How to Negotiate Contracts: Leveraging Quality to Combat Price

How to Negotiate Contracts: Leveraging Quality to Combat Price

Article highlights:

  • Maximizing service helps institutional and private labs stand out from commodity labs in the eyes of payers and ACOs
  • Understanding the drivers that impel payers to pursue lower fees can help labs develop effective negotiation strategies
  • Compromising on fee structure can actually lead to increased revenue and market share

Your lab has a major payer contract up for renewal. They slap you with deep, double-digit cuts to your fee schedule. The reason has a familiar ring to it: you’re too expensive compared with the reference labs of the world.

What do you do? Give in to commoditization and spiral down to rock-bottom pricing? Or negotiate from a position of strength by demonstrating value beyond what the commodity purveyors offer?

As the Chief Healthcare Informatics Officer at Sonic Healthcare, Dr. Philip Chen is driving his lab to do the latter—successfully. And not just with payers, but with accountable care organizations (ACOs) as well. Here’s how they’re doing it—and how you can too.

A Pair of Guiding Principles


For Dr. Chen, successful contract negotiations follow two guiding principles.

1. Maximize your service:

  • You aren't going to win on pricing, so you have to bring more to the table.
  • You have to show how your lab will provide value-based services to payers, providers, and patients that can improve both care and the bottom line.

2. Make a palatable offer:

  • Understand the payer's finacial pain points and what drives them to demand lower fee schedules.
  • Counter with an offer both parties can tolerate, one that is higher than commodity pricing, yet still competitive.

Using Data to Make a Difference


Dr. Chen’s lab maximizes its service to ACOs by putting data analytics into action. They actively monitor both their diabetic and chronic kidney disease (CKD) populations to identify patients who are:

  • Lost to follow-up—those who have not been seen for at least one year
  • Undiagnosed—those with lab values that indicate they have CKD or diabetes but who do not have an International Classification of Diseases, 9th Revision (ICD-9) code attached to their record

After appropriate patients have been identified, Dr. Chen’s lab takes action by:

  • Prioritizing patients by disease severity

  • Scheduling lab tests before a patient’s return visit to the physician

  • Working with physicians to ensure proper ICD-9 coding

  • Contacting patients directly by phone, text, or email

  • Alerting physicians that patients need to return to care

35 percent

Engaging directly with physicians and patients differentiates Dr. Chen’s lab, broadens its reach, and helps justify a higher fee schedule during contract negotiations. Most importantly, it has the potential to improve patient care and outcomes.

Across-the-Board Benefits


When Dr. Chen’s lab puts data analytics into action, everyone wins.

1. Patients benefit by:

  • Returning to care and managing their disease
  • Avoiding dangerous complications
  • Staying out of the hospital

2. Physicians benefit by:

  • Improving their Physician Quality Reporting System (PQRS) scores
  • Receiving financial bonuses from ACOs for delivering quality care
  • Improving patient outcomes

3. Payers and ACOs benefit by:

  • Avoiding unexpected costs for patients who appear “healthy” because they have no ICD-9 code for their disease
  • Estimating expenditures realistically, based on proper ICD-9 coding
  • Realizing higher shared savings—and a better bottom line

Why proper ICD-9 coding is so important

In ACOs under risk-based models like Medicare Advantage or a commercial shared savings, expenditures are estimated based on patient diagnosis. So if a CKD patient does not have the proper ICD-9 code, the ACO regards this patient as "healthy." Accordingly, they may only estimate expenditures at several hundred dollars per year. But the actual costs may be tens of thousands of dollars more — negatively affecting the ACO's bottom line.

What about the Lab?


Maximizing service in this way allows Dr. Chen’s lab to negotiate contracts from a position of strength. Early on, before they even implemented these informatics initiatives, they avoided significant fee cuts with one payer just by showing them the plan. 

ACOs also recognize the value of this type of maximized service. With ACOs, Dr. Chen’s lab offers additional services without any up-front charges. Instead, they negotiate for themselves a percentage of the shared savings the ACO realizes down the road. This positions the lab as a true partner, whose interests are tied to outcomes as much as any other stakeholder.

Philip Chen, MD, PhD

Chief Strategy Officer

Sonic Healthcare

Giving a Little to Gain a Lot


Maximizing service strengthens the lab’s position during contract negotiations—but it’s not enough to seal the deal. It must work in tandem with a sound understanding of the financial drivers that cause payers to pursue lower fees.

Consider the math. It isn’t just that hospital labs have higher fees than commodity labs. It’s that those fees can be as much as four times higher. That’s a whopping cost increase, from a payer perspective.

Dr. Chen recommends giving a little. Offer up a flat cut to, say, 1.5 times the commodity lab fee. An additional 50% is much more palatable to payers. Especially when it’s bundled with maximized service designed to improve outcomes. No commodity lab can offer that.

What You Can Do


If you want to strengthen contract negotiations in your lab, consider implementing similar initiatives. Put your data to work. Find ways to maximize your service to rise above commoditization.

Start by getting out of the lab. Talk to the contract negotiator in your institution. Meet with your colleagues throughout the hospital. Reach out to the payers themselves. They may even share their pain points, providing insights that can help you design win-win negotiating strategies.

Get a taste for how to set up informal meetings with colleagues by reading Stimulating Collaboration with Random Coffees and More.

Prepare to give a little on pricing, the way Dr. Chen’s lab does. You may have to initiate other maneuvers, like setting up a separate legal entity for outpatient lab services. This way, you can attach the lower fee schedule to the new entity while maintaining a higher hospital-based fee schedule. The result? Increased revenue and increased market share, as it was for Dr. Chen’s lab.

We hope you will consider maximizing your lab’s service in pursuit of greater LabacoEconomic value. And that you negotiate what your lab deserves. Good luck!

On Collateral Benefits to the Lab

Because of this type of service, we have much closer relationships with providers and patients. So we actually increase our market share with them. All of a sudden, with this service, you increase everyone's loyalty to your lab.

Philip Chen, MD, PhD

Chief Strategy Officer

Sonic Healthcare

Contributing Lab Leader

Philip Chen, MD, PhD

Chief Strategy Officer

Sonic Healthcare

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