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How to deal with lesser of language in contracts

Where payer contract negotiations are concerned, it’s important to know what your current contracts are/aren’t doing for you. Especially when a small portion of your contract can be used to keep your practice from the reimbursement it deserves. 

Specifically, “lesser of” language.

“Lesser of” language refers to a clause that exists in many healthcare payer contracts that allows insurance providers to pay the lesser of the billed charges or the negotiated rate. For example, when a practice charges $100 for a service rendered and the contracted reimbursement amount is $150, the payer need only reimburse the lesser of the two. In this sample scenario, the practice loses out on $50. 

Now think of the number of times this could happen for a single CPT code in a year. Maybe 100 times? Your practice could be losing out on $5,000 or maybe even more. The revenue loss could be significant.

“Lesser of” language or “lesser of” contract terms are often hidden in contracts, and sadly, many practices have their contracts on auto-renewal and haven’t touched clauses like this in a long time, if ever.

In a case study, the Healthcare Financial Management Association (HFMA) found that the health system they studied had commercial payer contracts that were 12 years old, on average. Only a few minor modifications had been made to these contracts, typically in the form of exhibits added to the original contract for annual adjustments. 

But wait. It gets worse.

The “lesser of” clause does not necessarily reward better patient care. A patient’s shorter-than-average hospital stay would easily trigger a “lesser of” payment from the insurance payer and the provider’s better-than-average care would go entirely unrewarded. 

Even if one line item is charged correctly on a claim, it holds no impact on any line items that follow it on the claim.

So what happens now? You know you’re losing money, but can you recover your losses? It may not be as simple as you might think.

Increasing your contracted allowed amounts might appear to be a good option, if there wasn’t limits attached to every contract. Typically providers are limited by payer as to the overall charge increases they can execute every year. In other words, if you change one charge price too high, you’ll have to drop other charge(s) to even up the difference.

The good news is that you can always charge more for your services so that you aren’t losing money in underpaid claims. The trouble is that you may not be able to project your revenue for the year based on the inflated charges. However, avoiding underpaid claims may be more important for you. You can also target your most profitable procedures or services by boosting the charges for those procedures or services so that you can increase revenue where it counts. 

The most time-intensive but most efficient way to increase revenue with your contracts is to negotiate your contracts when the time arises to do so.

Here are the next three things you can do to start negotiating better contracts.

#1 Collect and assess your agreements.

Gather all of your contracts if you do not already have them on hand. Then you’ll look for subtleties in your contracts that can affect profitability.

#2 Understand the current state of your contracts and identify improvement opportunities.

Make a list of current insurers for your practice and include high-level disconnects/variances among your major contracts. This list can include occurrences of “lesser of” language, stop-loss language or anything else that might be hiding in your contracts.

#3 Clean up your chargemaster.

Whether your practice is moving toward value-based contracting or sticking with fee-for-service contracting, you’ll want a tidy chargemaster. 

Ideas of what to scrape from your contracts

  • Unused or outdated charge items
  • Different charge rates for the same charge item
  • Blank charges 
  • And “lesser of” or possibly “stop-loss” language.

Current contract limitations may make removing all revenue blocking language impossible in the first go. Some changes will require time, so be sure to take good notes of the plans you’d like to carry out in the future so you know where you’re at when you come back to it.

Technology can help

Rivet is a reimbursement software that allows you to model fee changes in your contracts and offers you the big picture of what’s going on in your practice with payer contracts, underpayments and denials management. You can also check eligibility and provide accurate up-front patient cost estimates before services are rendered. The Rivet team will help you aggregate your fee schedules and input your claims data to enable you to increase revenue and decrease patient A/R days.  

For more information about Rivet's tools, download our PDF that breaks down our products:

Download  Rivet Products Overview PDF