Managed Care Contracts: The Next Margin Battleground for Hospitals

*:last-child]:mb-0 [&>*:last-child]:pb-0 [&>p]:font-normal text-left [&>.prm-button-bar]:justify-start [&_.portable-text-link]:font-semibold [&_.portable-text-link]:underline [&_.prm-button-bar_a]:no-underline [&_li]:text-light-gray [&_p]:text-light-gray">

When hospital and health system leaders look for ways to improve margins, they often focus on cost reduction, operational efficiency and revenue cycle management. Yet one of the most consequential drivers of financial performance for healthcare institutions often receives far less strategic attention: managed care contracts.

In many organizations, managed care negotiations are largely an administrative exercise - an annual process of renegotiating reimbursement rates, then shifting focus back to day-to-day operations. Analyzing individual payer performance is often set aside until the next renewal cycle.

But in today's increasingly volatile healthcare environment, that approach may become risky.

An aging population threatens to shift payer mix toward lower-margin plans. At the same time, the One Big Beautiful Bill Act (OBBBA) will drive down Medicare and Medicaid funding and reimbursement. Combined with the regular drum beat of prior authorization delays and retroactive claim denials, health systems may begin to see less upside on their managed care agreements.

This problem compounds over time. Contracts signed today may produce very different financial outcomes just months later.

These pressures are already visible in hospital finance operations. Nearly 43 percent of revenue cycle management leaders say payer reimbursement levels and contract terms are among the top barriers to revenue growth. At the same time, disputes between payers and providers are increasing. Media reports of contract disputes have reached record levels in recent years, highlighting growing tension.

Together, these trends point to a needed shift in strategy for healthcare entities. Managed care contracts can no longer be reviewed one at a time. Looking at individual agreements in isolation makes it harder to see how payer mix, reimbursement trends, and utilization patterns work together to create (or erode) enterprise-wide value. Instead, hospitals and health systems need a portfolio-level view - reviewing all managed care contracts together to spot patterns, benchmark performance, and find opportunities. Taking a broader view may help leaders build a more comprehensive, multi-year managed care strategy that anticipates a changing market.

A Deeper Look at Why the Traditional Contracting Model is Breaking Down

To determine what needs to change in managed care, it's important to understand why the traditional contracting model no longer works.

In the past, managed care contracts were negotiated in a fairly stable environment. Health systems reviewed prior-year rates, made small adjustments, and finalized agreements that stayed in place until the next renewal period.

But today's healthcare market feels anything but stable.

Claims submission and adjudication have become more costly and complex. According to Premier data, in 2023, healthcare providers spent more than $25.7 billion on claims adjudication - a 23 percent increase from the previous year. Denial rates remained near 15 percent but reached as high as 49 percent in some instances. Each denied claim requires multiple reviews, adding time and cost. Naturally, administrative costs per claim rose from $43.84 in 2022 to $57.23 in 2023, largely due to labor demands.

Prior authorization adds even more complexity. In 2023, more than 20 percent of claims required prior authorization, up from 17 percent the year before. In Medicare Advantage, that number reached 30.5 percent. At the same time, denials for claims that already had prior authorization nearly tripled. Most of these claims were eventually paid, suggesting the issue is more about process than medical necessity.

These prior authorization trends are putting pressure on both hospital finances and payer administrative capacity. The average days cash on hand dropped to 196.8 - the lowest level in a decade, which limits investment in patient care and may affect bond ratings. Payers also face rising administrative costs, averaging $40 to $50 per claim, which may contribute to higher premiums.

Taken together, these changes show that the annual contracting cycle no longer matches how healthcare operates today. Delays, denials and administrative complexity make it harder to predict revenue and cash flow, increasing financial risk. To respond effectively, healthcare leaders need a clear picture of how their current contracts are performing individually and across the board, so they can enter negotiations with data-driven proposals on how to improve quality while decreasing administrative load.

Evaluating Your Managed Care Agreements Holistically

Now, the good news: Healthcare leaders can look inward to understand which agreements are underperforming - and draw comparisons between payers and contract terms.

Health systems and hospitals already have access to large amounts of payer performance data. Too often, however, this data is reviewed in silos or limited to single contracts.

Leading organizations are taking a broader approach, reviewing contract terms and performance across all payers. This holistic approach helps identify where issues occur and where improvements are needed. This analysis can be done by creating a map of all payers by line of business and outlining quantitative and qualitative performance indicators, such as:

• Yield: actual vs. expected revenue.
• Value-based care metrics: actual vs. expected.
• Urgent vs. emergent volume mix.
• Relationship rating by payer: How easy is it to work with this payer? Are there more or fewer pain points working with this payer compared to others?

Health system and hospital leaders can go one click deeper, looking at payment accuracy, timeliness, and denial rates as a proxy for administrative burden by payer.

This approach can reveal clear patterns. For example, one payer may consistently delay payments, while another may generate more denials. These insights help providers pinpoint which contract terms or operational processes need stricter parameters or tracking.

The data needed for this work often already exists (if it doesn't, healthcare pricing data vendors can supplement internal data). The challenge is turning this data into clear, actionable insights. Once hospital and health system leaders understand their own performance, they are better positioned to assess how payers operate - and where leverage exists.

Acknowledging the Payer Point of View

With a clear view of performance, the next step is to consider the forces shaping payer behavior. Understanding is the key to finding leverage and negotiating power.

Payers are balancing several equally critical priorities: meeting quality and regulatory requirements, managing financial risk, and controlling administrative costs. Policy changes tied to federal legislation, including OBBBA, are expected to reduce payer margins. Enrollees still require the same level of service across enrollment, claims, prior authorization, billing, and member service; but payers have less margin to spend on their workforce.

Advisors with substantial experience working with payers can offer valuable, firsthand insight into how payers are likely to react to market challenges. For example, as a response to the current climate, many payers are looking for ways to operate more efficiently. This goal will necessitate outsourcing functions such as payment integrity, prior authorization, and member services. Sometimes, payer outsourcing comes at the cost of quality. Advisors may recommend health systems tighten up service-level contract parameters to pre-empt any issue in delay of care or patient communication.

Payer experience can also help hospitals and health systems understand what motivates payers. Payers want providers to be accountable for quality, access, and total cost of care. Payers want partners who can improve outcomes while controlling costs. These metrics can also be built into contracts to increase payer confidence in a provider organization's ability to deliver quality care at scale.

How Managed Care Agreements Can Evolve

Armed with both performance insights and an understanding of payer motivations, healthcare leaders can begin transforming managed care contracts into strategic partnerships where incentives are aligned, guardrails are established, and infrastructure is created to measure both care quality and value creation.

With better intelligence, healthcare leaders can get more creative with contract terms.

Some examples of how health systems and hospitals can aim to translate strategic priorities into contract terms include:

• Prior authorization administration guardrails: Include clauses to set audit limits and improve time to approval. Payers and health systems can jointly determine which types of services require prior authorization at the outset of the relationship. Then, they can set a target authorization approval rate and review turnaround time, reducing administrative hours.
• Adjudication interest and penalties: Agree on acceptable timelines for both claims approval and clean claims adjudication. For payment, ask for standard documentation of adjustment reasons. Implement interest or penalty fees for claims not paid within the agreed upon timelines.
• Site-of-care optimization language: Set standards on which types of non-emergent cases can be treated in ambulatory settings. This can help lower the cost of care while freeing up inpatient access for more emergent cases.
• Risk-sharing structures: Define savings models, utilization caps, or risk corridors to balance financial risk and encourage joint accountability.
• Targeted service line partnerships: Create sub-agreements for areas such as orthopedics, cardiovascular care, and oncology. Agree to use bundled payments to share risk for high-cost services.

Finally, health systems should advocate for the establishment of a joint operating committee, with stakeholders from both the payer and the health system, to review performance and operational metrics and work toward continuous improvement. This committee should create a shared performance dashboard to watch monthly trends in key performance indicators including expected versus paid claims as well as authorization and denial rates.

From Annual Negotiations to Strategic Partnerships

It's clear: managed care contracts can be a crucial lever to help improve financial outlook for hospitals and health systems. Health organizations must be proactive to gain the necessary market intelligence to negotiate effectively. Health systems that succeed may be better positioned to develop an ongoing, multi-year managed care strategy.

To protect margins, healthcare organizations must audit performance trends across all payers, understand the individual challenges and needs of each payer, design targeted contract terms, and use real-time data to track performance.

Premier's Financial Transformation Advisory Practice partners with healthcare leaders to do just that. By combining utilization data, reimbursement models, and predictive analytics, Premier helps health systems understand strengths and opportunities within their managed care portfolio and design smarter partnerships that can improve outcomes.

What sets the Premier team apart from other advisors in the managed care space is extensive, direct experience working for and with the nation's leading payers. Our advisors have decades of combined experience working on accountable care strategy and financial modeling on the payer side. This unique perspective gives hospitals and health systems access to truly differentiated insights. Premier's insights also help healthcare entities prepare for negotiations and build stronger contract strategies.

To take the first step toward understanding your managed care opportunity, explore Premier's Financial Transformation Advisory Practice and learn how our experts can help transform your new renewal cycle into a value creation engine for years to come.

To explore other margin protection and growth strategies, download our guide to margin improvement e-book.