A Better Way to Negotiate Healthcare Costs

It is time for leaders of hospital systems and health insurance companies to muster up the courage to take on a problem-solving approach to negotiation.


Jeff Weiss is an adjunct professor of Business Administration at Dartmouth's Tuck School of Business and a partner at Vantage Partners, LLC.

Healthcare costs are a constant focus of attention. They have a huge impact on the U.S. economy, and it is no surprise to anyone that a great deal of legislative and policy changes have been crafted in the last few years primarily in the name of making healthcare more affordable for all. What is puzzling is that little attention has been paid to the arcane methods that insurance companies (payers) and hospital systems (providers) both continue to use to negotiate their contracts. In a throwback to the '80s, these contracts are still negotiated employing a zero sum or, as it is often called, a positional bargaining approach to negotiation. Ways to together improve patient outcomes, delivery of healthcare, research, or myriad other forms of value rarely enter into the conversation, and opportunities for real economic savings are left on the table.

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Most typically, the provider and payor begin negotiating contract renewals nine months before the contract is up. Most contracts are one to three years in duration, so these negotiations happen quite frequently. Often, the provider chooses a number (a percentage increase in reimbursement rates) and announces it to the payer: "We want a 7 percent increase for the next three years!" The payer, in turn, brings a briefcase of data to the table, trying to prove to the provider that this is an outrageous request and that "the market suggests that even a 1 percent increase might be too much." In turn, the provider attacks the data, points to their rising costs and decreased levels of reimbursement from Medicare and Medicaid, and indicates, "We could come down a bit, but a 6 and three-quarters percent increase is our best offer."  Of course, the payer comes back with "the most significant concession"—and an appeal for both sides to "be reasonable"—of moving up to a 2 and half percent increase. You guessed it, the provider balks, the payer then balks, but each makes another set of their "final concessions" and "final offers," and then the threats begin. "You'd hate to have employers (your customers) defect to another insurance company, because their employees are no longer covered in our hospital."  "You'll be the bigger loser when we go to the press, and perhaps even the state house, and describe how you are making demands which are out of line with the market, bullying us into driving up the cost of policies, and using the threat of limiting access to your physicians." Eventually, and sometimes after taking things right to the brink of one or both sides walking away, some split of the difference occurs and an outcome is reached. Both parties issue a press release about the new contract, but, of course, neither side is really happy.

While this might be slightly simplified (and the concessions game takes a lot longer and happens in much smaller increments), it is not exaggerated. It happens all the time.

With clients who are providers and others that are payers, of course, I am concerned that neither side is happy. However, it is the consumer that really lost, and that's my main concern. A chance to reduce healthcare costs was lost, and is lost every time this happens.

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Imagine a different approach. The provider begins by performing their internal calculations of what they need, but they do not limit it to a bottom line number. Instead, they look at their costs and the sources of those costs, the investments they believe they need to make, actions they would need to take to improve quality outcomes, data they need to be able to improve treatment and results, measures they would need to implement to reduce administrative inefficiency, and the like. Imagine the payer developing a set of questions to fully explore each of these issues with the provider digging deeply into the "why"s and "how"s. Based on this, together the parties are able to establish a list of key issues that would provide real bottom line value to the provider. The parties then explore possible ways to work together on each of the issues. For example, they could look to see if there are types of data the payer could share with the provider that might help improve treatment decisions, or  process improvements the provider could take to help improve claims coding and processing for the provider, or ways to jointly be involved in a capital investment the provider is looking to make, or new forms of technology in which to jointly invest, or ways of sharing greater risk in more costly service areas for the provider, just to name a few. As opposed to approaching this as a game of chess or a battle, the payers and providers invent these ideas together. Based on this, either party then develops a set of packages which include different combinations of the ideas invented together. Each package is then associated with a different proposed rate increase, depending on the amount of value created (and how much of the value goes to the provider versus the payer) by the content of the given package. If the packages are well developed, there is already a far greater chance that rate increases will be lower, improved quality measures and administrative simplicity will be achieved, and both providers and payers will be putting their dollars to work in the areas most needed.

All of this helps employers and consumers, at the very least with lower membership fees and perhaps even with lower co-pays and deductibles over time. Further, by solving a set of real problems faced by the hospital (reducing costs and helping with certain joint value investments), this might even provide them with a greater ability to spend more money on the underserved. Adopted in a widespread manner, applying a system of negotiation as joint problem-solving should additionally produce better care and lower healthcare costs over time.

Of course, even when approached in this manner, some parts of the negotiation may still be challenging. The parties may disagree about which package they like. They still may quibble over or have some legitimate disagreements about what rate increases should be associated with each package. Personalities or skill (most people have a lot more experience haggling) may create contention. That said, it is always better to whack up a bigger pie than a smaller one, and in my experience, if the providers and payers stay focused on the issues they identified up front, and approach negotiation with some real creativity, their differences around rates increases become a lot smaller and their negotiated outcome becomes a lot more valuable to each.

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What might sound too good to be true is not. It works, but it is the rare exception that these contracts get negotiated in this manner. Too many of us still negotiate the way we first negotiated (which, ironically, was likely in a hospital). We cried and we got fed. If that did not work, we cried louder and longer. Any given provider will be tempted to just bully a payer into a big rate increase, or vice versa. Having worked on many of these negotiations over time, however, I can state that it is close to axiomatic, that if one bullies the other during one or two terms of contract renewals, the pendulum then swings the other way and the other party then becomes the bully, at least for a while, until it swings back again. Who loses? We all do.

It is time for leaders of hospital systems and health insurance companies to muster up the courage to take on this different approach to negotiation, one that has widespread use in so many other industries. The good news is that my partners and I have met with myriad hospital CEOs and CFOs who express a sincere desire for a new approach to negotiation, but far too many conclude, "Those insurance companies just won't go for it; they like to haggle and no know other way." Ironically, we hear precisely the same from health insurance CEOs and COOs when they share, "We'd love to approach negotiations in a different way, but those hospitals will never go for it".

It is time to break the log jam, and try something new. We need the best of both sides to stop approaching this as a battle of wills, and refocus on viewing and approaching these negotiations as an exercise in joint problem-solving. If not, as insurance premiums rise and hospitals continue to face significant cost challenges, we will all (continue to be) the losers.