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7 Tips for Effective Contract Negotiations

September 2014

Preparing for a physician contract negotiation? As you've likely discovered, these conversations take time and effort, and often go differently than anticipated. Discussing compensation, no matter how positive the business relationship may be, can present challenges.

Whether you are a hospital administrator negotiating with a key multi-specialty group, or an independent physician asking for increased call coverage pay, care preparation can help you achieve your desired outcomes.

Research. Know the reasonable payment rates for the specialty and the service. High quality market data is particularly helpful with this initial step. While you should be familiar with the entire range, MD Ranger recommends focusing your targeted rates between the 25th and 75th percentiles of market data. It is important to remember, while not everyone can get paid at the 90th percentile, statistically someone must be above the 90th percentile and someone must be below the 25th. You should enter the negotiation with quantitative evidence of the range you can support, as well as how your institution and the particular physician(s) compare to the 'typical' provider. Factors such as hospital size and trauma status can make a difference in the appropriate payment rate, as can national reputation and the credentials of a particular physician.

Establish objectives and define how you can compromise. After you have a sense of contract payment rates and ranges, define the scope of work and expectations of the position and determine what you are willing to negotiate. Your negotiation objectives should be consistent with fair market value, as well as your hospital's overall financial commitments for physician services. Data are now available to allow a hospital to see how the cost of each contract fits into its overall physician costs, which can be particularly helpful for overall physician strategy.

Consider the scope of the agreement, not just how much to pay. Hospitals and physicians often assume the scope of service should either be the same as the expiring agreement, or whatever the scope that the physician suggests. For example, a medical directorship contract might not carefully assess the number of hours of service, and instead focus negotiations on the hourly rate. Unsure what's appropriate for your service? Market data are available on the number of hours per year for more than 80 administrative and leadership positions, including ad hoc committees, quality initiatives, medical staff leadership and medical directorships. Providing your negotiating parties with objective information during negotiations helps to set expectations and ensure the final contract terms are within reason. If the situation legitimately warrants an exception, document your reasoning in the contract and keep track of hours for future audits.

If the situation is complex, acknowledge it. Situational details (such as intensity of workload, payer mix, trauma status, etc.) may distinguish a contract from most other contracts within the same service. If that's the case and if these factors haven't been considered in the payment rate, you might be under or over paying. Agreements like these carry compliance risks—particularly if the service has a comparatively lower workload than the average contract in the market, or if your contract results in significantly more professional revenue. Not even the very best market data survey can cover all situations. Also, if it is an exclusive contract, such as for a hospital-based service, there are special considerations for the value of the franchise. Experience and judgment are important to assessing risk and knowing when to bring in an internal or external consultant to document compliance.

Consider alternatives. Before entering a negotiation, prepare a list of alternatives, both for obtaining the service and paying for the service. Anticipating and responding to pushback will make a smoother negotiation process. Discussing alternative approaches can often yield savings or more efficient ways of achieving the same objectives, and provides an opportunity to discuss each party's objectives and challenges. The definition of fair market value includes the provision that "the price ...between a willing buyer and a willing seller, neither being under a compulsion to buy or sell". A good fair market value evaluation will simulate what would result from an actual competitive process, even if there isn't one.

If the agreement grants exclusivity, consider the privilege's economic value. It is well established that exclusivity—effectively a limited monopoly—has economic value. Not only is it a core principle of economics, federal regulators cite it specifically in the context of hospital physician contracting. There are two methods to estimate the value of exclusivity. One is to compare compensation between exclusive and non-exclusive agreements, which can be shown through market data. The other is to have a valuation expert measure cost reductions and economies of scale in a cost model of the practice of interest.

Document your process for compliance. Documenting compliance is essential for your compliance program; however, fair market value rate documentation can also facilitate negotiations. By demonstrating that you take compliance very seriously and that these efforts are protecting all parties, you will be well on your way to earning the respect of your colleagues across the table. You can find more information on how to document compliance here.

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