PPO Networks: The Devil Employers Think They Know

Source: David Chase/Forbes

Written with David Contorno, President, Lake Norman Benefits

Do you give your employees an unchecked unlimited expense account? If they carry your company’s health plan ID card, you do.

The Affordable Care Act requires every health plan to offer benefits free from most annual and all lifetime dollar limits. If you have a self-insured plan, you may feel the direct impact of this a little more immediately (although many employers still do not recognize it). Even employers that are fully insured should realize they are the insurance company anyway. The only benefit those employers get is delaying the impact of that spend until their next renewal date. But they pay dearly in the form of a complete lack of information on exactly how that money is being spent. As a result, companies should start to look at the health plan ID card as an unlimited corporate credit card. Which then begs the question…who is monitoring that spend?

Most employers use networks as their primary strategy to control that spend. Carrier networks love to tout their average discounts. “We save plans 60% on average over billed charges!” Well, there two major problems with networks: First, what is that discount off of? Generally it is off the “ChargeMaster” rate. What is the ChargeMaster, you ask? The chargemaster, also known as charge description master (CDM), is a comprehensive listing of items billable to a hospital patient or a patient’s health insurance provider, with highly inflated prices at several times that of actual costs to the hospital. The ChargeMaster typically serves as the starting point for negotiations with patients and health insurance providers of what amount of money will actually be paid to the hospital. It is described as “the central mechanism of the revenue cycle” of a hospital. We have seen a billed charge of $1,000 from a hospital for a manual toothbrush. 60% off that is still one expensive toothbrush. We found a $444 charge for a “mucous collection device” later found to be a box of tissues. Not to mention, the billed charges vary so dramatically, even within the same facility, that a finite percent off an infinite number has zero credibility. While one ex-hospital CEO describes the ChargeMaster as archaic fiction, it does play into the general obfuscation designed to keep healthcare costs growing.

You might think that all hospitals have similar Chargemaster prices…nothing could be further from the truth. The Huffington Post did a story when treatment costs were first made publicly available from a federal database in 2013, in which they found the cost to treat COPD (chronic obstructive pulmonary disorder) in the New York City area can range from $7,044 to $99,690. And herein lies the fundamental problem that has allowed this to occur: Back when we had richer health plans, patients didn’t care about the cost, as long as insurance covered it. Now that we are being left with these crazy-high deductibles, we are blaming the insurance company for the plan design (and the cost thereof) that leaves us with this exposure. Never mind the exorbitant price of the underlying care.

Every facility that participates in Medicare and Medicaid is required to file their actual cost, all in, with the Centers for Medicare and Medicaid Services (CMS), and anyone can access this data for a subscription fee. In Charlotte, N.C., the two largest hospitals systems file their cost for a CT scan as being between $75 and $90. Their average billed charge to a health plan? Between $1,800 and $2,700. That’s a 2,900% markup! The hospitals claim they have to charge higher prices to private insurance plans because of the below-cost care they provide to Medicare and Medicaid patients and the “free” care they provide to the uninsureds through the emergency room. Well, uninsured ER rates have dropped significantly under the ACA (and actual ER usage has gone up), and since ER rooms are highly profitable to the hospitals for those that have insurance, shouldn’t this have a positive overall impact on the private insurance pricing? Also, if I go a buy a car, and get a super deal from the dealership, will you be OK being the next customer in the door and being told you have to overpay because they gave some stranger before you a really good price? I think not.

The second problem with PPO networks is that nearly every network contract prohibits the plan (and the employer, by extension) from auditing a bill. It actually prohibits them from even requesting an itemized bill! All they can get is what’s called a UB or a universal bill. You can see the form here. Other than the info on who the patient is and who to pay, they only ask for total charges and diagnosis. As long as the diagnosis is a covered condition under the plan, the discount gets applied and the bill gets paid. Bills on this form can easily be hundreds of thousands of dollars. When we have asked for an itemized bill (that the insurance company can’t ask for) we have found pregnancy tests on men and charges for 16 surgical screws when only 4 were used, just to name a few “errors.”

We have heard firsthand stories where an insurance executive sat down with hospital executives and said, “We need a bigger discount from you guys,” and the execs said no way. So the insurance exec said, “I don’t think you understand…you can bill us more, and it can even net out to more than we pay you now, we just need to say we have a bigger percent off.”

Another perverse incentive to be aware of that came as a result of the ACA is called the medical loss ratio. Under this provision, insurance companies must spend between 80% and 85% of the premiums they receive for medical care for the insureds. If they spend less than that, they must provide a refund. Prior to this law, carriers could keep the difference for profit, so they had stronger encouragement to keep costs down. Now, the only way they can charge their customers more, and thereby boost profits, is if the underlying cost of care also goes up.

I’m not blaming the insurance companies. They had to bow to the pressure of their customers (employers) because if that big local hospital system left their network, their customers would leave in droves. The insurance companies are in a tough spot. If they try to “manage” the care, i.e. pre-certification, tiered drug formularies, narrow networks, their customer base gets ornery. And employers are loath to be seen as getting involved in their employees’ healthcare. I bet most employers don’t want to tell employees where to sleep or what car to drive, either, but I would imagine they nonetheless have parameters around how much can be spent for rental cars and hotels when traveling on the company dime.

Fortunately, there are employers all over the country who have wised up and tamed the out-of-control healthcare cost beast. They are spending 20-55% less than a typical employer on a per capita basis. Paradoxically, they are finding the best way to slash healthcare costs is to improve health benefits. Examples range from school districts in the rust belt to a municipality in the Pacific Northwest to a small manufacturer in the heart of oil country to a hotelier in Florida.

Another statistic carriers love to tout is their auto-adjudication rates (in other words automatic and prompt payment of claims as they come in). After all, higher auto-adjudication means the providers get paid quicker. And that means fewer headaches for providers and employees. But that also suggests that a 94% auto-adjudication rate means 94% of the time no one is looking at the bill even to the limited level their contract permits.

So let’s review:

  1. Although carrier networks have some influence over the discount, they have little over the starting price.
  2. Hospital charges are filed on a UB (universal bill) and the plans are contractually prohibited from asking for an itemized bill.
  3. If the plan requests any audit at all, they are required to pre-pay the claim, often at 100%, and are then subject to the hospital’s own audit procedures.
  4. Networks are forced to accept these terms or their customers will leave because they do not have a broad network.

Sounds like the fox is watching the henhouse. The abuses that can and do exist under this model are egregious. Different strategies are just starting to take shape and mature that expand who your employees can see by removing the network completely and letting them go wherever they want. And when the network contract is gone, the plan sponsors can deploy much more aggressive strategies to not only reduce the fraud and abuse, but significantly reduce costs on the legitimate charges. Some employers are contracting with providers directly, and more often than not, with a local hospital looking to compete against the behemoth health systems.

Under ERISA, plan sponsors (the employer) have a fiduciary responsibility to protect plan assets. Since most network contracts prohibit the plan from auditing the bill, and the few that do require 100% of the allowed charges be paid before an audit can begin, how can a plan sponsor meet its fiduciary requirement under ERISA to be good stewards of plan assets?

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