What to Know:
- Rural hospitals can unlock meaningful revenue gains by shifting from reactive contracting to a proactive, data-driven strategy grounded in market benchmarks and contract visibility.
- Hidden contract mechanics can quietly erode margins unless actively monitored and negotiated
- With better access to pricing data and value-based opportunities, rural providers can strengthen negotiations and secure sustainable growth.
Rural hospitals are navigating a complex financial landscape where tight margins and evolving reimbursement models make every managed care contract decision critical. And while that may be a true statement for most hospitals, rural providers face unique payer contracting challenges stemming from their size, geography, and payer mix. To stay competitive and financially sustainable, these organizations must take a more strategic, data-driven approach to payer contracting and revenue optimization.
Below are five areas of opportunity that, when aligned, can significantly strengthen a rural hospital’s negotiating position and long-term viability.
1. Contract Inventory
Before your hospital organization can effectively engage in negotiation activities, you need to establish and maintain a contract inventory. This inventory gives you visibility into contractual obligations, risks, and opportunities. At a minimum, your organization should ensure that it has all its current agreements and fee schedules. Once this is confirmed, develop a contract matrix that clearly documents key contract elements, including:
- Effective date.
- Initial term.
- Renewal term.
- Termination without clause provisions.
- Date of next renewal.
- Date of last known rate increase.
Pay particular attention to renewal terms (auto-renewal clauses, annual time-specific renewals and deadlines), as these directly impact your organization’s ability to enter into payer negotiations.
2. Chargemaster Updates to Prevent Lesser-Of
Most hospitals have provisions in their payer contracts stating that the hospital will be paid the lesser of the contracted allowable rate or 100% of billed charges for a given service. Rural hospitals often have low charge levels relative to their urban counterparts, which makes them susceptible to hitting “lesser-of,” that is, getting paid 100% of charges rather than the higher contracted allowable rate.
This is effectively forgoing potential revenue, so periodically review your claims data to ensure your hospital’s payments are not equal to charges (a sign you are hitting lesser-of). If your hospital is hitting lesser-of, increase your charges.
Not that it’s that simple. Health plans are adding stricter limitations to chargemaster increases that make it increasingly difficult to mitigate the impact of lesser-of provisions. Therefore, be sure to read chargemaster increase provisions in your payer contracts carefully and negotiate more favorable language if they do not allow your hospital to prevent cases from triggering lesser-of payments.
3. Price Transparency Benchmarking
Within the last few years, price transparency data has become increasingly accurate. While not perfect, it can give rural hospitals more visibility than ever before into how their competitors are reimbursed by health plans. This data can provide valuable benchmarks in payer contract negotiations by showing reimbursement disparities between your hospital and its rural and urban competitors. These benchmarks can be used to set negotiation targets and articulate the value that your hospital delivers to its rural community.
Again, this is easier said than done. Price transparency files—particularly those published by health plans (as opposed to those published by hospitals)—are extremely large and can be difficult to access. Engage a third party, such as a consulting firm, that can access the data and put the information into a more easily digestible format. Next, compare your hospital’s reimbursement rates by commercial payer to the same commercial payer’s rates for your competitors.
4. Determining Market Rates: You Are No Longer in the Dark
It is a new day for providers when determining market rates for their services. There are multiple proprietary data sets available, as well as publicly available, payer- and provider-posted price transparency data. Although this information is not easily mined, investing in acquiring it will create new revenue improvement opportunities. Hospitals can compare their payer utilization data set and payment yield to their competitors, for the same payers, using either hospital- or payer-posted price transparency data. The payment yield can be calculated in actual dollar increase and also expressed as a percentage of Medicare.
If your competitors are paid 225% of Medicare for the same services but you are paid only 175% of Medicare, there is a 50-percentage point gap. Your rates would need to increase by 28% to match your competitors’ rates. Having that information to price your rate proposal and justify rate increase requests puts you in a much stronger negotiating position.
5. Value-Based Care
The march to value-based care in rural healthcare continues as health plans, employers, and patients seek more value in the areas of patient experience, quality, and cost management. Although the journey has been more of a slog than a steady progression, more managed care contracts include value-based metrics, with an opportunity for providers to earn more dollars beyond the contracted rate increases.
Rural health systems are increasingly participating in ACOs and value-based models, but they face structural barriers (e.g., payment design, low patient volume, high fixed costs), making full participation challenging. These contracts typically include additional financial payments opportunities, also known as “upside only,” with no penalty for providers not achieving key performance indicators.
Our advice to rural healthcare providers: do not assume any financial risk for value-based care (downside) or give up rate increases in exchange for value-based incentives. Value-based care should create a financial opportunity that is beyond a contracted rate increase. Gaining experience in value-based care is desirable but must be measured against the financial opportunity and additional resources and costs to monitor and manage these programs.
From Survival to Strategy
Developing a cohesive strategy around these five areas will enable rural hospitals to move from reactive contracting to a more informed, proactive approach that drives both revenue improvement and long-term success.
