Key Terms, Components of Payer Contracts Providers Should Know

Key Terms, Components of Payer ContractsUnderstanding the terms and provisions in a payer contract is key to maximizing reimbursement, preventing denials, and operating a smooth revenue cycle.

Providers are in the business of keeping their patients healthy. But confusing payer contracts riddled with “legalese” and other complicated provisions can get in the way of improving patient outcomes.

Payer contracts define and explain a provider’s reimbursement arrangement for delivering healthcare services to patients covered by a specific health plan. The contracts cover everything from reimbursement rates and provider networks to medical necessity and provider credentialing.

Understanding complex payer contracts is key to ensuring timely, correct reimbursement and keeping a practice’s doors open. Knowing the ins-and-outs of each contract is also crucial to avoiding claim denials, drawing patients to the practice, and offering comprehensive (and reimbursable) services to patients.

Despite the importance of payer contract knowledge, providers, and even their practice administrators and revenue cycle leaders, may feel less than confident when up against payer organizations with legal departments, financial analysts, and advanced software systems.

The entire process of contracting and renegotiating with payers is complex, which could make providers feel like they have the disadvantage.

“Payer contracting, whether it is commercial payers or government payers, and the credentialing process is complicated, cumbersome, lengthy and time-consuming,” Tracy Watrous, Vice President Member Services and Content Development at MGMA, recently told

“It’s very hard for a medical practice to keep up without getting discouraged by the process because it is lengthy and complicated.”

However, knowledge is power, and the more providers and their practice administrators know about the terms used in payer contracts, the more they can take control of the contracting and renegotiation process to maximize reimbursement.

Allowed amount

According to HHS, the allowed amount on a payer contract is the maximum amount that a payer will reimburse a provider for a covered healthcare service.

Some contracts will also refer to the allowed amount as an “eligible expense,” “payment allowance,” or “negotiated rate,” the federal department explains.

The allowed amount is what the payer will reimburse for services defined as covered or in-network. This rate may not fully cover provider charges and patients may be responsible for covering the balance between the allowed amount and the provider charges.

Medicare sets it’s allowed amounts for specific services in prospective payment systems by care setting and the Physician Fee Schedule. Private payers tend to use Medicare’s rates as a foundation for building their own allowed amounts.

Clean claim

A clean claim is a claim that payers can process without needing additional information, HFMA states.

Incomplete clinical documentation and coding, incorrect patient information, missing physician approvals, and other claim errors result in reimbursement delays and claim denials. Failing to ensure a claim is complete and correct, otherwise known as clean, can seriously impact provider revenue.

Payer contracts define what a payer needs to ensure timely reimbursement of claims. This involves what a provider needs to ensure his claims are clean.

Providers should track their clean claim rate to evaluate their revenue cycle performance. Higher clean claim rates indicate that medical billing, coding, and claim creation processes are running smoothly and revenue is being collected efficiently.

Dispute resolution

With approximately nine percent of hospitals charges initially being claim denials, providers should ensure their payer contracts have clear dispute resolution processes.

In a payer contract, dispute resolution language defines the processes for mediation or arbitration, the American Medical Association (AMA) explains. In the event of a claim denial or a disputed claim, dispute resolution policies in the payer contract will direct a provider on how to resolve the claim in question and recoup the revenue if it is owed to him or her.

Dispute resolution language can include anything from informal resolution processes to formal litigation.

The AMA points out that dispute resolution language will become more important as providers engage in value-based payer contracts, which present a greater opportunity for claim denials or disputed claims. The industry group advises providers to forgo language in a contract that legally binds providers to a specific dispute resolution process.

“Often the aggrieved party may need the leverage of litigation to get to a resolution of a dispute,” the group states. “In contractual disagreements between physicians and payers, the aggrieved party is often the physician, and the absence of language stating that these provisions are binding may give some wiggle room for this leverage. This isn’t the place, therefore, to argue for hardnosed language.”

Fee schedule

A fee schedule is a list of fees or payments for specific provider services or supplies, HFMA explains.

Each payer contract should have a fee schedule attached, and providers should push payers to provide a complete fee schedule. The list will define all covered services and the negotiated rates for each service.

For example, Medicare manages the Physician Fee Schedule (PFS). Using the PFS, CMS reimburses for physician services under Medicare Part B.

Each Current Procedural Terminology (CPT) code receives a relative value unit (RVU), which are then adjusted for the Geographical Practice Cost Index and the national conversion factor. The result is the Medicare allowed amount for a specific covered service.

Other payers use similar processes to determine the allowed amount for each covered service listed on the fee schedule.

Medical necessity

Healthcare services or supplies that are needed to diagnose or treat a condition, illness, disease, injury, or related symptoms are considered medically necessary, HHS explains.

Medically necessary services also meet accepted standards of medicine, HHS adds.

Payers only reimburse providers for services that are deemed medically necessary. Therefore, payers define medical necessity in their contracts to ensure providers understand what type of services will be covered under the agreement.

Medical necessity clauses may also limit the number of times providers can perform a procedure or deliver specific care in a specified time period. For Medicare and Medicaid, the National Coverage Determinations and Local Coverage Determinations impose limits on how many times a provider can deliver a medically necessary service within a certain period.

Providers should be aware that they understand each payer’s definition of medical necessity because definitions may vary slightly by contract and their own definition may be different.

Billing payers for services that are known to be medically unnecessary can result in healthcare fraud investigations and punishment.

Network requirements

Networks requirements are a key component of payer contracts. The provisions detail the networks in which provider organizations can participate, as well as the credentialing requirements providers must meet in order to join a network.

Providers should ensure they join the appropriate network for their practice to generate revenue and increase patient volume.

Network requirements in payer contracts will become more important as the number of value-based contracts increases, Watrous explains.

“Value-based care is producing different networks for different products,” she says. “There’s always language in contracts that pertains to credentialing criteria that you have to meet in order to be added to the network. But oftentimes a contract will also have language that states that the payer can pick and choose which positions can participate in which networks.”

Ideally, a payer contract should not contain language that allows payers to select a provider organization’s network, she recommended to providers. Network changes should be tied to credentialing criteria only and not arbitrary selection of physicians.


Payers contacts should clearly define the contract’s period and under what circumstances the provider and payer can terminate the agreement.

“There will likely be provisions detailing processes for fixing material breaches of the contract, including timeframes for resolution,” the AMA explains. “Post-termination duties should be specified for both parties, including obligations for the payer to pay any outstanding compensation to the physician or true-up based on a pro rata portion of the performance year.”

Some payer contracts may also include termination language that states a contract will automatically renew unless a party starts the termination process.

Providers should always be aware of termination language in their payer contracts, Regina Flint, OB Hospitalist Group’s (OBHG) Contract Manager and Paralegal, recently explained to

“It is very important for the contract owner to receive notifications about what’s happening with their contract – just in case it fell off their radar,” she said. “Such as if there’s a termination for convenience provision, or if the agreement automatically renews unless someone does something. Or, the company’s needs may have changed and we no longer need this vendor or this service.”

Understanding the termination information for each contract an organization has ensures providers are not wasting resources on contracts that are not beneficial to them.

Unilateral amendment

Payer contracts that contain unilateral amendments mean that payers can change contract provisions without notifying the provider. If a contract contains unilateral amendment language, payers can change anything from reimbursement rates to clean claim definitions, and even network participation.

“Most payer contracts say that the payer can amend the contract at any time,” Watrous explained. “In the worst case, they say that no approval is required from the provider at all. In the best case, they’ll say, ‘We are amending this contract and you have 30 days to object to the amendment in writing or it automatically goes into effect.’”

Some states mandate that payers notify providers of any changes to a payer contract, but many do not.

Providers should be aware of unilateral amendment language in their contracts and negotiate with payers to exclude such language in future contracts.

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