Understanding Payer Contracts: Fee Schedules, Carve-Outs, Termination Clauses and How to Negotiate Rates

A three-physician orthopedic practice asked us to look at why their largest commercial payer paid less per visit than it had three years earlier, even though nobody had signed anything new. The answer took an afternoon with the contract binder. The fee schedule exhibit said rates were a percentage of "the current Medicare physician fee schedule". When CMS cut the conversion factor and shifted RVUs, the payer's rates moved with it, automatically, with no notice required. The practice had agreed to that in a sentence nobody had read since the day it was signed.

The same binder held a contract with a smaller payer that paid noticeably better, but had an all-products clause that had quietly enrolled the practice in a narrow-network exchange plan paying a fraction of the commercial rate. And it held a termination letter from 2019 that had never been sent, drafted during a negotiation that fizzled when the payer stopped returning calls. None of this was unusual. It is what we find in most practices that have never put their contracts on a schedule.

The direct answer: a payer contract is a fee schedule wrapped in terms that decide how that schedule can change, what it excludes, how long you are stuck with it and how you get out. To understand one, find the fee schedule exhibit and establish exactly how each rate is calculated; then read the carve-outs, the all-products and amendment clauses, the termination notice period, timely filing and recoupment limits. To negotiate, bring volume data by CPT code, the Medicare equivalent, cost benchmarks and a specific ask, start 120 days before the anniversary, and be prepared to use the termination clause you have read. The sections below are organised as decisions: if you are in this situation, here is what to do.

If you are deciding whether to sign with a payer at all

Sign when the payer's patients are already in your waiting room or will be, the rate covers your cost per visit, and the terms are ones you can live with for the full initial term. Decline, or stay out of network, when the rate is below your cost or the payer's share of your market is too small to matter. The way to know is a payer mix report from your practice management system showing visits and payments by payer for the last twelve months, and a cost-per-visit figure, which is total operating expense divided by total visits. Many practices have never calculated the second number; the MGMA DataDive cost and revenue benchmarks give you a specialty comparison when you do.

Three situations change the answer. A new practice usually needs to be in network with the top four or five payers in its area to fill the schedule, and should accept that the first contract is a starting point, not a final rate. A specialty practice with a scarce service can stay out of network with a payer and still see its patients, but should model the patient-balance and no-surprises consequences before deciding. And a practice that is the only one of its kind in a rural county has more leverage than it realises; payers have network adequacy obligations and will negotiate with a provider they cannot replace.

If the fee schedule is quoted as a percentage of Medicare

Most commercial fee schedules are expressed as a percentage of the Medicare physician fee schedule, and the percentage is the least important part of the sentence. Four other words decide what you are paid, and the fee schedule exhibit must answer each of them.

1. Which year? "Current year" means your rates move whenever CMS moves the conversion factor or RVUs, up or down, with no amendment. A fixed year ("the 2024 Medicare physician fee schedule") freezes the base, which protects you from cuts but also from increases. We prefer a fixed year with a scheduled annual increase written into the contract, because it makes the number predictable; failing that, "current year" with a floor ("never less than the rates in effect on the effective date").
2. Which locality? Medicare rates vary by geographic practice cost index. The exhibit should name the locality, and it should be yours.
3. Which conversion factor? Since 2026 the Medicare schedule carries two conversion factors, one for clinicians who are qualifying participants in advanced alternative payment models and one for everyone else, as the MACRA statute required. A contract that says "the Medicare conversion factor" is now ambiguous. Have it name which one.
4. Which site of service and which modifiers? Medicare pays differently for facility and non-facility settings and reduces payment for multiple procedures, assistant surgeons and bilateral procedures. The exhibit should say whether the payer applies Medicare's site-of-service differential and multiple procedure reduction rules, or its own.

Then check the arithmetic on your top codes. Pull the national payment amount from CMS's Physician Fee Schedule look-up tool for the year named, apply the percentage, and compare it with the allowed amount on recent remittances. A gap means the payer is using a different base than you think, or a different percentage for some code families, which brings us to carve-outs. Our contract rate benchmark does this comparison for a list of codes against the current Medicare amounts.

If the contract says "lesser of billed charges or the fee schedule"

Every contract says this, and it means your chargemaster is a ceiling on what you can be paid. If your fee for 99214 is $150 and the contract allows $165, you get $150. The decision here is about your fee schedule, not the payer's: set charges above the highest contracted allowable for every code you bill, and review them annually when the Medicare amounts change. A simple rule many practices use is a uniform multiple of the current Medicare national payment amount, high enough to clear every contract. Charges that are consistent across payers also protect you if a payer later argues your "usual and customary" fee is lower than what you billed them.

If there are carve-outs

A carve-out is any code or category paid on a different basis from the main schedule, and it is where percent-of-Medicare contracts earn or lose the most money. Common ones: drugs and biologicals paid at a percentage of average sales price rather than the fee schedule; vaccines and their administration codes; laboratory tests paid from the clinical laboratory fee schedule at a different percentage; durable medical equipment and supplies; and sometimes a short list of high-volume procedures paid at a flat rate. The practice's decision is to find every carve-out, price it against your acquisition cost or your cost to perform, and refuse the ones that pay below cost.

Drugs are the usual trap. A rheumatology or oncology practice paid at ASP plus a small percentage can lose money on every infusion if the payer's percentage is below the practice's acquisition cost after supply chain fees. Vaccines are the pediatric version: a schedule that pays the product at a percentage of a stale reference price and the administration code at Medicare rates may not cover the invoice. For both, bring the invoices to the negotiation. Payers do not want providers to stop offering a service, and a cost-based argument for a carve-out is far easier to win than a general rate increase.

If the contract has an all-products clause

An all-products clause obliges you to participate in every plan the payer offers now or later, at the rates the payer sets for each, often by notice. The decision is simple: strike it, or replace it with a schedule of named products you have agreed to join, with the right to decline new products within a stated period after notice. If the payer refuses, understand what you are accepting: Medicare Advantage products paid at or near Medicare rates, exchange plans paid below the commercial schedule, and Medicaid managed care products at the state's rates, all under a contract you negotiated for commercial business. Some states restrict all-products clauses; ask counsel. Where the clause stays, at least negotiate that rates for each product are stated in the exhibit rather than set unilaterally.

If the termination, renewal and amendment clauses are one-sided

Three clauses decide whether you can ever change the deal. The term and renewal clause: most contracts run one to three years and renew automatically ("evergreen") unless either party gives notice, typically 90 to 180 days before the anniversary. The termination clause: without-cause termination on 90 days' notice is common and fair; a contract that lets the payer terminate without cause but requires the practice to show cause is not. The amendment clause: "by written notice" means the payer can change the fee schedule or the policies incorporated by reference simply by sending a letter, and silence is consent; "by mutual written agreement" means you have to sign.

Our rules of thumb. Insist on mutual amendment for anything touching rates, or at least a right to terminate within 60 days of a notice of a rate change. Put the anniversary and notice dates for every contract in a shared calendar with a reminder 150 days ahead, because the window for renegotiation closes with the notice deadline, and a missed deadline means another year at the same rate. And read the termination-for-cause triggers; some contracts let the payer terminate immediately for things like a change of ownership or a provider leaving, which can take an entire group out of network because one physician retired.

Two more clauses sit here and quietly cost money. Timely filing in commercial contracts is often 90 or 180 days, far shorter than Medicare's twelve months; the practice's denial reports will show how often that limit is hit. Recoupment lookback is how far back the payer may reach to recover an overpayment; where state law sets a limit (California's Knox-Keene Act limits most non-fraud refund requests to 365 days from payment, and Texas's prompt-pay law applies a 180-day limit to the fully insured plans it covers) the contract may not exceed it, and where it does not, negotiate twelve months and the right to offset the practice's own underpayment findings over the same window.

If you want a rate increase: the negotiation sequence

A negotiation that gets an answer looks like a business case, is delivered to a person with authority, on a schedule, and carries a consequence if ignored. This is the sequence we run.

1. Build the data pack (120 days before the anniversary). Twelve months of claims for the payer: top 25 CPT codes by volume and by dollars, allowed amount per code, the Medicare national amount for the same codes and year, your cost per visit, and your quality and access data (patient satisfaction scores, same-day access, after-hours availability, quality programme results). Include the number of the payer's members you treat. Payers negotiate by code family and by total spend, so present it that way.
2. Decide the ask and the floor. Ask for a specific percentage on specific code families, and be ready to say why: inflation in your cost per visit, the gap between this payer and your other payers, the cost of the carve-outs. Decide privately the number below which you will give notice.
3. Find the right person (110 days). The provider relations representative who answers claim questions usually cannot change rates. Ask for the network contracting manager for your region. Send the request in writing, with the data pack, and ask for a meeting date.
4. Meet and listen (90 days). The payer will have its own data about your practice: cost relative to peers, utilisation, quality. Ask for it. Where you are an outlier on their numbers, be ready to explain or to accept that the rate increase may be tied to a value-based arrangement.
5. Negotiate the terms, not just the rate (60 to 90 days). Trade things the payer values for things you value: a longer term for a fixed-year base plus annual escalators, participation in a new product for a carve-out fix, a quality bonus for a lower base increase. Get every change into the fee schedule exhibit, with an effective date.
6. Use the notice deadline (at the notice date). If there is no agreement by the notice deadline, send the non-renewal or termination notice the contract requires. This is not a threat; it is the contract working as written, and it is often the step that produces the payer's first real offer. Be prepared for the possibility that it does not, and have the patient communication, the out-of-network workflow and the referral conversations with your physicians ready before you send it.
7. Confirm and audit (after signing). Load the new fee schedule into the practice management system's expected-allowable table and audit the first 90 days of remittances against it. In our experience a meaningful share of negotiated increases are not loaded correctly on the payer's side, and nobody notices until the next negotiation.

If the payer says no

A refusal is information. If the payer will not move on the base rate, go back to the smaller asks: carve-out fixes priced to cost, a shorter timely filing cure, mutual amendment, a quality bonus. If the payer will not move at all and the rate is below your cost, the choice is between leaving the network and absorbing the loss, and the payer mix report tells you which. Practices overestimate how many patients they will lose by going out of network with a mid-size payer, and underestimate the administrative cost of staying in one that pays badly. Model both honestly. And keep the file: the data pack, the correspondence, the payer's stated reasons. The next negotiation starts from it, and so does any complaint to the state insurance regulator about network adequacy or payment practices.

The decision table

The edge cases

Medicare Advantage. MA contracts usually pay at or near the Medicare fee schedule and are the one place where a percent-of-Medicare rate below 100 percent should be refused outright, because federal rules require MA plans to pay non-contracted providers what original Medicare would have paid. Being out of network with an MA plan is therefore less costly than it sounds, though patients in HMO products will need the plan's authorisation to see you.

Medicaid managed care. Rates are generally anchored to the state Medicaid fee schedule and the plan's room to negotiate is limited. The useful asks are administrative: prior authorisation turnaround, timely filing, and the plan's own rate floors, which some states require.

Rental networks and "silent PPOs". Some contracts let the payer lease your rate to other payers and third-party administrators you have never heard of. Look for "affiliates", "network access" or "leased network" language and require a list of who may access the rate and notice when it changes. A claim paid by an unknown payer at your lowest contracted rate is the symptom.

IPAs, delegated groups and capitation. If you join a payer through an independent practice association, your contract is with the IPA, which may hold capitation and pay you from it. Read the IPA agreement for how the fee schedule is set, what the IPA retains, and how risk pools are settled; the payer contract you can see may not be the one that decides your payment.

Out-of-network patients. Federal No Surprises Act protections cover emergency services and certain out-of-network services at in-network facilities, and some states have broader balance billing laws. For an office-based practice considering leaving a network, the main consequence is that patients' out-of-network benefits and your patient balances change; model that before sending any notice.

A payer contract review is part of every RCM audit we run, because underpayment against contract is one of the largest and least visible leaks in a practice's revenue. If you are heading into a renewal and want a second set of eyes on the exhibit before you send your ask, book a call and bring the contract.

Questions we hear

What percentage of Medicare is a good commercial rate?

It depends on specialty, market and payer, and anyone who gives you a single number without seeing your data is guessing. Primary care in competitive urban markets often sees commercial rates close to Medicare; procedural specialties and rural practices often see substantially more. The better questions are whether the rate covers your cost per visit, how it compares with your other payers for the same codes, and what base year and conversion factor it is tied to. Benchmarks from MGMA and from your specialty society help; your own payer comparison helps more.

How often should we renegotiate?

Every contract should be reviewed every year at the notice window, and formally renegotiated at least every two to three years or whenever your costs, your services or the market change materially. A contract with a fixed base year and no escalator is losing real value every year it sits; one with "current year" Medicare language needs checking every time CMS publishes a final rule, which it does every autumn.

Can a payer change our fee schedule without our agreement?

If the contract allows amendment by written notice, yes, and silence after the notice period is treated as acceptance. That is why the amendment clause matters as much as the rate. If your contract has that language, read every payer notice that arrives, calendar the response deadline, and use the right to object or terminate that the clause gives you. If it does not have that language, a unilateral rate change is a breach, and a written objection citing the clause usually reverses it.

Is threatening to terminate a good tactic?

Threatening is a poor tactic; giving notice as the contract provides, after a documented attempt to negotiate, is a legitimate one. The difference is preparation. A practice that sends a non-renewal notice without a plan for its patients, its referrals and its cash flow will fold when the payer calls its bluff, and payers remember. A practice that sends it with the data pack already on the table, a patient letter drafted and an out-of-network workflow ready is negotiating from its real position, and often does not have to leave.

Who in the practice should own the contracts?

One named person, usually the practice administrator, with a shared calendar of anniversaries and notice dates, a binder or folder with every current contract and fee schedule exhibit, and a standing item on the quarterly leadership agenda. The billing team supports with underpayment reports and denial data; the physicians decide the floor. Contracts that belong to nobody renew by themselves at the old rates, which is exactly what the payer's contract is designed to do.

Sources and references

• Physician Fee Schedule, CMS: the programme page for the Medicare physician fee schedule, with the annual rules and the current conversion factors that percent-of-Medicare contracts reference.
• Search the Physician Fee Schedule, CMS: the look-up tool for payment amounts, RVUs and policy indicators by HCPCS code, year and locality; use it to check a payer's arithmetic.
• PFS Relative Value Files, CMS: the annual files with work, practice expense and malpractice RVUs, GPCIs and conversion factors, the base most contracts are built on.
• Fee Schedules - General Information, CMS: index of the Medicare fee schedules, including the clinical laboratory and DMEPOS schedules that carve-outs often reference.
• MGMA DataDive, Medical Group Management Association: benchmark data on practice cost, revenue and productivity by specialty, useful for the cost-per-visit figure in a negotiation.