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#5: To PPO or Not to PPO…That is the Question

This blog has taken me a while to write because of the number of times I had to re-write it. I have never been the most politically correct Consultant but rarely do one’s words have the potential to aleniate so many people. If anyone noticed, we have a health benefit crisis in the United States, with per employee per year cost increasing over 300% since 2000. If that isn’t enough, there is so much finger-pointing going on it makes one’s head spin…it’s the Pharma companies fault…it’s Hospital’s fault…it’s our inability to manage disease effectively at fault…it’s lack of transparency…it’s lack of information…it’s the misalignment of benefit design with consumerism.

In fact, it is all these causes and more! In the words of Howard Beale in the movie Network from 1976, “I’m mad as hell and I’m not going to take it anymore”. Since its inception, the TPA industry has pioneered many of the most forward-thinking risk management and cost control strategies seen in the benefits marketplace. The word “disruptors” is almost too cliché these days as everyone seems to use it, but TPAs committed to innovation and using their experiences from the “front lines” truly represent a positive disruption of the status quo.

Lately, however, I believe that we have slowed down our innovation and perhaps even lost sight of our delegated role of Administrator of Plans. I say this because I continue to observe a litany of poor strategies put into play relating to the unit cost of medical services:

Preferred Provider Organizations

Does anyone really think that a 20-year old idea which hasn’t been significantly updated can really work? Providers aggressively bill with software that “maximizes revenue”; provide deceptive contracts that create the illusion of a great deal; then are saddled with collection of thousands of dollars in patient liability. Is there any alignment of purpose in that? If I’m a provider and only collect 75% of the amount due to me because of high deductibles and coinsurance, why would I agree to a better contract?

Forget about better deals, think about the pure logistics of it. Is it possible to keep 50 contracts with facilities up-to-date given the hundreds, if not thousands, of ways to “game the system”? Expand that to a regional or national network with hundreds or even thousands of hospitals.

I think it is important to tell a little story about an audit I just completed for a health plan that has a self-funded operation. Over a 12-month period they managed the heck out of several contracts with hospitals. Most impressive was use of DRG methodology on inpatient care and excellent case rates for outpatient services. The outlier or stop loss provision wasn’t bad either, increasing from $200,000 to $400,000 during the 12 months reviewed. Even if the outlier was exceeded, the allowed amount was to be calculated based on 35% of billed charges…that’s right, a 65% discount!

On the surface, a great deal. Well, I looked at roughly 25 claims paid throughout the year and an interesting thing happened. The facility realized that it could still manipulate the outlier provision to their advantage. High cost drug and surgical implant cost surged. Once the outlier was increased I saw knee implants priced at $135,000 and implants for back surgeries spike to over $350,000! Oncology and other high cost drugs showed inflated billings of over 1,000% of AWP.

The moral here is that even the best intended PPO network has an insurmountable hill to climb. Because of that, their value is significantly diminished. It is also important to understand that a PPO’s efforts to maintain a robust network from an access perspective conflict directly with a TPA’s ability to enforce its obligation to fairly and equitably manage costs.

Rental of Carrier Networks

I can remember 8 years ago, when I gave several speeches to the TPA community with strategies to “Beat the BUCAs”. Now it seems that TPAs believe that something has changed. Two or maybe even three of the BUCAs “lease” their networks to TPAs at a cost of $13-$20 per covered employee per month. From my perspective, an extremely short-sighted “deal” only benefitting the carriers. Let’s look at the business proposition offered:

  1. The networks have all the issues discussed above, but carrier protection of the provider relationship makes enforcement of standard TPA cost control impossible. In fact, carrier rental agreements forbid collecting any form of clinical or substantiation data.

  2. TPAs using the networks are evaluated on their operational effectiveness, which means claims turnaround and minimizing provider complaints. If you think about taking a claim off line to complete the cost control your client expects, your effectiveness results suffer.

  3. For the benefit of renting a carrier network, your clients get to experience the “ancillary” services available to them, like carrier stop loss, PBM services and care management. Let’s think about this. If I manage a care management unit of a carrier tasked with controlling costs for an insured and carrier ASO business, I don’t think my best people and best programs are likely to be focused where I have no risk.

  4. TPAs pride themselves on delivering creative, customized solutions to clients on things like plan design, direct contracting and care management. It doesn’t work when using carrier networks because they don’t want “provider partners” confused.

  5. From a business perspective, the situation is even worse. A TPA can’t compete for any business where the carrier or even another TPA using the carrier network is involved, and I might be lucky enough to have minimum revenue requirements. At the same time, they can pursue my business all they want.

  6. The carriers don’t lease TPAs their best networks. In one case, the few TPAs who have access pay 1% to 3% more than their ASO business pays and with the other network with a larger base of TPA users it’s much worse. That carrier has a three-tier network system whereby their best TPA network (used by only two TPAs in the country) pays 2% to 3% more than their ASO business; and the easy to attain network pays double digit above the ASO version. Pandering to the big carriers just to have their name on your ID card is most often a stab in the back to your customer.

Forgetting about issues like those outlined above, there is even question about whether carrier networks without cost control meet “tests” for any fiduciary responsibility a TPA might have with their clients. I recently completed a data analysis on 2,500 facility claims where carrier networks were involved, and the average allowable amount compared to Medicare was 281%. I’m not sure what the right number is, but a range of 160% to 175% of the Medicare allowable would have saved $25-28 Million over the carrier discounts.

Out-of-Network Management

I have been a little tough so far on unit cost control strategies but I don’t want to forget about management of the 6-8% of claims for every Plan where the patient has used a non-contracted provider. Some of these occur due to emergencies, others are based on the patient desiring “the best care” and many are due to HREAP providers (Hospitalists, Radiologists, ER MDs, Anesthesiologists and Pathologists). Yes, I kept it clean. Many use another title for that last group.

Here’s the thing, I don’t believe that most TPAs have ever had the time or energy to really focus on how they manage these claims. If PPOs have issues from a cost control perspective, what do we think about an industry of “PPO Aggregators”, “Wrap Networks”, “Supplemental Networks”, or in its worst form “Blind Networks”. These provide automated re-pricing based on multiple layers of contracts with various PPOs. It should be no surprise that providers “pad” their fees to allow for the discounts rather than spending the administrative time to track PPO contract provisions and appeal accordingly.

For the most part, TPAs see out-of-network as a service that must be provided and as a source of revenue. Most do not measure the quality of their efforts and ways in which savings and the resulting contingent fees can be increased. Be advised, there is a lot of data circulating among brokers, consultants, and in the media about abuse of OON services to embellish fees. Do you want to get caught with your hand in this cookie jar?

I think that I have “vented” my frustrations enough. Now is the time to identify some strategies that have tremendous potential for bringing TPAs back to being an innovative bunch:

Reference-Based Reimbursement (RBR) or “Cost Plus”

Nowhere is the ongoing battle between a client’s C-Suite and Human Resources more visible than in consideration of RBR. The C-Suite needs operating cost savings and HR wants no ripples in the pool. I would argue that if RBR is implemented properly it will enhance a company’s relationship with its employees. Delivering a “fair reimbursement” to providers generates enough savings to reduce payroll deductions for health benefits, eliminate the stratification of in-network and out-of-network benefits and even reduce deductibles and out-of-pocket amounts.

As I noted above, much of the success of RBR is based on how it is implemented and managed on an ongoing basis. There are several characteristics of RBR “done well” and there are significant variations in approach with the vendors currently supporting it. On one end is an aggressive approach, with a relatively low “mark-up” on Medicare and a very high volume of participant disruption. On the other end is a “prospective negotiation” model, where a hand-off from care management allows for negotiation of a reimbursement prior to or during an admission or encounter.

As you might expect, a lower “mark-up” on Medicare generates the greatest savings but a ravaged relationship with a medical community and covered participants. The “negotiation model” saves the least because the negotiation typically occurs with a representative of the provider with limited scope of authority. This is likely the same person who negotiates with PPOs, so that is a statement on its overall effectiveness.

So, the first characteristic of a strong RBR program is utilizing a highly “defendable” approach to determining a “fair reimbursement” for billed services. Keep in mind that the Medicare allowable is a benchmark established across all facilities and all geographic regions, and represents for the most part an “average”. In my mind, the determination of an RBR allowed amount only begins with what percentage of Medicare is “fair”. It should also take into consideration clinical variables that might justify a higher reimbursement or even the facility’s cost-to-charge ratio. Credibility is instantly injected into the discussion with a provider if the process of determining reimbursement is thoughtful.

The second characteristic of a strong RBR program relates to the first, and is the recommended “starting point” for determining a fair reimbursement. I once heard a healthcare finance expert suggest that most reasonably run hospitals can earn a profit if revenue from commercial patients exceeds 140% of what it receives for Medicare patients. Having studied many RBR programs, the right “starting point” involves balancing “pain” (disruption for participants and providers) with “gain” (savings). Simply, the more aggressive the program approaches the calculation of the allowed amount, the higher the rate of appeals and balance billing. Following are some reasonable expectations:

Appeal Rate and Balance Bill Rate Chart

The characteristic of strong RBR programs, communication and advocacy, relates to the last two columns above. First, what foundation does the RBR program provide to help covered participants understand the difference in the way their benefits are now paid? Second, if the TPA receives an appeal or the participant receives a balance bill or other collection effort from the provider, what support is provided to them? Communication and advocacy are all about confidence. The client’s management (even HR) must recognize that an RBR program will cause minor disruption but they are confident that they are being fair to providers and covered participants. The covered participants must be confident that the program will protect their rights and even credit if necessary.

One important point about protection to covered participants. Ever watch TV and see advertisements for lawyers you can’t imagine representing or defending you? The same is true for those involved in advocacy and legal representation…they must be well respected and credible with the providers. Look for multiple levels of legal protection and involvement from, well respected law firms.

The final characteristic of strong RBR programs is recognition that RBR is only one component of an overall strategy to bring costs under control or reduce them. It must be paired with some of the other innovative approaches that follow, like care re-direction via navigation, direct contracting and community health.

Care Re-Direction Via Navigation

I always wondered why so many Plans only differentiate between in-network and out-of-network providers, when one of the biggest drivers of cost is inappropriate use of healthcare resources. Think in terms of the child’s ear ache treated at the Urgent Care Center or ER versus a call to a telemedicine or video medicine program. Think about lab tests or high cost radiology done on an outpatient basis at the local hospital versus an independent lab or radiologist. Think about outpatient surgery at a hospital versus an ASC. The excess cost is mind blowing:

Excess Cost Chart

So how do we re-direct care most effectively? Three strategies must be implemented. First, plan design financial incentives and employee communications must lead patients to question providers on where they are ordering care. Those who pursue less costly alternatives should be rewarded. Second, we must provide telephonic “navigation” resources and well-designed web tools to guide patients while in the course of treatment. Finally, most Plans include a “Medical Necessity” provision, excluding coverage for care which is not medically necessary. We must tighten this definition and enforce it, with as much focus on the setting of care as the need for care.

Direct Contracting and Community Health: One of the most effective ways to overcome Human Resource concern over RBR programs is to provide covered participants with at least some access to contracted providers. In exchange for contracts that are equal to or better than RBR-based reimbursement, these providers recognize the participants, accept the agreed upon reimbursement and are forbidden from “balance billing”. This is NOT building a PPO. The goal is to reach out to the most utilized facility and top 50-100 providers used by the employee base and explain the resources we are using to re-direct care to them.

“Community Health” is a variation of direct contracting. It is an organized group of doctors and a facility which is willing to contract effectively as well as improving the delivery of care in the community. A partnership between the employers, providers and TPA in the community emerges, focused on health improvement, quality of care and cost of care.

Pursuit of “Carve-out” Products: The final step in the quest for innovation is the integration of “carve-out” products to enhance access to effectively contracted and managed care. I use the word integration purposefully. Products like lab networks, high cost radiology, tele- and video-medicine, medical tourism and bundled ambulatory surgery have been around for a while but adoption and penetration has been embarrassingly low. Each of the companies offering the services have great tools and experience to assist with building utilization and resulting savings. As an industry, we must recognize that our ability to use these solutions versus the cookie cutter approaches used by PPOs and carriers are what differentiate us.

I promise to be less long-winded in future blogs. Controlling the unit cost of healthcare is just one of the topics I am most passionate about.

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