How managed care contracting strategies promote operational resilience

In an increasingly volatile marketplace, managed care contracting is quickly becoming a strategic priority for many healthcare organizations nationwide. As such, providers have begun to ask these and other difficult questions:

• Do we want to enable in-market payer growth or restrict it? Do we want to partner with out-of-market plans to introduce new alternatives?
• Should we reset payer contracts that are no longer workable? If so, how?
• Are we leaving economic value on the table, and if so, what can we do about it?

“It’s all about creating a path to sustainability,” said John Poziemski, managing director at Kaufman Hall. “Organizations have been inspired to rethink old strategies and devise a managed care contracting strategy that’s responsive to changes in the populations they serve.”

Setting the stage

This novel strategy comes against the backdrop of macro-economic pressures forcing providers to look beyond cost structure and operations to ensure financial viability, said Poziemski.

First is the changing role of national health plans in many markets.

“Big national healthcare companies have been in a growth mode that emphasizes vertical integration,” he said. “We call them ‘insurers,’ but they don’t really look like insurers anymore based on their portfolio of assets and services they provide to the marketplace. If your objective as the CFO is to instill resilience into your company, you want to avoid tying too much of your performance to one plan that also may be competing with you in certain service areas.”

Second is the rapid evolution of today’s healthcare marketplace.

“In the past, CFOs might have assumed their organization’s payer mix or acuity mix would always be constant over their career, but the reality is that both are changing very rapidly in a lot of markets,” said Poziemski.

“There’s a shrinking commercial base and a growth on the government side particularly with Medicare Advantage plans and Medicaid,” he added. “There’s also a whole Medicaid redetermination process that’s occurring. This changes the mix of the members and patients that organizations serve and has serious economic implications for every healthcare company.”

Third is the national and market-specific cross-subsidy dynamic that continues to invite disruption.

When commercial payments increase, and government payments decrease, disruptors can easily gain market share in price-sensitive markets, which is most markets today. “Employers are saying, ‘You can’t shift costs onto us anymore.’ This is creating a perfect environment for disruptors to come in, get a foothold and build some momentum in the marketplace,” said Poziemski.

Rethinking value-based contracts

Being paid fairly and for the level of value their organization creates for the marketplace is the right focus for CFOs in 2023 and beyond, said Poziemski.

“An organization’s contracts represent how it shows up in the marketplace,” he added. “That has implications. Whose growth do you want to enable? That starts to change the approach to managed care contracting.”

For example, how much value per life does the health system receive because of a value-based contract?

“This isn’t just a function of the rates,” he said. “It’s a function of how those members interact with the health system. Are they steered to the health system or around it? Organizations need to look holistically at the economic value of each member.”

Poziemski said it’s time to for organizations to evaluate whether value-based contracts ultimately generate tangible benefits.

“Organizations need to ensure their value-based contracts are long-term profitable,” he said. “So many organizations create value but don’t capture it.”

Considering payer partnerships

As healthcare organizations consider partnering with payers, Poziemski urges CFOs to ask this question: Would a partnership enable or limit our resilience in the market?

“Many CFOs are concluding that their organization is not as resilient as it needs to be given the strength of some of the carriers in their market,” said Poziemski.

When assessing a potential partnership, Poziemski recommends that providers consider these questions:

• Does the partnership move us closer to the premium dollar?
• Does it enable us to capture a fair share of the value we are creating?
• Does it enable us to grow more proximate to plan members?
• Will we be able to deliver a differentiated experience to plan members?

Pursuing ‘hard resets’

Although health systems have tended to play it safe in the past, Poziemski said he gets the sense that more are being brought to the brink.

“A lot of organizations are at the point of no return,” he said. “It’s this concept that to be viable long term, we’ll need to reset the collective expectations of our partners because our current contracts don’t allow for this. That’s where the concept of going radical comes in — doing something intentionally disruptive to the system.”

While in some instances this may mean going out of network, in others, it could mean something more drastic: Contract termination. Poziemski urges CFOs to consider the short-term impact of contract terminations on cashflow or access to capital markets versus the long-term impact on resilience.

However, there are also upstream and downstream implications to consider, he said.

“A lot of organizations are saying, ‘Ok, if this is something we’re going to do, we need that roadmap in place so we can mitigate risk,’” he said. “Typically, we see three to six months of pre-planning.”

For example, contract terminations will undoubtedly affect the health plan, members and employer groups. However, there will also be downstream effects on the physician enterprise in the form of sudden loss of patient access, decrease in panel size, and changes to quality incentives and productivity.

Opening lines of communication with payers

One of the most effective steps organizations can take when negotiating managed care contracts is to foster transparent communication with payers, said Poziemski. For health systems, the challenge lies in conveying the capital-intensive nature of their work, he added.

“Health systems are constantly investing in technology and facilities, and they carry quite a bit of debt,” he said. “There’s also interest and depreciation associated with capital investments.”

However, healthcare organizations also need to understand the payer side of the equation — particularly the implications of risk-based capital.

“Providers tend to think plans are more profitable than they really are, and plans tend to think providers are more profitable than they really are,” Poziemski said.

What’s the solution? Collaboration.

“The healthier conversations occur when everyone comes together with an open mind and an agreement on the fact that healthcare today is too expensive, and the market demands more affordable solutions and products,” said Poziemski. “The best way to deliver that is working together and not against each other.”

• Regardless of structure, goals of the relationship can include:
• Delivering integrated care and coverage options that combine plan and provider
• Partnering to reduce total cost of care on a per member and population basis
• Structuring the relationship to reward desired performance and outcomes
• Partnering with a regional plan to build a Medicare Advantage (MA) product to counter the strength of certain national payers in the MA market

Ultimately, payers and providers are in a symbiotic relationship

“The reality is that plans need providers,” Poziemski said. “We’ve seen that manifest in terms of what activities they’re pursuing, how they’re vertically integrating with different parts of the provider universe and even acquiring provider assets. I think providers also need plans. They need to understand the total cost of the care and the health status of the population they’re serving. They need this information on a real-time basis to make the right decisions and change behaviors.”

Looking ahead

Cost containment and operational efficiency have been priorities for quite some time. However, organizations are also increasingly looking for additional ways to promote operational resilience, including a more deliberate managed care strategy.

“In years past, managed care contracting has been an important function and competency for provider organizations, but it’s always been at arm’s length from the strategic planning function,” said Poziemski.

“I’m starting to see those two things converge. We’re at the beginning of a wave. This is going to be front and center for a lot of people.”

This article is based on a presentation given at the Academic Medical Center CFO Executive Council meeting on February 2, 2023. 

About Kaufman Hall

Kaufman Hall is a trusted partner for organizations in dynamic, disrupted, and transforming industries. With a unique combination of consulting services, Kaufman Hall uses rigorous analytics to help leadership achieve transformative outcomes. With particular expertise in healthcare and higher education, Kaufman Hall hires the best of the best to solve the toughest business problems on Earth.

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