How Negotiation Skills Can Improve the Outcome of Contracting and Finances for Hospitals

The average health system is sandwiched between ever-increasing regulatory burdens, intense care-related pressures, and cripplingly complex contract arrangements. Unfortunately, this swarm of challenges is arriving a year after hospitals hit record low visitation numbers, primary care practices lost over $15 billion, and value-based care arrangements increased in both scale and complexity. Your hospital needs some wins. Fortunately, many of these pain points involve the same core component: contracts. Aligning contract arrangements with financial, clinical, operational, and strategic goals can help you boost care-related metrics, improve financial outcomes, and eliminate tricky contract-related fees.

But to secure best-in-class contracts, you need to leverage world-class negotiation skills to ensure payer partners and vendors give you the right terms. And that's often easier said than done.

Understanding the Current Contract Landscape in Healthcare

●?????Suboptimal contract terms and conditions cost companies and healthcare systems 9 percent of their annual revenues. — McKinsey

●?????"Most companies are leaking value through their contracting practices" and a mere 10 percent of companies have adequate contract management resources, tools, and support. — Bain & Company

●?????"Pandemic progress means dealmakers are starting to refocus on pursuing competitive advantage. We see investors adding capabilities and rethinking ecosystems, with a laser focus on value and patient-centricity." — Nick Donkar, US Health Services Deals Leader

While healthcare contracts have always been intimidating, outcome-based variables and pandemic-related frictions have turned contract negotiations into cripplingly complex discussions. Every term, deal, and outcome metric needs to be carefully scrutinized. Easier said than done. McKinsey notes challenges with facilities tracking over 200 metrics across various contract terms to ensure compliance and correct payments. Often, this overwhelming complexity comes from failed up-front negotiation strategies or uncoordinated contract goals.

There should be deep alignment between business goals, financial requirements, and contract terms. In fact, we find that almost every hospital is leaving significant amounts of money on the table during contract negotiations. Not only is money being left on the table, but many hospitals are also crippling their metrics and creating additional, cost-creating complexities by allowing unnecessary term introductions and confusing clauses into the contract.

There are 10 core objectives that every contract should meet:

1. An easy-to-understand set of terms and conditions without ambiguity
2. Targets, terms, and conditions that are tied to the right cost elements
3. An appropriate risk-to-outcome ratio
4. Rewards, incentives, and penalties for vendors based on performance goals
5. The ability to meet operational and regulatory restrictions
6. Appropriately captured value across the lifecycle of the contract
7. Terms that are tied to not just outcomes, but the correct outcomes for your healthcare system
8. Financial outcomes that are intrinsically tied to financial needs and requirements
9. Favorable terms for both parties
10. The ability to create meaningful relationships through mutual agreements

Unfortunately, making the right concessions, counteroffers, and handshakes to secure all ten of those core objectives isn't easy; it requires the right negotiating skills.

The Role of Negotiations in Healthcare Contracts

●?????"[properly negotiated] VBC contracts can improve most providers' EBI(T)DA—often, by at least 20 percent and sometimes up to 50 percent in low-margin systems." — McKinsey

●?????Negotiating contracts with risk and outcome baked into the DNA of the terms helps create "binding contracts that distribute risk in easy to understand ways across all participants." — Ernst & Young

●?????During the initial development of contracts, negotiations often fail to address all relevant aspects for contracting, implementation, and ongoing vendor management." — McKinsey

Contract negotiations are how you secure the 10 objectives listed above and align all contracts with operational goals. It's important to note that contract negotiations are not about "winning." Instead, think of negotiations as a place to create a sensible and financially-tight contract that creates wins for both parties.

For example, selling the right patient satisfaction data at the negotiating table can hospitals score major wins. And high-performing network metrics can be leveraged to secure more favorable terms. Unfortunately, many hospitals lack the internal skills necessary to dive deep into negotiations. And that's the big secret: negotiating is a skill.

It doesn't matter if you're discussing a fee-for-service, pay-for-reporting, or hyper-complex Value-based Contract (VBC), leveraging the right negotiating skills plays a massive role in your end-of-year outcomes. Every carve-out, implant, and threshold needs to be carefully analyzed, discussed and negotiated to ensure you receive the best possible deal.

Make no mistake; there are other areas of savings in the contract space. You can use technology to pour over line-item details, leverage the right data analytics to drive performance-related objectives, and choose the right benchmarks for success. But negotiations unlock these downstream values. You need the right contract in the first place.

So, what does negotiation look like as a skill?

Creating Wins With Negotiation

●?????"By instituting the philosophy, style, and skills best suited for the negotiation situation and payer, healthcare providers can step closer to obtaining the levels of payment necessary to survive." — HFMA

●?????"The most important trip you may take in life is meeting people half way." — Henry Boyle

Yes. Negotiating is a skill — not a tool. Your entire healthcare system is bridged to the negotiating table. Contracts with poor terms can impede growth and impact care. So, small mistakes in this area have big consequences. Every hospital has leverage. You need to know how to use it. Whether you're negotiating terms with equipment vendors or securing a best-in-class M&A agreement, you need to make big wins at the negotiating table to grow.

Here are a few examples of skills every negotiating team should have:

●?????Best Alternative To a Negotiated Agreement (BATNA): Your hospital should always have a backup plan. Your willingness to take another deal can be key to the negotiating process. It's important to note that some deals (e.g., rare drugs, novel therapies, government deals, etc.) have no alternative. But for those deals that do (e.g., vendor deals, etc.), having a backup plan helps you negotiate with more confidence. Your negotiating team should be capable of voicing that you have a backup without it sounding like a negotiating threat. It's not; it's simply a failsafe if you can't secure favorable terms.

●?????Presenting the right information: Negotiating involves marketing yourself. What makes you a value-based partner in the agreement? Do you have a strong history of physician alignment to contract terms? Is your patient satisfaction sky-high? Are there areas where you have fantastic outcomes? You want to present the right information at the right time. Always emphasize your strong points during negotiations.

●?????Make the right tradeoffs: Every contract is riddled with wins and losses. You want the wins to outweigh the losses. It's very important that both parties walk away satisfied. Counterproposals should be modeled after securing a contract (when taken as a whole) that is favorable in both directions.

●?????Ask the right questions: Contracts should have zero ambiguity. You want your negotiator to ask the right questions. What exactly does this clause mean in this context? How will this specific term impact you? What happens when additional variables are introduced in the mix? For example, a specific term may seem favorable, but by asking questions, you may start to discover that it has the potential to lead to more denials. Thus, it may not be so favorable in the long term.

●?????Build rapport and listen: Research shows that actively listening and small talk helps both parties secure more realistic and financially-suitable contracts. The goal of your negotiator is to ensure you walk away with the best deal in the long run. This means keeping everyone happy.

●?????Offer alternatives: Take-it-or-leave-it strategies rarely work. Your negotiator needs to be agile enough to offer smart alternatives to keep the conversation flowing. Or, as Strengthening Negotiation Skills, Part II in the Journal of Public Health Management puts it: "Successful negotiators provide multiple alternatives, which help them stay objective and avoid being tied too tightly to any single outcome."

Of course, this is a small list. Negotiating is an incredibly complex skillet that requires the perfect blend of personality, experience, and patience. But it's an important skillet for hospitals to have and utilize regularly. Luckily, you don't need a vested negotiator on your payroll. You can?

Does Your Hospital Have the Right Negotiating Skillset?

With hospitals still reeling from pandemic-related frictions, securing financial wins is more important than ever. Between increased labor costs, supply chain woes, and ballooning drug prices, you need to rethink your entire contracting strategy. Is your hospital system ready to negotiate first-class contracts? Do you want to add consultants with world-class negotiating skills to your talent mix?

At VIE Healthcare Consulting, we help healthcare systems build incredible solutions. From preoperative and IT consulting to patient experience, telehealth, and contracts, we give hospitals the tools, resources, and expertise they need to navigate thinning margins and grow consistently despite economic pressures.

Are you ready to take the next step? Are you interested in learning more about our various consulting capabilities? Contact us. We help hundreds of hospitals save millions. And we can help you do the same.

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