Six Payer Contracting Challenges for Private Equity–Backed Healthcare Providers and How to Solve Them

In 2018, there were 590 private equity (PE) deals in the US healthcare industry collectively worth more than $88 billion. Many of these deals focused on historically fragmented specialties within the provider sector, including behavioral health, dermatology, orthopedics, otolaryngology, urology, and dentistry. With the COVID-19 pandemic putting a severe financial strain on the shrinking pool of independent provider groups, PE investment in such groups has and will continue over the next several years as the providers seek financial support.

PE-backed healthcare providers need to optimize their contracts with commercial health insurers and Medicare Advantage plans to deliver the returns necessary to satisfy their owners, and most importantly, their physician partners. Payer contracts should recognize the improved value PE investment typically brings—for example, expanded access through the hiring of more providers and the opening of new locations, along with technology to improve the patient experience. However, many PE-backed providers struggle to improve the financial and operational terms of their payer contracts at the same rate as their value propositions to payers and patients.

Solving the Problem

When negotiating payer contracts, there are six common challenges PE-backed healthcare organizations face. Below, we discuss those challenges and offers solutions that can help these organizations establish and meet reasonable expectations for contractual improvements.

Challenge One: Underestimating the Payer Contracting Timeline

When a PE firm invests in a healthcare provider, they work to grow the provider organization’s top line and EBITDA as quickly as possible. However, payer contract negotiations, which should be a focus for economic growth, tend to move slowly and require attention to detail. For example, analyzing rates and contract language and developing a negotiation strategy can take up to two months before the provider even initiates contact with payers. The provider and a given payer may then share multiple rate proposals during the negotiations, with each proposal coming a month or more apart to allow for analysis and consideration. This adds up to a significant and time-consuming work effort.

Solution: Understand the time frame for negotiating and implementing new payer agreements, and know how to increase the likelihood of an expedited process.

Negotiating a contract—from the initial outreach to a payer to the effective date of the new agreement—typically takes between three and six months. See figure 1 for a typical payer contracting timeline.

The following actions can increase the likelihood that negotiations will be on the shorter end of the range:

1. Review any existing payer contracts for renewal limitations. Contract renewal may be tied to a specific date (e.g., the end of the initial contract term, the renewal date), and if that date is far enough away, the payer may drag its feet.
2. Identify the correct contracting representative from the payer. Contacting the payer’s negotiating representative directly is a more efficient way to initiate negotiations than calling the payer’s provider services number and expressing a desire to negotiate a contract.
3. Negotiate contract language and initiate credentialing while rate negotiations are ongoing. Contract language negotiations and credentialing are critical aspects of the contracting process that can take several months each. Initiating language negotiations and credentialing at the same time as rate negotiations can ensure that a contract becomes effective as soon as possible after rates are agreed upon.

_{Designed by: MaryAnne Akhouzine
Edited by: Matt Maslin}