ITIJ 201, Cost Containment Review, October 2017
Is this the end of Preferred Provider Organisations (PPOs)? Jason Davis examines the opportunities that exist for international insurers in the brave new world of reference-based pricing
I was recently in a meeting with a room full of affiliated US hospital CFOs to discuss their cost containment model for their employee benefits. The CFO panel was reviewing the ‘savings’ outside their facilities that were being ‘repriced’ in several ways by their cost containment solutions and the room rumbled with general comments like ‘hmmmm’, ‘ok, not great’, ‘not terrible’. I will never forget the exchange that followed:
CFO: “How much are we paying for this anyway?”
Adviser: “We pay them 25 per cent of the savings.”
CFO: “Wait, I have a question, by savings … what do you mean? Are you saying the difference between charges and the payable amount, or is there another number considered, like average actual allowable or anything like that?”
Adviser: “It’s the difference between the billed charges and the payable amount; if they save you $100 off the billed charges, they keep $25.”
Crickets: chirp chirp
CFO: “Well, that isn’t good!” (and laughter filled the room).
Remember, these are hospitals, so they know that chargemaster billed charges and anything tied to them are meaningless1, but for this meeting they were payers, and so their perspective was different. After the laughter passed, the rest of the meeting involved cancelling all PPOs, applying reference-based pricing (RBP) (more on that later) instead, and removing all per cent of savings contracts … and that’s no joke.
There are three major trends that are illustrated in this story worth noting:
The pressure on PPOs has never been higher.
Employers (big and small) are implementing alternatives away from PPOs.
Percentage of savings contracts are being challenged.
PPO pressure cooker
A documentary is coming out soon targeting provider charges and the PPO industry as a whole. The film is slated to be called The Great Heist. The following captures the essence of the project: “There are a number of tricks the industry plays on healthcare purchasers but none is more pervasive, yet easy to fix, than PPO networks. This has caused Americans to spend 30 to 50 per cent (over $1 trillion per year) more than necessary, resulting in nest eggs getting crushed and putting millennials on the path to be indentured servants to the healthcare industry.”2
This is not the first time we have had controversial comments about PPOs or provider charges (e.g. Time’s Bitter Pill), and so why could this be any different?
The pressure on PPOs has never been higher
The main difference now is how much out of pocket (OOP) costs have increased for the average American in the last few years with no end in sight. The national average deductible is roughly $1,500, but can be as high as $7,150 for individuals and $14,300.00 per family3. Can you imagine? Because of this, I am seeing a ground swell of articles on the healthcare re-pricing industry (also blog posts, tweets, yelp reviews, and so forth). Beyond the compounded negative sentiments about healthcare costs, a well-timed documentary on ‘where the money goes’, couched as an elaborate heist, could have profound and far-reaching effects.
Carve-in versus carve-out
Believe it or not, right now many American payers are looking to dump all PPOs from their models and use RBP for all services, but admittedly (to date) this has mostly been seen in the small group market. Some payers are keeping a physician-only network, and using RBP to curb crushing hospital costs. They manage the limited balance billing with pre-negotiations, patient advocacy, and legal resources, as needed. Over time, these payers look to ‘carve-in’ some direct relationships if they make sense (based on quality and value).
On the other end of the spectrum, large carriers have been using RBP for out-of-network claims for many years. Recently, large and jumbo employers (and their brokers) are talking to their PPO networks and saying they want to ‘carve-out’ certain providers because they don’t think they are getting a fair price (for example, dialysis providers4). However, PPOs are saying ‘if you buy the network, you need to use all of it, even providers you feel are overcharging’. This is not going over well anymore, and I am seeing some large networks with no choice but to give in to these requests – or risk the employers moving to RBP. Here is an excerpt from an email I recently received from a large TPA:
“We have been getting more and more RBP requests recently to the point where we can no longer say ‘we don’t like that approach’. We don’t, but we are also in business to be in business … if you follow.”
To summarise, PPOs are being abandoned altogether, narrowed, limited to physician only, or being picked apart per provider or claim type, and that’s a big deal.
We were told for years that international payers could not access major carrier PPOs like American payers, and then they did. Now we are being told that international payers will never walk away from PPOs and look at RBP. Really? I am already seeing many international payers discussing RBP and with the prospects of 20 to 40-per-cent deeper savings, lower fees, and minimal/manageable balance billing. If they can, why wouldn’t they?
In with the new: the emergence of RBP
Few would disagree that the use of fixed-fee schedules, like RBP, instead of traditional cost containment methods like PPOs, is one of the most hotly debated and misunderstood topics in our industry. But, increasingly, payers everywhere (domestic and international) are looking at RBP as a solution to escalating claim costs and associated high fees for ‘savings’. I have been doing RBP for four years and work with over 500 US employer groups, and so allow me to provide a front row look at this controversial cost containment model.
Top tips for insurers seeking to take advantage of RBP:
1) Make sure your policy language gives you the ability to pay a negotiated rate or a reasonable and defined reference-based price (I recommend a percentage above the Medicare rate). Almost no one has good language – an ongoing tragedy that I have been harping on about for years.
2) Try to work with providers towards a reasonable settlement (before or during admission is best). If the terms are reasonable, accept the settlement and move on. The goal is not to be a bully; you just want a fair shake.
3) If facing an ‘unreasonable’ provider or one that basically tells you ‘buzz off’ … you need to pay your RBP rate. In a world where one party can just say flat-out ‘No’ to a reasonable settlement, and get paid more money, why would they ever say yes? Your negotiation is only as good as your end-game.
As for balance billing the member, you will experience it more rarely than you might expect. Most providers follow the trend of high billing (since ‘everyone else is doing it’) to maximise payments from payers, but rarely intend to squeeze hapless patients directly. If they do want to go down this route, there are ways to enforce the consumers’ rights and get the ‘balance’ (that no one ever actually pays) absolved. Worst case, you may find the provider more malleable for negotiation after you have paid out the benefits spelled out in the policy; and settlement is always recommended.
I had a client that had 46 per cent combined ‘savings’ from their PPOs. Dissatisfied with the results and hearing about the strategic merits of RBP, the employer switched to paying all claims at 140 per cent of Medicare and the programme provided support for members to make sure they were not caught in the crossfire from a provider attempting to collect abusive charges.
Make sure your policy language gives you the ability to pay a negotiated rate
This past July marked their first year. The results? This employer saw 71-per-cent savings from paying 140 per cent of Medicare, totalling an additional $3.2 million in savings compared to traditional PPO solutions. Though the client was initially concerned about ‘noise’ from the consumers, pre-negotiations and patient advocacy services ensured that there was minimal disruption, which represented less than two per cent balance billing. Of these claims, 75 per cent were resolved without additional payment, 25 per cent were resolved with a top-up settlement. In four years of doing RBP, I can say that these results are representative of the norm.
Balance-billing boogie man
The most controversial part of RBP is undoubtedly the possibility of balance billing. If a provider receives a payment it does not want to accept as payment in full they have two options:
1) They appeal or sue the payer(s) for underpayment (which is virtually futile if the policy is well drafted), or
2) They balance bill the consumer.
I understand what I am about to say is difficult to believe, but once US providers have confirmed insurance benefits have been liquidated, they rarely balance bill consumers directly, and if they do, they offer significant discounts on the balance.
Obamacare added IRC § 501(r) when Section 501(c)(3) applies to a facility, upon billing self-pay patients directly, the law requires providers to not ‘engage in extraordinary collection actions before making reasonable efforts to determine whether the individual is eligible for … financial assistance’. The law explicitly prohibits the use of gross charges. Providers may only bill the qualified self-pay patient at the ‘best’ (meaning lowest) negotiated commercial rate, average of the three ‘best’ (lowest) negotiated commercial rates, or the applicable Medicare payable rate. Overall, providers have updated their uninsured and ‘under-insured’ collection policies.
It is worth noting that most providers have a surplus of beds and so they do not like the idea of angry consumers telling their friends (in person or online) how they are being overbilled and mistreated, so, for purely business reasons, they either write off the balance or they greatly reduce it.
Bear in mind, what I have described so far is US payers paying RBP to US providers dealing with US consumers. Would RBP be different with international clients? Likely, yes.
International travellers typically cluster in the sunbelt or touristic areas in the US. Consequently, these hospitals have enjoyed some high-dollar reimbursements, which they do not want to lose, and so many specialty companies have sprouted all over the world to collect from international consumers. Though a US hospital (most are not-for-profit) may shy away from openly balance billing someone living in their backyard (out of a sense of community commitment or fear of public backlash), it can be argued that they could be more inclined to pursue a non-resident/citizen. I think this is generally true and so international payers should keep this in mind as they consider RBP. All said, when faced with defined benefits, whether a domestic or international payer, a provider should be motivated to settle at a reasonable rate; and isn’t that the point of a balanced negotiation?
Is RBP a good idea for international payers? RBP is not for everyone, and I would never recommend it for expatriate plans, but RBP is a highly effective way of reducing US travel emergency claim costs, and if managed appropriately, it could be a differentiator. Keep in mind that many administrators will not be able to handle RBP plans because they may perceive it to disrupt their core business (non-RBP). In a price-sensitive market, with aggregators showing the lowest priced policies, perhaps a new RBP travel plan, with it’s 20 to 40-per-cent lower claim costs and lean administrative expenses, can be priced much lower than the competition. If the RBP travel plan actively works to settle claims, and provides consumer assistance as needed, there is no reason that this model cannot be the next big thing in US travel cost containment.⬛
1. Jan Emerson-Shea, Vice-President for External Affairs for the California Hospital Association, quoted by Roni Caryn Rabin, Wide Range of Hospital Charges for Blood Tests Called Irrational, http://www.npr.org/sections/health-shots/2014/08/15/340637076/wide-range... August 14 2014.
2. Dave Chase, Have PPO Networks Perpetrated The Greatest Heist In American History. Sept 5, 2016 https://www.forbes.com/sites/davechase/2016/09/05/have-ppo-networks-perp...
3. Society for Human Resource Management 2016 Health Care Benchmarking Report https://www.shrm.org/hr-today/trends-and-forecasting/research-and-survey...
4. Watch John Oliver’s hilarious review of the dialysis situation in the US https://youtu.be/yw_nqzVfxFQ