Wimpy, the character from the Popeye cartoon series (not just a hungry guy, but a talented economist), famously said, “I’ll gladly pay you Tuesday for a hamburger today.”
Put enough Tuesdays between today’s hamburger, or, for you, units of service, and the time of payment, and we have lessons on the time value of money, and (today’s message for an inflationary period), and on the fact that as time passes, dollars are worth less.
Over the decades during which interest rates were near zero, most of us lost track of the impact of the ravages of inflation on negotiated managed care rates. To the extent that compensation demands and other operating costs increased, there was always renegotiation three or so years down the road when the current contract expired, a rule that I am sorry to say many blew off . . . they never renegotiated. Instead, asleep at the switch, they allowed contracts to roll over unchallenged or, worse, signed agreements without even looking at the rates, which often were going in the wrong direction.
But that’s not you. Two or so years ago, you certainly began building automatic cost of living increases into your agreements with payors. [But if this is not you, then change your strategy today.]
But for what index did you negotiate? Someone out there just shouted, “well, the CPI, of course!” Maybe so, but the overall CPI for all urban consumers or some geographic subset (e.g., the Consumer Price Index for All Urban Consumers (CPI-U), Washington-Arlington-Alexandria), or perhaps some product specific subset (e.g. the housing component of that same CPI index)?
But why use a CPI model at all? Is it indicative of the price sensitivity of the inputs impacting your practice? Must the index be so indicative? Might another index, even one from a different domain (e.g., the PPI or the PMI) or even the year on year increases in Blue Cross of Wherever State’s premium?
Of course, all of this requires thinking, and time, effort, and, yes, money. That’s why everyone else, but not you, have avoided negotiating indexed increases into your managed care contracts, right?
Reach out to discuss your situation.
