The current state of managed care contracting

Managed care contracting presents unique challenges for health systems because it requires navigating payer-specific complexities and adapting to evolving, population-specific dynamics. For example, in Medicare Advantage (MA), providers face numerous pressures — notably an escalating administrative burden, compounded by a demographic shift that impacts both their payer and acuity mix. As denials and prior authorization requirements rise, they create additional operational hurdles. Fee-for-service reimbursement pressures are intensifying the need to transition to value-based care (VBC) models as a path to margin sustainability. These factors, combined with the rapid expansion of the Medicare population, make negotiating favorable managed care agreements and achieving sustainable outcomes increasingly difficult for providers.

The uneven playing field between health systems and health plans adds to the challenge. Plans typically have far greater experience and access to the necessary actuarial expertise and data, giving them a significant negotiating advantage. By contrast, many health systems operate with fragmented strategies and siloed operations, despite investments in operational efficiency. Persistent challenges — such as limited insight into the value health systems are creating for payers, and outdated contracting approaches — continue to impede their ability to align enterprise-wide goals with payer-driven renewal schedules.

Siloed operations further compound the issue, preventing effective collaboration between revenue cycle teams and managed care contracting departments. Without a unified approach, health systems struggle to capture the full value of their contracts, leaving revenue on the table and exposing themselves to increased performance risk.

What health systems need to change in their approach to managed care contracting

Health systems must rethink their approach to managed care contracting, transitioning from fragmented, reactive processes to proactive, enterprise-wide strategies. Achieving this transformation requires four key shifts:

Health systems must approach negotiations with clear objectives rooted in operational realities, clear line of sight into network performance and value creation (relative to peers in the market), and firm priorities for establishing a viable path to long-term margin sustainability. Instead of reacting to health systems proposals, providers should enter negotiations prepared with a clear set of “asks,” advocating for terms that support strategic goals and build sustainable payer relationships.

Eliminating siloes between departments is essential. Revenue cycle teams must share insights like denial trends with contracting teams to strengthen negotiation strategies and improve operational performance. This alignment ensures that contracting decisions reflect the broader needs of the organization and offer enterprise-wide visibility.

Fee-for-service rates and VBC incentives  must be modeled and evaluated in aggregate to understand their combined financial impact and risk. A unified view helps prevent financial gains in one area from undermining performance or increasing risk elsewhere.

Advanced analytics are crucial for assessing performance metrics, identifying risk drivers, and monitoring outcomes. Data-informed analytics are essential for assessing performance metrics, identifying risk drivers, and supporting continuous improvement. Health systems should evaluate whether to build these capabilities internally or partner externally.

By adopting these approaches, health systems can create a unified framework that drives operational efficiency, reduces risks and delivers sustainable financial results.

6 spokes of managed care contracting success

Among numerous approaches available to address managed care contracting challenges, Optum Advisory¹ offers a comprehensive framework designed to transform contracting and drive sustainable outcomes. The framework is built around six key spokes that health systems can leverage to enhance performance across payer agreements and lines of business:

Contract rates and terms analysis: A thorough analysis of reimbursement rates against market benchmarks helps health systems gauge their competitive position and surface opportunities for more equitable agreements.

Enterprise financial and risk analysis: Proprietary data-driven models assess the financial impact and risks tied to contracts. This analysis helps prioritize negotiation “asks” based on impact, while aligning with enterprise objectives.

Contract negotiation and strategy: Expert negotiation support provides analysis of proposed terms, direct engagement with payer actuaries, and advocacy for fair agreements. This hands-on approach enables health systems to secure favorable terms and mitigate contract-related risks.

Revenue cycle and utilization review: High denial rates and inefficiencies should be addressed by identifying trends and integrating payer insights to improve performance and reduce friction in future negotiations.

Tech enablement: Technology-enabled tools — such as financial clearance automation and payer portal adoption — can streamline operations, reduce administrative burden, enhance efficiency, and improve overall performance.

Performance management: Payer scorecards, feedback loops, and targeted initiatives are created to ensure continuous improvement. Ongoing performance monitoring ensures that negotiated contracts achieve their intended outcomes, reduce payer abrasion, and strengthen payer-provider relationships.