When the largest commercial contract for this multi-specialty clinic shifted to a lower-paying carrier, the practice faced the prospect of a revenue shortfall totaling more than $2 million. Read on to find out how this practice reversed that decline by heading back to the negotiating table.

Client: Multi-specialty clinic with ancillaries (lab, imaging, radiology)

Company size: Six physicians, roughly 100 full-time employees

Challenge: Declining revenue due to shift in payer mix

Solution: Negotiate higher reimbursement rates with largest commercial payer

Results: Projected $2.1M added revenue in 2016
Like many practices, this clinic derived the lion’s share of its revenues — roughly 50% — from one commercial payer.

By 2014, the practice saw a drop of more than $1 million in revenue — nearly 10% of its total annual revenues — and the decline was only accelerating. CRI projected a drop of more than $2 million in 2015 – that is, unless something changed.

When times are tough, businesses often look to slash expenses first. However, like many medical practices, more than 75% of the clinic’s expenses are fixed. Items such as rent and utilities, leases, and malpractice premiums typically offer little opportunity to negotiate. With CRI’s support, the practice administrator cut nearly $350,000 in variable expenses such as marketing costs and retirement plan expenditures. Even those reductions did not approach the looming revenue shortfall of $2 million. Unless the owners took a pay cut — always the last resort — cost-cutting was not going to put the practice back on track.

CRI turned their attention to the revenue side of the profit equation. After reviewing the fee schedules for the clinic’s two largest commercial payers, CRI suggested renegotiating with the new, larger insurer.

CRI knew that the practice was in a good negotiating position. The six-physician practice offered multiple clinical specialties (as well as laboratory, radiology, 3-D mammography, and other imaging). Not only do patients appreciate receiving all of those services under one roof, but insurers also prefer it because those ancillary services cost less in the physician setting than they would in a hospital.

CRI drafted a letter to the large insurer explaining that the practice would like to enter discussions to renegotiate the fee schedule.

To prepare for the negotiation, CRI benchmarked the insurer’s fee schedule against Medicare rates and the practice’s other commercial payers. CRI found that, although reimbursement across all codes averaged about 170% of Medicare rates, many of the practice’s highest-volume codes were being reimbursed at much lower rates.

Armed with CRI’s research, the practice administrator submitted a proposal that would increase rates on about 90% of the practice’s highest-volume codes.

After several months of negotiations, the insurer accepted the practice’s proposal and put the new rates into effect in August 2015. Revenue started to recover almost immediately. Through April 2016, the practice realized nearly $900,000 in added revenue compared to year-to-date 2015. At that rate, the practice’s top line will increase by more than $2.1 million, or roughly 25% higher than 2015 revenues.

Payers will most likely continue to ratchet down reimbursement rates even as expenses go up. Here are some tips to stay above water:
  • Review fee schedules from your largest payers. Request fee schedules for your commercial payers (if you don’t already have them). Compare reimbursement rates for high-volume Current Procedural Terminology (CPT) codes to Medicare rates and your other commercial payers. You will likely see that they vary anywhere from 105% to 250%.
  • Consider negotiating every two to three years. Payers’ fee schedules are not always “take it or leave it.” In fact, many payers are willing to negotiate rather than risk losing a practice that is popular with their members.
  • Charge the right rates. Your efforts to renegotiate will be in vain unless you charge the new rates. Most commercial contracts reimburse the lesser of the practice’s fee or the agreed-upon rate. As soon as the new rates take effect, update your billing to make sure your practice is charging the negotiated rate.