Managed Care Contract Negotiations
Aug 25

The importance of measuring utilization and outcomes

In order to compete in a market that is moving toward managed care, doctors must be able to show that they are more effective clinically than their peers. In other words, mature managed care markets will reward doctors based upon cost effectiveness, rather than mere utilization under the old fee for service system. As such, the challenge for many medical practices will be to gather the information necessary to prove to a third party payer the practice is indeed cost effective. In other words, a practice must somehow gather utilization and outcomes data, usually by clinical episode or diagnosis code. This type of information will be critical when competing for contracts and can also be extremely valuable in the negotiation and renegotiation of managed care rates. Let us look at a simple example.


An Ob/Gyn group wants to negotiate rates with Aetna. It gathers and assembles the following limited practice data: (1) C-section rates, (2) VBAC rates, (3) Average length of stay in the hospital, (4) Rate of surgical complications, and (5) Length of stay and complication rates for laparscopic hysterectomies. At the same time, the group was able to obtain national utilization data for its specialty. It beat the national average in every category named above. Obviously this is an enviable situation for a medical practice since it can demonstrate with actual statistics that it is a cost effective provider. In this situation, Aetna will probably listen to proposed changes to its reimbursement schedule for this particular group. This is because payors want cost effective doctors in their network in order to contain related health care costs over a long period of time; They certainly do not want their economics hindered by doctors who overutilize services.


The problem encountered by most doctor offices is that most computer systems are incapable of providing utilization and outcomes information. These medical billing systems were designed for a traditional fee for service environment and not for a managed care environment. While many systems have come a long way towards adapting to a managed care environment, most have yet to progress to this level of output. Practices need to keep this issue in mind when selecting a new computer system, otherwise the practice runs the risk of having to replace the system within a relatively few number of years should managed care gain a strong foothold in a particular community and as such, the information needs of the practice change.


If the current software system cannot provide utilization and outcomes data, there are other ways to obtain it. Hospitals may have this information gathering capability; Other third party entities such as managed care plans may have this capability; or the practice may just have to track and accumulate this information manually. However, as the need for this information increases, most practices will have to commit to purchasing a much more expansive computer system. This is one reason why doctors are continuing their affiliation activities so they may have access to this type of data in the future. Large delivery systems have the capital to acquire and implement these systems.


The point should be clear: Either start thinking about tracking utilization and outcomes now or risk losing out in the future. Practices that fail to do this will not be able to compete for contracts nor convince a payor to increase its reimbursement payments to the practice. The end result will be a decline in practice revenues.

About Reed Tinsley, CPA

As a top advisor to physicians, I help increase practice profits by delivering hands-on, expert medical accounting/tax support, practice counsel, and revenue-building strategies. Read more →