Buried in almost every payer agreement is a small language provision with massive financial consequences. The lesser-of clause in payer contracts quietly caps reimbursement and can turn low or no chargemaster increases into millions in lost revenue.
The good news is that you can take steps to avoid leaving serious money on the table. This is what you need to know:
What is the “lesser-of” provision?
A common language clause in payer contracts where reimbursement for a specific service is based on the lower (or lesser) of either the provider’s billed charges or the contracted allowable amount.
How does this clause affect reimbursement?
Payers compare billed charges to negotiated rates and automatically default to paying the lower dollar amount.
What creates a lesser-of scenario?
There are typically two causes for triggering a lesser-of payment:
- The first scenario is the compounded impact of providers not increasing charges over a number of years (three to five years, for example). When hospitals obtain rate increases annually from health plans, but do not increase their chargemaster, contracted reimbursement rates can exceed charges.
- The second scenario involves payers transitioning their reimbursement from a percentage-of-charge methodology to fixed dollar rates or other fixed rate methodologies (e.g., from groupers to a Medicare methodology). This can shift the overall reimbursement within multiple service categories, creating lesser-of scenarios.
How can under-optimized or low charges trigger unintended revenue loss?
When outdated or inconsistently priced chargemasters fall below contracted reimbursement rates, providers are paid less than their negotiated rates.
What is the financial risk to providers with lesser-of language?
In ECG’s experience, we see more providers being paid less than contracted rates. These “lost” dollars will only compound over time if the problem is not corrected. Even small charge discrepancies across high-volume services can compound into millions in annual lost reimbursement.
Can I mitigate this impact during contract negotiations?
Yes. Understanding the difference between contracted rate increases and the actual payment yield increases is critical.
- Contracted rate increase is the percentage increase negotiated and applied to rates, which were agreed upon between the two parties.
- Payment yield increase is the amount that allowables will actually increase.
During contract renewals, if rates are simply increased 5% across the board, sometimes the hospital will not actually yield a 5% increase in allowables. Some services will not experience an increase, based on the limitation with the lesser-of language. There are a couple of ways to mitigate the impact.
- The first is to model and understand the impact and bring that financial information to the attention of the payer. If you can shift the discussion and negotiation from contracted rate increases to payment yield increases, that is ideal.
- The second option is to plan and incorporate yearly chargemaster increases into the overall negotiations. Hospitals can analyze all their payer contracts along with their negotiated increases and determine the minimum amount charges need to increase for all contracts to achieve their negotiated payment increases.
Are there other strategies to mitigate exposure?
Yes. Perform routine chargemaster maintenance, including:
- Implementing standard yearly increases.
- Benchmarking charges against market norms.
- Conducting comprehensive charge reviews.
Crucially, if you are adjusting fixed reimbursement methodologies or adopting new ones, model the reimbursement scenarios to ensure charges remain above contracted allowable amounts.
Client Examples
ECG has advised multiple clients on how to mitigate the impact of lesser-of language provisions.
- A multihospital system in the Midwest had a lesser-of charge issue with all the major commercial payers. That one language provision resulted in reduced reimbursement of $26 million annually. ECG helped identify the issues and provided analytics and modeling to quantify the financial difference.
- For another health system, ECG identified significant lesser-of reductions occurring. Through successive strategic chargemaster increases, the system’s revenues are projected to rise by $8.4 million due to the reduction of lesser-of scenarios, with the revenue improvement continuing year over year.
