How to Reduce the Cost of Correctional Health Care, Part 3

Health Care Provider Contract Evaluation and Re-Negotiation

Once you have all of the data for your medical claims (See Part 2), you can start to analyze where you are spending your money. The biggest advantage of a claims database is the ability to pull information out. The most useful reports for an analysis are:

• Amount spent by provider
• Amount spent by service category
• Amount spent by specialty
• Amount spent by inmate
• Utilization by provider
• Utilization by specialty

There are an unlimited number of ways you can look at the data in your claims database, as long as you are capturing 100% of the claim data, but these will show you the areas you should concentrate on. Once you have run these reports, pull out all of your provider contracts. If you don’t have any contracts, you are wasting money. NOBODY should ever pay full charges for health care.

Next, look at the providers you spend the most money with, and review their contracts first. The most common contracts with providers are often done on a discount off of charges basis. You should easily be able to negotiate a 20% discount with any provider (it is not unusual to see a discount of 40-50%). If you don’t have at least a 20% discount, renegotiate that contract. If they are not willing to renegotiate, find a new provider, or hire a consultant to negotiate provider contracts for you. While it is easy to get a discount off of charges contract, that is not necessarily the best type of contract to negotiate.

Other methods of contracting use fee schedules. These usually mean that the contract is negotiated using either Medicaid or Medicare as the base line for pricing. While Medicaid provides the greatest savings (on average Medicaid pays 10-20% of billed charges), it is usually not an acceptable method of contracting for providers, especially to see inmates.

Several states have passed laws that require providers to treat inmates for Medicaid fees, but this has not resulted in improved care. What has happened in those cases is the providers refuse to perform routine services for inmates, and the only option available is the Emergency Department when the inmate is in critical condition. This has lead to liability for the facilities because of the standards of care are not being met.

A popular alternative (and the method utilized by the Federal Bureau of Prisons), is Medicare based contracting. The contracts are not done on Medicare rates (usually around 45-55% of billed charges), but instead use the Medicare rate as the base, and then a premium is added to that amount. Typical contracts using this method run from 110-200% of Medicare, depending on your area of the country.

The biggest benefit of this type of contract is the protection against a catastrophic episode. If you have been managing health care at a correctional facility for any length of time, you are very aware how one episode of care can spiral out of control and eat up your entire budget. In the past, a jail had to carry stop-loss insurance to protect against those episodes, but by putting Medicare based contracts in place, you can eliminate the need for those types of contracts.

In order to illustrate my point, I want to share the results of a study I performed for one of my clients. I had often recommended to them that they change their contracting strategy from the traditional “discount off charges” contracts to a Medicare based strategy.

The client chose correctional facilities from four different markets. Two facilities were located in FL, one was in North Carolina, and the fourth one was in California. All of their existing provider contracts were negotiated at a discount off of charges. Their typical discount was 10% to 20% off of charges. Their best contract for inpatient services was 30% off of charges. The client utilized a stop-loss insurance policy to guard against catastrophic care cases.

I assisted the client with the development of its provider contracts, to include: Medicare based contracting language, “not to exceed” clauses, reimbursement rates for procedures not covered by Medicare, and the best possible premium rates for the individual institutions.

In a period of less than two months, we were able to establish Medicare based rates with the majority of their providers in all four markets. The negotiated rates for most outpatient community based providers ranged between 100% of Medicare and 130% of Medicare. The negotiated rates for inpatient services ranged between 125% and 150% of Medicare. Outpatient facility based providers were contracted at rates ranging from 125% and 150% of Medicare as well.

For the next 12 months, we collected all of the medical claims from these four facilities. We ended up with a total of 1,875 claims for these facilities during that time.

The total of all billed charges for these claims was $2,406,793.55. The total Medicare allowable amount was $946,350.76, a $1,460,442.79 difference, or less than 40% of billed charges.

Here is a breakdown of the number of claims and the billed charges by service location:

Inpatient facility 55 – $884,856.51

Outpatient facility 174 – $548,868.53

Outpatient 1646 – $973,068.51

Total 1875 – $2,406,793.55

Here is the Medicare Allowable rate by service location:

Inpatient facility $377,966.78

Outpatient facility $146,387.18

Outpatient $421,996.80

Total $946,350.76

Here is what the client would have paid under the old contracts(not including insurance premiums):

Inpatient facility $707,885.21

Outpatient facility $439,094.82

Outpatient $778,454.81

Total $1,925,434.84

Using the worst case scenario for all four contracts, here is what was paid utilizing the Medicare based contracting strategy (total amount paid by client was lower than these figures):

Inpatient facility at 150% $566,950.17

Outpatient facility at 150% $219,580.77

Outpatient at 130% $548,595.84

Total $1,335,126.78

The savings realized under the worst case scenario for Medicare based contracts equate to an across the board savings of 1,071,666.77, or more than a 45% savings versus billed charges. When compared to typical institution health care contracts, these charges are still more than 30% less than a negotiated discount of 20% off of charges.

The results of this case study show that Medicare based contracting make sense for a correctional institution of any size.

All that being said, there are of course some additional points to cover when negotiating a contract with your provider. Things to include:

• A Not to Exceed Clause – Make sure to include language that protects you from paying more than billed charges. Even when using a Medicare based contract, there will be instances of the Medicare rate being higher than the hospitals billed charges for a particular service. By including this clause, you can ensure you always save money.
• A Payment Terms Clause – Make sure to include a paragraph that details how quickly the provider will get paid. If you are good about paying in a short time frame, you can usually get the provider to reduce his rates even more.
• Authorized Services Clause – Always include wording that informs the provider that you will only pay for pre-authorized services. This will keep the provider from checking out the inmates shoulder when he is in for his knee, and from you having to pay for that.
• Exclusivity – You should consider using this if you want to maximize savings. You may be able to get a low rate if you promise a provider to use him exclusively for his specialty. If he knows he’s going to get all of your business, he may drop his rates.

This should show you just how much money can be saved if you implement a comprehensive contracting strategy with your providers. It is not uncommon for a facility to be able to save 20-30% utilizing these methods.

The next segment of this series will focus on the technology that can be utilized at a correctional facility to improve care and cut costs. There’s a lot more than an EMR available to help you out!