Manage Practice Capacity to Improve Contracting Leverage

Most practices feel like they have little or no leverage in payer negotiations. The fact is that virtually every practice can increase its leverage, not always enough to move mountains, but always more. Chief among the strategies to increase leverage is to manage practice capacity. The objective is to maintain practice capacity at slightly less than patient's demand for services.

Your practice can be described as having Excess Capacity or Excess Demand. A practice with excess capacity is one where there are appointment or treatment slots going unused because there are no patients to fill them. In any business with very high fixed cost, like physician practices, unused capacity is poison to the bottom line. In a practice with excess capacity the highest managed care priority is to add volume. With excess capacity the contracting strategy is simple - take any reasonable offer to remove all barriers to increasing volume. As maximum capacity is approached begin selectively reducing access to the lowest rate payers.

Most practices are in a situation of excess demand. Consider a practice working as hard as it can with all appointment slots used. Cost continues to go up and reimbursement rates stay flat, at best. In this situation a practice cannot work harder to make more money. The only alternative is to increase the average rate paid for services. Managing the practice's capacity to less than demand is essential to increasing the average rate.

In every practice some payers pay more than others and some payers buy more services than others. By comparing the average rate paid and the volume of services purchased for all payers, a practice can identify the commercial payers that pay at the lowest average rate. If a practice has excess demand and terminates with the lowest rate payer the same service slots will be replaced with patients from other payers at a higher rate, thus increasing the average rate. This very analysis creates the necessary leverage to renegotiate with the lowest payer. That leverage will either be compelling or it won't. In either case the practice can realize the increase by renegotiating or terminating.

This strategy becomes self-reinforcing because as the lowest payer is terminated or recontracted a new payer becomes the payer with the lowest rate. Through this mechanism of identifying and recontracting the lowest payer a practice with excess demand can progressively increase the average rate of payment. To enable this strategy a practice is best positioned when it manages capacity to slightly less than demand.

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