top of page
  • Writer's pictureGene Preston

Third Party Payer Negotiations

"This internal jargon, sprinkled with the egos of executives from both sides, limits the ability to construct the win/win deal that is better for all and serves the patient in the best possible fashion."

Payer Relationships

Possessing a complete understanding of the other party in any negotiation is paramount to a successful outcome. Most non-profit health system executives experience is limited to the financial and operational acumen of healthcare. Such experience is healthcare centric and has inherent prejudices that limit their ability to connect with a third-party payer. To complicate matters more, the third-party payer experience is centric to financial and operations of a health plan which is laden with the same prejudices towards providers. In my experience I have heard a variety of comments from both sides of the negotiation table.

“They are trying to screw us!”

“Hospitals game their charge master.”

“They are making subtle policy changes and taking margin little by little.”

“You can’t trust them.”

“The health plan does not care about the patient, we do.”

“They just want to be paid more”

“They just want to pay less”

This internal jargon sprinkled with the egos of executives from both sides limits the ability to construct the win/win deal that is better for all and serves the patient in the best possible fashion.

Understanding the Payer

An understanding of the principals of health insurance is necessary to bridge the intentions of both parties at the negotiation table. Expanding on the mindset and goals of a third-party payer is to vast to address in detail; however, it can be reduced to two fundamental principles. Unit cost and utilization are the core of the financial operations of a health plan. Simply stated, “How many units do we need and what is the cost per unit?” Obviously, this oversimplifies the financial operations of a health plan but will serve to assist in building a fundamental understanding.

Unit Cost

Unit costs are DRG base rates, APCs, RVUs, per diems and a variety of other payment modalities. Payers seek to negotiate fixed prices as it reduces the variability in cost per unit. This is not any different from a provider negotiating fixed cost for medical supplies and allows them to budget with more precision and reduces cost variances in departments and service lines.


Utilization remains the variable today that payers must contend with the most. Today with risk adjustment, payers have been able to add predictability based upon disease state to many of the healthcare services needed for care of the patient. It remains very difficult to predict catastrophic healthcare events as well sudden onset of disease.

Payers also break utilization down by place of service and drive utilization to the environment that has the most favorable unit cost. Hospitals and health systems, competing with the lower unit costs of a physician practice, need to understand the payer has strong incentives to access the lowest unit cost possible and be prepared to negotiate their arrangement with this mind.

Knowing the Payer

The following data set is available in most states or resides in a national database. These data sets will provide a significant amount of intelligence preceding any negotiation and should be added to your managed care data warehouse.

1. Insurance Blank (quarterly and annual regulatory filing)

2. Rate Filing (cost per unit and expected utilization of the filed premium rate)

3. Medicare Advantage (enrollment by company, by plan by county)

4. Member Month Data

5. Annual Report

6. Payer Performance Surveys

7. Star Ratings

8. Risk Adjustment

Understanding the current state of your facility and of the insurance market will lay a foundation to approach your managed care strategic plan with full visibility. In my experience, having these tools to draw upon has made a difference in being able to secure a win/win agreement.

20 views0 comments

Recent Posts

See All


bottom of page