Seconds Count: Making the Most of Contract Renegotiations

The best time to start thinking about renegotiating an employment contract might be before you sign on the dotted line the first time. What you put in place then will define discussions in the future. But whether you landed a plum of a deal or a lemon, round two will be different. In either case, the key to success is to be prepared and proactive.

By the fall of 2012, 53 percent of cardiology practices that responded to an online survey reported being fully integrated with a hospital or health system, with the majority agreeing to three- to five-year contracts. Fourteen percent were in the process of integrating and yet another 11 percent were considering the option. Now, as 2014 heads to a close, many of those groups find themselves in the throes of renegotiating contracts or on the cusp.

“This wave of integration happened in a compressed amount of time and now all those three- and five-year contracts are coming up for renewal,” says Joel Sauer, vice president of consulting at MedAxiom Consulting in Neptune Beach, Fla., which conducted the survey. Driven by public policy that slashed revenues and incomes, many independent cardiovascular practices sought a safe haven in employment models. Almost four in five physicians in the survey saw an increase in compensation after integrating.

Preserving salary and maintaining some degree of autonomy topped physicians’ priority list in their first round of negotiations, recalls J. Bryan Herchelroath, DO, a cardiologist with PinnacleHealth Cardiovascular Institute in Harrisburg, Pa. Now entering their fourth year after integration, governance issues might supersede compensation. Given their 10-year contract, the institute’s three dozen or so cardiologists aren’t pressed—but that doesn’t mean they aren’t following developments and thinking ahead.

“There have been a lot of changes even in the last three years that we wouldn’t have been able to predict three or four or five years ago,” he says. “It is very dynamic. The landscape of the payers will continue to change and that is what keeps us on our toes.”

Then & now

Call it knowledge, familiarity, a relationship or older and wiser. One major difference between an initial negotiation and renegotiations is that the physicians and hospital systems have had a chance to work together and assess each other’s strengths and weaknesses. “Whether it is two, three or five years later, the fact is the other party to the arrangement is now a known quantity,” says Eve T. Horwitz, JD, MBA, a lawyer who specializes in healthcare at Archstone Law Group in Waltham, Mass. “Three years later you know what that doctor contributes and is capable of. From the flip side, the doctor has been able to see how well organized and operated the [hospital] practice is.” 

That knowledge may translate into power for one side or the other. Subpar performance over time puts a physician’s group at a disadvantage while exceeding expectations gives them clout, especially in competitive markets where they and their patients can go elsewhere if they dislike the terms of the renegotiation. If cardiovascular specialists didn’t establish what and how they were to be measured in the first contract, they may face a rude awakening in the second round, warns Rebekah Apple, MA, senior manager of physician services and support at the American Association for Physician Leadership in Tampa, Fla.

“When they first start out, it is so critical that they get a clear agreement on how they will be evaluated, how often they will be evaluated and what those benchmarks are,” she says. Failing to do so leaves physicians in a weaker position during renegotiations if the hospital cites unsatisfactory results. “Then they have nothing to stand on.”

If they haven’t been doing so already, physicians and physician groups should track their results and outcomes as a way to prove their worth to the enterprise, advises Frank L. Fazzalari, MD, MBA, chief of cardiothoracic surgery at Crittenton Hospital in Rochester, Mich., and chair of the Society of Thoracic Surgeons’ (STS) practice management workforce. STS members have access to data and quality metrics based on the society’s well-established clinical registries, a resource they can tap to gain bargaining power. 

“Administrators are interested in data and numbers,” Fazzalari says. “If you can show it, and you can make your case in a scientific fashion, you have a better chance of getting where you want to go in these negotiations.”

Power in numbers

Sauer proposes that physician affiliation also may change between round one and two of negotiations. Cardiologists who previously shared ownership of a practice now may identify with their employer, although he adds that he has not seen such splintering yet. “If I was a deviant hospital administrator, I would probably try to cause that fracturing because I think it would help my leveraging position,” he says. “The more cohesive the physicians, the stronger their negotiating position. The more fragmented, the more I can divide and conquer.”

Fazzalari encourages physicians to unify formally with covenants and even noncompete clauses well before entering into renegotiations. If cardiac surgeons unite with cardiologists, they can wield even more leverage during renegotiations because the hospital system will be loath to replace entire cardiovascular service lines. And compensation—the catalyst behind integrations just a few years back—should take a back seat. 

“That is where people lose track,” he observes. “They go into [negotiations] thinking, ‘How will I improve my compensation?’ They are missing the boat. That is probably the last thing they should be thinking about. That every-man-for-himself or women-for-herself mentality is what will ultimately lead to failure in negotiations.”

That “we” spirit has helped maintain unity at PinnacleHealth Cardiovascular Institute. Physicians are paid the same and once they reach their expected threshold for relative value units (RVUs), the excess revenue goes in a pot to be split by all. “It doesn’t serve one individual,” Herchelroath says; for instance, an interventional cardiologist who performs high RVU-generating procedures. “That establishes an appreciation that when that guy is in the cath lab, there is someone out on the floor doing work and seeing some people in the office and feeding that guy in the lab.”

Less money, more options

The fiscal landscape that hospitals and physicians navigated several years ago has changed as well under healthcare reform. Hospitals face diminishing profits and many physicians have seen pay cuts. One in five hospitals posted negative total margins in 2012 in an analysis of American Hospital Association data by Avalere Health. Not-for-profit hospitals hit an all-time low for revenue growth and cash flow margins in 2013, according to Moody’s.

And cardiologists’ compensation took an almost 8 percent dive between 2012 and 2013 in a survey by MedAxiom. Cardiologists are not alone, though. A poll by Jackson Healthcare found that 88 percent of physicians reported a drop or no change in income between 2013 and 2014.  

Horwitz sympathizes with physicians but adds they should be realistic about the fiscal situation.

Sauer urges cardiologists entering renegotiations to first investigate the hospital or system’s finances and market share as a reality check. “Really understanding the hospital’s position and needs are very critical,” he says. “If the hospital is struggling financially, that will be its main focus and physicians need to understand that, especially those who are renewing.”

Salary remains a key issue in renegotiations, but cardiologists can use the opportunity to lobby for other benefits. Rather than push for more pay, seek reimbursement for advanced education, Apple suggests. Horwitz says to focus on what achieves success and try to build that into the deal. Fazzalari encourages members to negotiate greater involvement in leadership positions, which will give their team more control in key decisions.

The PinnacleHealth group, for instance, ensured that half of the institute’s board seats go to cardiologists. Herchelroath, who completed a three-year board term, says the experience provided insights that will inform the next round of negotiations. “We need to find some equation to help us transition into more of a value-based or time-value-unit-based salary model,” he says.

A value proposition

Value may be the biggest bargaining chip cardiologists have. “Value transcends work RVUs,” Sauer says, acknowledging that reimbursement still rewards a productivity model. “But if it is just RVUs the physicians deliver, and nothing else, then the tendency is for the system as a whole to be underwhelmed. That doesn’t create that mutual value that would make the negotiations go more smoothly and favorably to the docs.”

Cardiologists already bring value to the table, Fazzalari argues, although they may not be recognized for their contributions. “We can help and be involved in decisions that will ultimately improve quality, reduce cost and potentially the bottom line,” he says. “At first blush, administrators may not understand the value of that.” 

Horwitz concurs, saying the most common mistake made by hospitals is “to underestimate the less quantifiable contributions of a physician.” Still, the onus is on cardiologists to prove their worth, particularly when preparing for renegotiations. Fazzalari counsels members to keep a record and monitor areas where they add value to the health system, especially for meeting quality metrics that resulted in payments.

It is never too early to start preparing for renegotiations, Fazzalari says. Apple counsels physicians to document their accomplishments, the skills they applied and the benefits accrued by the system for later use in renegotiations.

Formal preparations should kick in about 18 months before the contract runs out, Sauer advises, but if the renegotiation includes an innovative approach, he recommends adding more time to the process. For instance, cardiology groups might want to give themselves time to model a new compensation plan under different scenarios to spot any unintended consequences—or as Herchelroath puts it, “So we don’t lose our shirts.”

“[Renegotiations] are inevitably slower than anybody would imagine,” Sauer says, in part because hospital administrators and physicians already have busy schedules. “And partly because of the nature of these renegotiations. We are talking about very significant amounts of money. These are not decisions that are made lightly.”