Thought Leadership

Unraveling Game Theory Dynamics in Healthcare: A Battle Between Payors and Providers

By Revive
posted Aug 17, 2023

Authored by Amy Strauss and Paige Butz

In the complex world of healthcare, a delicate chess match is performed between payors and providers as they compete for market share while striving to offer affordable coverage for their patient population. Understanding the dynamics of this strategic interaction can be best achieved through the lens of game theory, an economic framework that models decision-making in situations where each participant’s success depends on the actions of others.

The Players:

Healthcare payors, including Blue Cross Blue Shield, UnitedHealthcare, Cigna, and Humana, amongst others, seek to minimize costs and gain profits, while ensuring availability of healthcare services for their members. Their ultimate objective is to negotiate lower reimbursement rates with providers to increase their profitability and efficiency.

On the other hand, provider organizations, which includes hospitals, clinics, and healthcare providers, aim to deliver the highest quality of care, and optimize outcomes for the population they serve. They must constantly weigh the cost of care against reimbursement rates to maintain financial sustainability. Consequently, their goal is to negotiate higher or status quo rates from payors to cover their rising costs while achieving financial solvency.

Their Strategies:

In the negotiation process, payors and provider organizations adopt various strategies to achieve their respective goals. Health insurance payors have the following options at their disposal:

  1. Offering lower reimbursement rates.
  2. Creating narrow networks of providers to reduce expenses.
  3. Setting conditions and quality metrics for reimbursement.

On the other hand, provider organizations can employ the following strategies:

  1. Demanding higher reimbursement rates based on the quality of care they provide.
  2. Refusing to accept certain insurance plans if reimbursement rates are too low.

The Long Game

Although each negotiation may seem like a battlefront, it is vital to remember that the dynamic between payors and provider organizations is not a one-time game but rather an ongoing iterative process. Over time, both parties may adjust their strategies, adapt to changing market conditions, adhere to new regulations, and respond to patient demands. We’ve seen payors become more contentious in the negotiation process, with higher out-of-network probabilities. Systems have been facing unprecedented economic pressures while payors are gaining unprecedented profits and share prices.

Provider organizations have a vested interest in maintaining financial solvency and ensuring the quality of care they provide. They need to shift their view of the negotiation process to be part of a broader long-term strategy, allowing them to proactively plan for potential contract disruptions instead of merely reacting defensively.

This strategic advantage arises from identifying opportunities to be more forward-thinking in the negotiation process. By focusing on long-term goals, provider organizations can forge alliances, implement quality-driven initiatives, and adopt innovative approaches to optimize their position in the healthcare landscape.

What’s next?

The game theory concept illuminates the intricate dynamics between payors and provider organizations in the healthcare industry. By understanding the strategies each party employs and embracing a long-term approach to negotiations, they can create a more sustainable and patient-centric healthcare ecosystem. To improve the quality of care and control costs, fostering collaborative efforts and proactive planning is key. As both payors and providers recognize their interdependence and strategically navigate their interactions, they can forge a path towards a healthier and more efficient healthcare system for all. Providers can utilize this theory to their advantage by leveraging mutual interests, utilizing iterative bargaining to increase compromise, exploring shared risk contracts, and engaging pertinent stakeholders by involving physicians and advocating for patient-centric policies.

Interested in learning more? Revive is hosting a conference this November in Nashville to continue the conversation. Summit by Revive brings together top managed care executives, legal experts and renowned healthcare thought leaders for an intimate conversation about the state of our industry and how we can chart a successful path through our challenges. Learn more here.