Two distinct reimbursement philosophies dominate managed care contracts: fixed rate reimbursement and algorithmic reimbursement. Through these reimbursement structures, payers shape provider’s balance sheets and consequently, their negotiating strategies.
The complexity of these arrangements, unique payer-provider market dynamics, and closely guarded contracts have made it difficult for providers to get a holistic view of market standards. With CMS’ price transparency regulations and reporting standards, providers now have the ability to understand reimbursement structures trends across the US.
Let’s dive into the data to explore how reimbursement strategies are leveraged by both payers and providers and what each strategy reveals about their strategic objectives.
Generally, payers and providers prefer differing structures
Fixed Rates
Under fixed rate reimbursement, payers establish predefined rates with providers for particular services.
- Reimbursement structures include case rates, fee schedules, and per diem
- Leaves providers bearing the risk if their costs change
Algorithmic Rates
In contrast to fixed rates, algorithmic reimbursement create rates that require some calculation.
- Percent of charge reimbursement structure
- Provides flexibility for providers, allowing reimbursement to better align with the provider’s costs
In practice, many contracts blend fixed and algorithmic reimbursement structures to balance cost predictability and financial flexibility. For instance, payers may reimburse a hospital with a fixed rate for routine inpatient care, with separately negotiated percentages or carveouts for high-cost implants or procedures. Meanwhile, some outpatient services might have fixed rates, while others may be reimbursed based on a percentage of charge. But which is most common?
72% of Outpatient Rates Are Fixed Rates While 28% Are Algorithmic
Across more than 10,000 outpatient services at over 5,000 general acute care hospitals, we find that 72% of outpatient rates are based on fixed rate structures, while a sizable 28% employ algorithmic rates. These algorithmic rates provide more flexibility for providers to cover their costs.
Inpatient services, however, show a different pattern. Here we focus on MS-DRG inpatient services. Looking at over 750 MS-DRGs across the same set of general acute care hospitals, we find that a large majority (95%) of these inpatient rates are reimbursed as fixed rates. This suggests a broader preference for predictable inpatient reimbursement, and indicates that MS-DRG rates may inherently provide appropriate levels of risk adjustment for providers to cover costs. The remaining 5% of inpatient rates are structured as percent of charge rates.
Why are inpatient services reimbursed as fixed rates more often than outpatient services?
At first glance, this might seem surprising, since large-scope inpatient services can result in variable hospital costs that aren’t matched by fixed rates. In fact, fixed rates can be a valuable method for managing this variability. Given the complexity and variability of inpatient care, payers may prefer fixed rates as a form of risk sharing for these services. By agreeing on a case rate, payers know the maximum expenditure for a particular episode of care, while providers assume the risk of delivering all necessary services within that predetermined rate. The prevalence of fixed MS-DRG rates suggests that providers may find MS-DRGs and adjacent inpatient stop-loss provisions appropriately address population risk.
Another factor for reimbursement structure differences across care settings may be related to how different rates are contracted and reported. There are over 10,000 outpatient CPTs compared to just over 750 inpatient MS-DRGs. Many of these outpatient services are less costly than inpatient services, so they may not be explicitly negotiated. In these cases, the outpatient services may frequently fall under a contract’s catch-all percent of charge rate.
Regardless of the reason, the variation in reimbursement structure results in different market dynamics across care settings. The high prevalence of fixed rates for inpatient services provides payers more certainty on spend. In contrast, the significant portion of algorithmic rates among outpatient services lets payers provide flexible reimbursement that helps providers cover costs for these services. While reimbursement structure varies quite a bit across care settings, a closer look shows even more variation within care settings, between different payers. How are the major payers positioned?
Reimbursement Structures by Payer
A closer look at the high-certainty rates of inpatient services shows some distinct differences between four national payers. For each payer we looked across all inpatient services and broke down the proportion of rates with each reimbursement structure. Cigna shows a particularly high prevalence of fixed rates, negotiating them in over 99% of their contracts. Aetna (99%) and UHC (98%) also show high levels of fixed rates. Blue Cross contracts, however, are more mixed, with fixed rates found in only 86% of inpatient agreements.
On the outpatient side, Cigna and UnitedHealthcare again demonstrate their focus on predictability, structuring 97% and 89% of hospital contracts with fixed rates, respectively. On the other hand, Blue Cross (69%) and Aetna (65%) have a lower proportion of fixed outpatient rates and relatively more percent of charge agreements.
The balance of power between payers and providers shapes contractual terms
In markets with concentrated provider systems, providers may have more leverage to push for percent of charge reimbursement that helps them better cover the variable costs of care. In contrast, payers with a strong market position can demand more predictable fixed rate agreements.
These structures are a result of the strategic objectives of each player. Payers’ strategic goals impact their preference for reimbursement models. Those focusing on cost predictability and spend may favor fixed rates, while others prioritizing high quality provider networks might opt for algorithmic rates to accommodate hospitals. This strategic choice reflects a payer's broader approach to market positioning, member satisfaction, and healthcare cost management. Price transparency shows us which groups prefer which structures, allowing the industry to adjust and respond to trends. By utilizing this data beyond the negotiation itself, both players can set themselves up for success.