When Your “Best” Payer Is Your Worst Contract
Why looking at financial contribution alone can conceal a major reimbursement opportunity
A health system may see its “best” payer as the one that generates the most revenue or contributes the most operating profit. Those contributions matter, but they can also obscure a consequential weakness: the payer generating the most profit dollars may also be reimbursing at the lowest rates.
When leaders equate financial contribution with contract favorability, they may overlook their largest reimbursement opportunity. Before setting objectives for the next negotiation, health systems should understand how each agreement performs across comparable services, why performance differs across the payer portfolio, how reimbursement has changed over time, and how current rates compare with the market.
The essential question is whether reimbursement differences reflect deliberate strategic choices or years of accumulated concessions, incomplete analysis, and missed opportunities to reset the relationship. Market benchmarks, reimbursement trends, and rate analysis provide a clearer picture of contract competitiveness and financial opportunity.
Four Analyses That Strengthen Renegotiation Preparation
Four complementary analyses help health systems evaluate existing contracts and develop market-supported negotiation priorities and rate targets.
Analysis | Data and Method | Strategic Value | Key Limitation |
|---|---|---|---|
Medicare equivalency | Reprice payer-specific claims to a consistent Medicare year and methodology; compare by hospital and by inpatient and outpatient services. | Compare contract economics on a common basis, rank relative reimbursement, and quantify payer-specific gaps. | Sensitive to service mix; does not establish market position or cost adequacy. |
Unit-cost trends and Hospital CPI-U | Compare cumulative contracted unit-cost growth by hospital with Hospital CPI-U over the same period. | Evaluate rate increases against industry pricing trends and identify lagging payers. | Hospital CPI-U is a price index, not a measure of hospital input costs or rate adequacy. |
Price transparency | Match hospital-published negotiated rates by payer, product, service, setting, and payment definition. | Assess reimbursement against relevant peers and identify service-specific priorities. | Published information may be dated or incomplete and may not reflect current contract terms or capture all provisions affecting actual reimbursement. |
Claims-based market benchmarks | Compare allowed-amount benchmarks across matched services, providers, payers, and markets using consistent measures. | Place reimbursement in a broader market context and identify gaps relative to relevant benchmarks. | Coverage, lag, and aggregation vary; benchmarks may not identify specific payers. |
A Common Benchmark Makes the Differences Visible
Comparing payer agreements requires more than lining up negotiated rate increases. One contract may use diagnosis-related group (DRG) payments, another may use per diems or case rates, and a third may combine fixed rates and percentages of charges. Outlier provisions, carve-outs, and exclusions further impact the economics.
Expressing reimbursement as a percentage of what Medicare would pay for the same services creates a common basis for comparison. Repricing each payer’s claims against a consistent Medicare reference year and payment methodology reveals relative reimbursement across the payer portfolio. Separate analyses by hospital, inpatient services, and outpatient services show where the differences are concentrated.
The Payer Generating the Most Profit May Offer the Weakest Reimbursement
Consider a hypothetical health system evaluating three commercial payer agreements. Payer A generates $100 million in annual reimbursement and $20 million in operating profit. Payers B and C generate $70 million and $60 million in reimbursement and contribute $18 million and $15 million in operating profit, respectively. Based on total dollars alone, Payer A appears to be the system’s best payer.
A closer look tells a different story. Payer A has the lowest operating profit margin and reimburses at 150% of Medicare, compared with 192.8% for Payer B and 187.5% for Payer C.
Payer | Modeled Annual Reimbursement¹ | Operating Profit | Operating Profit Margin | Reimbursement as a Percentage of Medicare² | Estimated Annual Revenue Opportunity vs Payer B |
|---|---|---|---|---|---|
A | $100.0M | $20.0M | 20.0% | 150.0% | $28.5M |
B | $70.0M | $18.0M | 25.7% | 192.8% | Reference |
C | $60.0M | $15.0M | 25.0% | 187.5% | $1.7M |
¹ Hypothetical illustration. Modeled Annual Reimbursement represents prior-period claims repriced at current contract terms, including payer and patient responsibility, before collection losses. Revenue opportunities hold each payer’s volume and service mix constant and apply Payer B’s aggregate Medicare-equivalent reimbursement as the reference.
² The table presents aggregate Medicare equivalency. A complete analysis should also evaluate results separately by hospital and inpatient and outpatient services.
Claims modeling shows Payer B has the portfolio’s highest reimbursement as a percentage of Medicare. Using Payer B as the reference point allows the system to estimate annual revenue opportunities associated with Payers A and C.
$28.5 million Payer A opportunity: At Payer B’s Medicare-equivalent reimbursement level, Payer A’s existing volume and service mix would generate an additional $28.5 million in annual reimbursement: $100 million × (192.8% ÷ 150.0% − 1)
$1.7 million Payer C opportunity: Applying the same methodology to Payer C produces an estimated annual revenue opportunity of $1.7 million.
Payer A remains an important relationship. Yet the analysis shows that the system’s largest source of payer profit is also its weakest contract based on relative reimbursement and operating margin. Payer A’s substantial volume magnifies the financial consequences of its weaker reimbursement—and the opportunity to improve it.
Relative Performance Today Can Conceal Years of Erosion
Growth in total revenue can mask inadequate rate increases when volume grows or the service mix shifts toward higher-acuity care. Tracking payer-specific unit cost increases isolates rate performance and allows health systems to compare contracted increases with broader industry pricing trends.
Hospital CPI-U provides an external reference for changes in the prices paid for hospital services. The hypothetical example below illustrates how seemingly modest annual differences can compound into a substantial long-term deficit.
Hospital CPI-U | Contract Unit Cost | |||
|---|---|---|---|---|
June | Annual Growth | Cumulative Growth | Annual Growth | Cumulative Growth |
2015 | - | - | Contract effective June 1, 2015 | |
2016 | 4.26% | 4.26% | 0.00% | 0.00% |
2017 | 5.65% | 10.15% | 0.00% | 0.00% |
2018 | 4.74% | 15.37% | 0.00% | 0.00% |
2019 | 0.50% | 15.95% | 0.00% | 0.00% |
2020 | 5.29% | 22.08% | 0.00% | 0.00% |
2021 | 2.43% | 25.04% | 0.00% | 0.00% |
2022 | 3.86% | 29.87% | 0.00% | 0.00% |
2023 | 4.12% | 35.22% | 2.00% | 2.00% |
2024 | 6.87% | 44.51% | 3.00% | 5.06% |
2025 | 4.16% | 50.52% | 4.00% | 9.26% |
2026 | 5.12% | 58.23% | 3.50% | 13.09% |
By June 2026, Hospital CPI-U increased 58.23%, while the contract’s cumulative unit-cost increases totaled 13.09%. While the comparison does not establish the rates the hospital should receive, it demonstrates how prolonged periods of no or below-benchmark increases can compound into a significant cumulative disadvantage.
Market Transparency Reveals Your Competitive Position
Market transparency analysis shows how a health system’s reimbursement compares with rates for other relevant hospitals. Hospital-published price transparency files provide payer-specific negotiated rates for defined services. Independent, all-payer claims-based benchmarks provide a broader view of allowed reimbursement across payers, providers, geographic markets, and service categories.
Used together, these sources connect specific hospital-payer comparisons with broader market experience. Credible comparisons require alignment by service, care setting, product type, date of service and payment definition. The resulting analysis can identify competitive gaps and the services that warrant priority in negotiations.
An Identified Gap Becomes an Opportunity Through Strategy
A contract’s current position and its trajectory should both inform negotiation objectives. Together, portfolio, trend, and market analyses provide the financial reference points for negotiation strategy. Converting opportunities into results requires credible market evidence, a clear understanding of the system’s leverage, and executive alignment on targets, risk tolerance, and acceptable trade-offs. Strategy must then adapt as proposals, information, market conditions and stakeholder responses alter the negotiating environment.
Execution also matters. Experienced managed care negotiators can help translate analytical findings into defensible proposals, effective responses, and disciplined trade-offs.
Build Negotiation Objectives from the Full Portfolio
Before the next renewal, leaders should be able to answer five questions:
Which payer provides the strongest reimbursement overall?
How does performance differ between inpatient and outpatient services?
Which payer generates the greatest financial contribution?
How has reimbursement changed over time?
Where are the largest actionable opportunities supported by payer-portfolio and market evidence?
The answers may challenge long-held assumptions. They allow health systems to prioritize negotiations, establish rate targets, align executive expectations, and define what a successful agreement should achieve.
Turn Portfolio Insight into Negotiation Action
BDC Advisors helps health systems evaluate payer portfolios, quantify reimbursement opportunities, and translate findings into negotiation strategies. We lead managed care contract negotiations, work alongside internal teams, or advise behind the scenes from initial assessment through agreement completion.
To discuss whether your “best” payer is delivering the value your organization should expect, contact Carrie Knowles-Atkinson at carrie.knowles-atkinson@bdcadvisors.com.
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