Here's a Chance to Understand Why Certain Healthcare Providers Don’t Get a Seat at the Third Party Payer Negotiation Tables

Here's a Chance to Understand Why Certain Healthcare Providers Don’t Get a Seat at the Third Party Payer Negotiation Tables

When discussing healthcare spending, the phrase “health care dollar” is often used to illustrate where medical-related expenses go. As a consultant and trainer, I've been teaching managed care contracting courses for HFMA, AICPA, MGMA, and others and also analyzing and negotiating contracts since the late 1970s. I've also been a director of provider contracting for a large insurer, and an HMO. In this article, I'll share some insights that explain why there's little to no interest in negotiating fees with some providers. First, it's not personal. It's business.

According to AHIP, the allocation of the healthcare dollar highlights an underlying profitability strategy: spending more on certain provider relations activities like negotiation, contracting, and network expansion does not always yield tangible savings to the plan. This directly impacts profits, making health plans less inclined to invest in expanding contracts with lower-cost or less profitable provider categories.

Where the Health Care Dollar Goes

Hospital Costs: 40.7 Cents

Hospital expenses dominate healthcare spending, accounting for nearly half of the healthcare dollar. These costs are broken down as follows:

  • Outpatient hospital costs (19.9 cents): Payments for non-drug-related treatments in outpatient departments.
  • Inpatient hospital costs (17.6 cents): Includes payments to physicians and facilities as well as prescription drugs administered during hospital stays.
  • Emergency room costs (3.2 cents): Covers physician and facility payments for ER visits and ambulance services.

Hospitals hold significant leverage due to their essential role and high cost, making them priority negotiators for health plans.

Prescription Drugs: 24.2 Cents

Prescription medications account for nearly a quarter of each dollar:

  • Outpatient prescription medications include self-administered drugs and medications given in clinics.
  • Net spending on self-administered prescriptions factors in rebates from drug manufacturers, which provide tangible savings to the plan.
  • This does not account for people purchasing drugs and not using benefits when they purchase in India, France, Canada, Mexico and elsewhere where toe same drugs cost considerably less.

Prescription drug spending is a significant focus of cost management, as rebates can directly impact a plan's bottom line.

Doctor Visits and Outpatient Services: 18.7 Cents

  • Doctor visits (11.6 cents): Payments for non-drug-related services during office or clinic visits.
  • Other outpatient care (7.1 cents): Includes costs from ambulatory surgery centers, labs, and home care.

These services offer moderate savings potential, but they do not provide the same scale of impact as hospital or drug costs. Thus, providers in these categories often have limited leverage in negotiations.

But, consider this: as more procedures are approved to be safely performed in the ASC setting, independent (non-hospital affiliated or owned) ASCs are likely to see more leverage as it is redirected from the 19.9 cents allocated to outpatient hospital surgery options. how long will it take? Nobody knows for sure.

Overhead and Administrative Costs: 15.7 Cents

  • Taxes and fees (3.4 cents): Mandatory assessments and taxes.
  • Other fees and business expenses (3.3 cents): Includes agent commissions and direct sales costs. Many of these commissions are going away. Where will that money be channeled? Probably to profits.
  • Profit (2.4 cents): The margin for both for-profit and not-for-profit insurers.
  • Cost containment (2.2 cents): Activities like claims management, fraud detection, contracting, prior authorizations, reinsurance premiums, and network management.
  • Quality improvement (0.8 cents): Investments in improving health outcomes. Have you seen many? I haven't.
  • General and administrative costs (4.3 cents): Covers operational expenses like salaries, rent, and utilities.

Why Some Providers Are Excluded from Negotiations

Certain categories of healthcare providers, such as physical therapists, chiropractors, home health, DME, and some other outpatient care specialists, often don’t see the same investment in contract negotiations. This is because health plans prioritize cost containment where they can achieve the highest savings relative to their administrative effort and expense. For instance:

  1. Low Return on Investment: Contracting with these providers often results in minimal cost savings compared to the administrative effort involved. Unlike hospitals and pharmaceutical companies, these providers don’t significantly influence the overall cost structure of a health plan. This is especially true for chiropractors. They are limited to treating neck and back, even though their scope of practice may include more they can do, the health plan doesn't wish to purchase those services.
  2. Impact on Profit Margins: Spending more on negotiating or expanding contracts with these providers would increase administrative costs without yielding a proportional reduction in medical expenses, thus squeezing the already slim profit margins (2.4 cents). This is also why you won't likely see benefits expansion, bundled price negotiations for surgery, redirection, and other strategic cost containment offered by managed care and contracted plans.
  3. Cost Containment Priorities: Efforts are better spent on managing high-cost categories like hospitals and drugs, which account for 64.9 cents of the healthcare dollar. These areas offer more opportunities for substantial savings and rebates, directly improving the plan’s financial performance... for now. As care transitions safely to independent ASCs that are more flexible and willing to add specialties, I believe the hospital dollar will be reduced and redirected to the independent ASC setting.

The Business Logic of Selective Negotiation

The healthcare system is designed to optimize profits by focusing resources on areas that provide the greatest financial return. While this strategy makes economic sense for insurers, it often leaves smaller provider categories underrepresented in contract negotiations. As a result, these providers may struggle to compete or expand their network presence.

By understanding this allocation of the healthcare dollar, we can better grasp why certain providers are left out of the negotiation process. It’s not simply about the cost of care—they are excluded because the effort to negotiate with them does not align with the health plan's goal of maximizing profitability.

But is there a light at the end of the tunnel? I believe there is. If these marginalized providers can "bundle in" their services with their commensurate procedures in outpatient surgery, they could realize more margin for the same or similar reimbursement if they are part of the bundled case rate that is prepaid in full. They won't have to bill, collect or wait for money to be paid. Too bad the ancillary providers in this category just don't understand the opportunity here and are afraid to participate. Kudos to those who get it and adopt the bundling option early.

Alacrity Healthcare is your go to alternative. With Alacrity, employers, unions and independent self-pay patients are able to redirect these dollars, eliminate the health plan profit margins, commissions paid to sales reps, and the rest of that 15.7 cents on what they spend in health benefit claims. To learn more or to apply to participate in Alacrity's network, call 800-727-4160.

Armando Montalvo

Managed Care Leader | Provider Network Development & Optimization | Risk-Based Contracting | Payor Relations

1mo

Very informative! Thanks for sharing.

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Isaac S.

Helping Healthcare Leaders Grow their organization by introducing them to Quality Talent

1mo

Your expertise in managed care contracting is invaluable, Maria.

Excellent breakdown of the allocation of income within the financial structure of the company, although it was necessary to add the cost of interest on debt payment that is allocated in the operation for the maintenance of the structure such as renewal or acquisition of equipment, given that this type of business requires a lot of investment to keep the equipment updated and provide quality medical services as support for medical management with the patient...

Syed Abdul Asfaan

Passionate Web and Mobile App Developer | IT Operations Head | Tech Enthusiast Driving Innovation | Salesforce Expert | CEO at Design Plunge

1mo

Well written and insightful article

Talitha Williams

Strategic Data Driven Healthcare Consultant | 5P Healthcare Advantage Formula | Maximize Reimbursement | 🔝Patient Experience | Outcome Improvement | Clinical Practice Business Growth | Veteran🥾 | Foodie 🍱| Vanlife🚌

1mo

I love this article Maria! "Too bad the ancillary providers in this category just don't understand the opportunity here and are afraid to participate."  You are absolutely right!! They will need to innovate or perish. I myself find it difficult to "convince" providers of the need to innovate and pivot. It is definitely a more reactive industry than a proactive one. But as Mark Cuban often says, first come the innovators, then come the imitators, then come the idiots. If too many providers fail to pivot soon enough, I'm afraid they may come up with the short end of the stick

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