How Is Inflation Affecting the Reimbursement in Your Managed Care Agreements?

Many provider entities are struggling with rising costs. Financial challenges have been compounded by increased labor costs due to COVID-driven nursing staff shortages, exorbitant sign-on bonuses, and “the great resignation” of non-clinical employees.

Rubbing salt in the wound, the inflation numbers for the twelve months ending in April 2022 were recently released, and many reading this may be too young to recall inflation at such a level. Total inflation was reported at 8.3%, a reduction from the 41-year high for the twelve months ending on March 31, 2022, at 8.5%. This is particularly alarming considering that, according to the U.S. Labor Department, between 2012 and 2020, inflation never exceeded 2.3% (2019) and dropped to 0.7% in 2015.

How is this significant increase in inflation affecting reimbursement from healthcare providers managed care agreements as an extension of the provider’s profitability? Because inflation has been so low for so long, providers have been willing to execute managed care contracts with little to no annual increases in the cost of living. For instance, it is not unusual to come across agreements with a 1.0% to 3.0% annual increase. Physician agreements, in particular, often have no annual increase included in the document’s fee schedule. At least two other factors are associated with this sudden rise in inflation affecting providers.

First, Medicare, Medicaid, and other governmental reimbursements typically comprise at least 50% to 60% of a provider’s total revenue. Most analysts do not see these governmental payers keeping up with surging inflation, at least not in the near term. And, because many providers barely break even from these governmental payers, it’s possible that half or less of a provider’s payer mix must account for 100% of their profit, which compounds the impact of inflation on provider reimbursement.

Second, most managed care agreements are for long-term periods, often three years or more. Ultimately, it locks a provider into a losing scenario, in which costs outpace the opportunity to increase revenue by large margins.

The big question is what can be done to rectify this scenario and keep provider businesses profitable? The simple but often challenging answer is to renegotiate managed care agreements. There are a wide variety of approaches to this process, and often providers find better negotiating success through engaging an objective partner rather than being in the trenches themselves. This can range from seeking council and advisory from an outside source to allowing the outside party to handle all negotiations and analysis.

Coker has the expertise to guide your organization through this process to achieve the best possible outcomes, leveraging the most efficient mix of your resources and ours. Contact us and request to speak with Brandt Jewell today for a free consultation about how we can help you navigate these challenging times.

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