Archive for February 6th, 2011

Tale of Two PPO Network’s Shell (Discount) Game

Sunday, February 6th, 2011

           A large Texas public school district attempts to determine which PPO network has the best “discounts” for their multi-million dollar self-funded health plan. Two independent auditing firms are hired for that purpose, over a period of three years.

Audit firm #1 represents that PPO “A” exhibited an average overall PPO discounts of 41%. Audit firm #2 confirms this figure. Audit firm #2 represents that PPO “B” exhibited an average overall discount of 37%, or less than what PPO “A” can deliver. A significant differential of 4%.

Yet, neither of the three local hospitals will confirm or deny these representations.

Suppose than an independent study reveals that neither PPO “A” or “B” have a market dominance over the other. And, a careful review of actual hospital specific PPO contracts between both networks reveals little or no difference in overall discounts. For all intents and purposes, the “discounts” are the same.

But the difference is how the “discounts” are accounted for. Are all of the discounts passed on to the consumer? The answer many have found is elusive.

Take a $100,000 billed charge for a hospital stay. PPO “A” and PPO “B” both negotiate a 41% discount. But PPO “B” negotiates a “provider re-pricing fee” which they acquire from the discount. Here is how that works:

PPO “A” – $100,000 billed charge less $41,000 = $59,000 paid to hospital by self-funded plan

PPO “B” – $100,000 billed charge less $37,000 = $63,000 paid to hospital by self-funded plan. Hospital pays PPO “B” $4,000 re-pricing fee, bringing the hospital’s net reimbursement down to $59,000.

Net result is that both PPO “A” and “B” pay the hospital the same, or $59,000. So the “discount” is exactly the same.

The $4,000 difference is an administrative expense hidden in the claim side of the ledger.

Editor’s Note: Many insurance consultants evaluate PPO networks without looking at and comparing actual provider specific PPO contracts. You cannot evaluate PPO contracts without seeing them. A claim re-pricing exercise is useless. We know of one consultant who asked competing PPO’s to reprice 13 sample hospital claims on a 7,000+ member school district – he did not review provider specific contracts and the hospitals involved would not confirm or deny the consultant’s work product.