Managed Care Contract Negotiations Provider Prospective June 26, 2008

1. Managed Care Contract NegotiationsProvider ProspectiveJune 26, 2008

2. Overview of Topics • Payer, Provider Relations • Payer, Provider Negotiations • Managed Care Market Strategy • Managed Care Market Modeling • Examples • Future Trends

3. Payer/Provider Relations

4. Payer/Provider Relations: Historical Context • Payers and Providers have historically had a somewhat contentious relationship with very little trust between them: • Some payers have taken advantage of hospitals/physicians using payment hierarchies, bundling policies, and misleading methodologies as well as arbitrary denials and audit take-backs • Some hospitals have taken advantage of payers using phantom or targeted chargemaster changes

5. Payer/Provider Relations: Climate of Most Negotiations • Historical relationship creates a atmosphere of distrust in every negotiation • Arbitrary mandates are set because of this history (for example) • % of charge contracts are bad for the payer and good for the hospital • Fixed fee contracts are bad for hospital and good for the payer • Atmosphere of distrust does not allow for the development of “creative solutions” • This ultimately hurts the employer/consumer/member

6. Payer, Provider Negotiations

7. Overview • Myths about Payer/Hospital Negotiations • Managed Care Strategy • Modeling for Negotiation • Market Based Modeling • An Example

8. Myths about Payer/Hospital Negotiations • Payers have access to more data than providers, therefore • Payers will always have the advantage of better data • Payers have many (more) actuaries and financial analysts, so Payers will always have a modeling advantage over Hospitals • Payers understand the market better than hospitals • You must get the public’s support • In a tough negotiation, whoever wins the public’s support first will have a huge advantage

9. Facts about Payer/Hospital Negotiations • Data is the most important tool in any negotiation • Market leverage is the second most important tool in any negotiation • A good negotiator must understand the data and its limitations in order to effectively use market leverage

10. Managed Care Strategy • Before beginning any negotiation, a hospital must have a data driven well-developed managed care strategy that: • Takes into account the local market realities • Key payers • Other hospital competitors • Major local employers • Changing plan designs • Premium rates • Fits in with hospitals long term financial plans • Is realistic and can be implemented

11. Modeling for NegotiationCost Based vs Market Based • Targets for negotiations are usually set based on contract profitability, not market rates • That is, the provider estimates cost and develops a cost plus margin to propose to managed care payers • Hospital has no idea if cost + margin is even reasonable in their market • An efficient provider may be making a profit, but could be making an even greater profit if they understood “market rates” • Most hospitals idea of identifying “market rates” is “what is the payer we’re about to negotiate with paying the other hospital(s) in town?”

12. Approach to Managed Care Contracting • Cost Basis • Understand your cost for providing services • Develop expected cost + margin • Calculate needed reimbursement rates • Market Basis • Understand market dynamics • Develop model of managed care market • Calculate rates that “market” can support

13. Market Based • Analyze the local managed care market • What are local market premiums? • What are providers being reimbursed? • Hospitals • Physicians • Ancillaries • Key questions to be answered from analysis: • What is the local market paying for the services we provide? • How much can we receive for our services and still be in line with the market? • What will be the effect on the local market of our rate requests?

14. General Approach • Collect managed care market data • Publicly available information • Hospital financial data • Rate filings • Consulting firms • Data services • Proprietary information • Hospital financial information • Negotiated provider contracts • Market knowledge • Consulting firms

15. General Approach (cont’d) • Develop an actuarial model of the local market • Process is much more difficult in a very large/diverse market • Manhattan/New York City • Los Angeles County, CA • Very easy in smaller/less diverse market • Indianapolis, IN • San Diego County, CA • Most Georgia markets • Greenville, SC

16. General Approach (cont’d) • Once the model is developed, all the key questions can be answered, and a managed care strategy can be developed • Target reimbursement rates (In general and by payor) • The actuarial model contains all the necessary information about the market

17. Modeling Markets

18. Market Hospital Data • Begin with financial (cost report) data for 3 major systems in the market • Adjust data for known market facts to produce known financial results • Client’s financial performance • Medicare reimbursement and market share • Make similar adjustments to unknown data • The key is to always be conservative • Produce expected average reimbursement for hospitals in market

19. Actuarial Model Development • Collect Client’s system utilization and reimbursement data • Inpatient and Outpatient • Estimate hospital market share and commercial membership • Develop actuarial model for market • “Gross up” Client’s data based on market share and membership to develop expected utilization per 1000 • Use hospital utilization per 1000 to develop physician utilization per 1000 • Apply expected physician reimbursement rates to complete PMPM cost projection

20. Actuarial Model Development (cont’d) • Compare results to market premiums • Rate filing information • Other data (Mercer surveys) • Adjust assumptions until actuarial model predicts market

21. Model Results

22. Baseline Hospital Data forMarket (All Data is Publicly Available)

23. Adjustments to Baseline Data • Baseline data must be adjusted to remove non-managed care payors • Medicare • Medicaid • Workers Compensation • Self Pay/Charity etc • Other

24. Adjusted Commercial Results

25. Projection to FY 2008 and Chargemaster Adjustments

26. Actuarial Model Assumptions

27. Premium Rate Development

28. Negotiation Basics • Never ask for “unrealistic” rates • They do not give you room to negotiate, they only make you look unprepared, uninformed and weak • All rate proposals have to be defensible to all constituencies • Hospital Board, Employers, Payers etc • Stick to your strategy, adjusting tactics throughout the negotiation • Expect the worst (because that’s probably what you’re going to get)

29. Finalizing Agreements • Never depend on payer’s data without some external verification • Don’t allow artificial payer deadlines to complete contract cloud your judgment • Pay attention to all details • Be careful of “insignificant” issues • If truly insignificant, they should be insignificant to both sides

30. Examples of Other Markets • The following examples are of two markets in the Midwest • The data used for this analysis is all publicly available • A complete analysis would use this information to develop an actuarial model • This is simply the hospital reimbursement portion of the analysis • This information would then be merged with physician reimbursement and client specific information to develop a premium build up actuarial model

31. Market A

32. Lessons from Market A • Hospital 5 clearly is below market • Although hospital 5 is not at the same prestige level as hospital 1, they could increase reimbursement significantly without a payer terminating their contract • Hospital 5 is subsidizing the market • Hospital 5 probably has know idea that they could increase managed care revenue 25-30%

33. Market B

34. Lessons from Market B • Hospital 1 clearly is paid out of line with the market • Hospital 1 probably would not be able to ask for a large increase • Payers would be able to put a much cheaper product in the market by avoiding Hospital 1

35. Some Examples in Georgia Results Are All Based On Publicly Available Data Only

38. Future Trends • Consumerism • Tiered networks • All Providers • Physicians only • Price Transparency • Consumers are increasingly interested in the true cost of services • Employer Cost Shifting • Member out of pocket payments • Continually increasing • Create hospital bad debt