Avoiding managed care pricing pitfalls

Healthcare providers, concerned about competing as managed care proliferates, have attempted to negotiate as many contracts as possible to secure market share. Economic theory suggests that, in the short run, any contract that yields incremental revenues in excess of incremental costs is desirable. However, the marginal costs associated with managed care contracts can have serious financial consequences. Maimonides Medical Center (MMC), New York, New York, had negotiated a variety of payment terms and methods for inpatient healthcare services--including discounts off the Federal DRG rate, discounts off the state-regulated case-payment rate for managed care companies, global pricing, per-diem rates, and capitation--with more than 15 managed care companies. As market incentives changed, however, contract decisions that had been made either "on the margin" or in response to market-driven prices did not always improve financial performance over the long term. Some of the unexpected pitfalls MMC encountered were dual discounting and adverse risk selection.