Payer contracting has reached an inflection point. Although these contracts are the lifeblood of a health system, the managed care function is often seen as a routine set of transactional and administrative activities. Too often, these critical activities sit within an overwhelmed and under-resourced team that isn’t optimally connected with enterprise strategy. The result is that health systems are leaving significant value on the table by failing to capture the full economic potential of their payer relationships across both fee-for-service (FFS) and value-based care (VBC) arrangements.
The legacy payer contracting model (calendar-driven relationship management and renewals) is no longer adequate in a market defined by ongoing payer realignment. Health system leaders who continue to treat payer contracting solely as a tactical function will find their care delivery and consumer value being commoditized in an increasingly complex equation. The winners will be those who can secure advantaged economics and operational alignments demonstrated through differentiation.
To win in this environment, health systems must invest in and elevate the managed care function, building the knowledge, capabilities, and enterprise alignment required to contract strategically around the differentiated value they bring to payers and consumers. The opportunity is significant. Organizations that take a more collaborative, strategic, and enterprise-driven approach can unlock stronger negotiating leverage, more predictable performance, and greater economic value across their payer portfolio. Achieving this requires a fundamental shift in how health systems approach payer engagement, grounded in four foundational capabilities that enable smarter, value-aligned contracting and strengthen total payer economics across both FFS and VBC arrangements.
Build the core capabilities to create collaboration and negotiating power
There are four core capabilities and operational requirements that underpin every successful payer relationship and unlock full economic value.
Real physician voices, twice a week
Free, and one click to unsubscribe.
A shared data source of truth. Health systems routinely enter negotiations presenting cost and quality data that payers cannot validate. The fastest path to leverage in a contract negotiation is a single, mutually agreed-upon data foundation. When both sides operate from the same numbers, disputes give way to dialogue, and dialogue enables collaboration and differentiation.
Contract-aware operations. Operations should be built around the terms, incentives, and performance expectations embedded in every agreement. Too often, contracting teams negotiate value-based constructs that the health system’s care delivery infrastructure is not equipped to execute. Closing this gap and making the contract visible to the people who deliver care, without creating additional work for them, is a key best practice to capturing value and achieving high performance in contracts.
Aligned economics across all lines of business. Activating total payer economics means looking beyond VBC lines of business and evaluating the full margin contribution of each payer relationship: FFS, commercial, Medicare Advantage, and commercial self-insured/fully insured. Health systems that focus only on either FFS or VBC performance metrics miss the larger picture. Aligned economics, properly structured across all payer lines of business, produce a far more compelling case to create collaboration at the negotiating table.
Year-round joint governance. The best collaborative relationships set up a cadence for year-round communications and meetings. Joint operating committees, shared performance dashboards, and aligned quality metrics create an ongoing accountability structure that shifts payer and provider behavior from episodic and reactive to strategic and collaborative. Governance is the operating system for collaborative payer relationships, and it should run year-round, not just during reconciliation periods.
Concentrate leverage: the payer force-ranking imperative
Not every payer relationship deserves the same depth of investment. Health systems that approach their payer portfolio strategically, rather than simply managing every contract with the same level of effort, create a meaningful competitive advantage. This means deliberately narrowing where deep collaboration occurs, establishing clear criteria and guardrails for which payers qualify for strategic partnership, and building the internal sophistication within the managed care department to manage that tiered portfolio with discipline. When health systems get this right, the economic outcome is substantially better.
Leading health systems are adopting a deliberate portfolio strategy, force-ranking payers by scale, equitable economics, data-sharing capability, willingness to innovate, and strategic alignment, and concentrating collaborative energy where it will compound the most value. For example, a “collaborative payer” should receive deep strategic engagement, co-developed performance models, and joint governance infrastructure. Other payers may receive a more streamlined arrangement. This tiered approach allows health systems to protect organizational bandwidth while maximizing the return on their most strategically significant payer relationships. How to do this takes planning and thoughtful execution, but the goal is not to invest the same level of collaborative resources with every payer equally. It is to understand and create deliberate strategies where collaboration can create the highest value.
Sequence risk: the readiness-to-execute gate
One of the most consequential mistakes a health system can make is taking on downside risk before the enterprise is ready to perform. Readiness to execute is what determines whether a contract creates value. Health systems should enter downside arrangements when the analytics, care activation capabilities, risk adjustment infrastructure, care model operations, and workforce resources required to perform are implemented. Once these operational requirements are in place, health systems can more likely achieve high performance in long-term risk-based contracts.
Before moving payer relationships from upside-only to shared risk, health systems must honestly assess their capabilities across analytics, network integrity, funds flow, governance, and care model execution. If the infrastructure isn’t there, the right answer might be to delay, invest, and sequence. Readiness is a precondition for collaboration with the payer and sustainable performance.
Redefining the playbook: shifting to offense and establishing a collaborative payer model
Most health systems play defense in payer contracting, responding to what payers put in front of them rather than proactively shaping the terms of engagement. The highest-performing health systems are now flipping this dynamic. They bring innovative network designs, co-developed medical policy frameworks, and differentiated value propositions to the table before contract cycles begin.
This requires an all-payer operating chassis, characterized by market intelligence, a unified contracting playbook, and operational infrastructure that scales reliably across contracts, models, and markets rather than building one-off programs for each payer. When this chassis exists, performance accelerates. Attributed lives, the economic base of any payer relationship, grows because patient access, physician alignment, and network steering become built into the health system’s operating model.
The value at stake
Health systems that build and deploy strategic payer contracting capabilities unlock meaningful value: value grounded not in volume, but in demonstrated performance, operational credibility, and a clear enterprise strategy. When health systems can articulate and prove their differentiated strengths, they capture greater economic value across the entire payer portfolio, reduce reconciliation friction, and replace contract disputes with joint governance and shared accountability. This creates organizational stability that payers recognize and reward with deeper partnerships, more flexible contract structures, and a clearer path to progressive risk and delegation that benefits both financial performance and patient outcomes.
Payer contracting is no longer a back-office managed care activity; it is the strategic launchpad for a health system’s financial and competitive future. Elevating the managed care function into a sophisticated, enterprise-aligned capability (one that understands market dynamics, quantifies system value, and contracts intelligently across a diversified payer portfolio) is now a system-level priority. Health systems that invest in this capability, and that concentrate effort where value can compound, will outperform those that continue to negotiate reactively.
The opportunity ahead is clear
Health systems can build the core capabilities that create true payer collaboration and negotiating power, including disciplined risk sequencing, a unified value thesis, and the ability to contract around the differentiated elements of their care model, consumer experience, and physician enterprise. With these capabilities in place, health systems can reshape the terms of engagement, steer attribution, and strengthen total payer economics across both FFS and VBC arrangements. In a market where performance pressure is intensifying, the health systems that act now (those that build collaborative, strategically led payer contracting capabilities) will hold the leverage, retain the lives, and capture the economics that define sustainable growth.
Christine Mulheran is a health care executive.
