defending revenue it reasonably believed had been settled.
In fact, these practices have become egregious enough that Congress has decided it’s time to step in, if only when it comes to Medicare Advantage. The proposed Protecting Approved Care Act would restrict Medicare Advantage plans from reversing authorized coverage, reopening coverage or payment determinations, or downcoding claims to reduce payment, subject to defined exceptions.
This act shouldn’t be necessary since CMS already restricts Medicare Advantage plans from later denying authorized care based on medical necessity. However, hospitals continue to report post-claim reviews, inpatient downgrades, payment reductions, and recoupments involving care that had previously been approved. CMS itself has addressed reports of plans characterizing some disputes as payment reviews rather than coverage determinations. Apparently, we need a policy debate over the durability of the word “approved.”
The proposed legislation applies to Medicare Advantage, but payment uncertainty exists across managed care products.
Measure payor contract performance through final payment
For every managed care contract you have, do you know the difference between expected reimbursement and what you ultimately receive?
A useful payor contract analysis follows the claim through final payment. Compare expected and actual payment, including denials, underpayments, reductions after authorization, and recoupments. Then look at how long it takes to reach final payment, how often appeals succeed, and what it costs to get there.
Look at where the problems concentrate as well. A payor may perform reasonably well overall while producing terrible contract yield in a particular product or service line. A high-dollar service may look profitable under the fee schedule and substantially less so after payment behavior and cost to collect are included.
Breaking the results down by payor, product, service line, and reason makes the gap between contract rate and contract yield visible.
Manage contracts for yield, not just rates
Take that information into the next negotiation. Recurring post-payment audits should inform audit provisions. Long recoupment periods should inform contractual windows. Reconsideration of authorized care should inform language governing authorization finality and payment review. Denial and appeal standards, payment timelines, vendor authority, and escalation processes can all affect contract yield.
Legitimate corrections will always exist. Eligibility and coding errors happen. Coordination-of-benefits issues happen. Fraud deserves investigation. A contract yield assessment helps distinguish those cases from recurring payor behaviors that separate expected reimbursement from realized reimbursement.
It can also change larger decisions about the business. Leaders may view a contract, product, or service line differently once they understand its actual yield and use that information to make decisions about growth and participation.
Providers spend months preparing for negotiations and fighting for another percentage point of reimbursement. They should know how much of that hard-won increase they actually keep.
The rate is only the beginning
A good negotiated rate is an accomplishment. The economics become real when the claims start arriving — maybe or maybe not.
A contract yield assessment closes the loop by showing what those negotiations actually produced and putting that information back in the hands of the people negotiating the next agreement. The rate tells you what the payor agreed to pay, but contract yield tells you what the agreement is actually worth.
