A Wave Change In Insurance Payment Models: Cost Plus, Not Bills


Mike Dendy, Woody Waters, Jeff McPeters and Bill Rusteberg may be the biggest looming nightmare of the insurance industry and the hospital billing department. But they don’t see it that way: They see themselves as a solution to a problem.

By Jeanne Pinder


The three are among the growing ecosystem of practitioners of “cost plus” or “Medicare plus” medical billing.

The problem they’re working to solve: The outsized hospital bill that we’re all familiar with, marked down incomprehensibly to a smaller sum and paid in a way that the other parties to a transaction (the  patient and the employer who paid for the insurance policy–and, indirectly, the care associated with the policy) cannot in any way see or understand.

Discussing “Bitter Pill,” the Time magazine article by Steven Brill laying out specifics of hospital billing and outlandish charges, Dendy said: “corporate leaders reading that article would assume that they are immune due to their relationships with large insurance companies.  The exact opposite is actually true.  The large insurance companies collude with the hospitals to exacerbate the problem.  … Almost all hospital bills paid on behalf of corporations in America are paid blindly.  There is almost never any review for accuracy or reasonableness of charges.”

I usually don’t write much about insurance, and about employer, provider and payer relationships, but what these companies are doing is interesting.

Dendy’s company, Advanced Medical Pricing Solutions, based in Atlanta and Phoenix; Waters’s company, ELAP Services, a competitor based in Chester Springs, Pa.; McPeters’s company, GPA, a third-party administrator  of insurance plans in Texas; and Rusteberg, an independent industry consultant based in Victoria, Texas, are upset about the medical billing system – and in a position to do something about it.

First, a bit of history: for a long time, payments in employer and group insurance plans have  been made using preferred provider organization (PPOs), Exclusive Provider Organization (EPOs) or Health Maintenance Organizations (HMOs).

These are networks of providers assembled by insurance companies; the providers participate in the network at an agreed-upon price, called the contract rate or “negotiated price.” That means that there’s a sticker price – say $100 for an office visit – for which a doctor receives a negotiated price of $80, agreed upon but not revealed publicly.  That means some providers may receive $100, others $40. It also means that the patient receiving care may have a $20 fixed per-office visit rate, and the payment for the service comes out of the pocket of the purchaser of the policy – employer, union, or other entity. The same “negotiated rate” applies to bigger-ticket items as well, like hospital bills, MRI bills, cancer treatment and so on. A $100 office visit, well, maybe that’s O.K., but a $100,000 hospital bill? Not so much.

As a response to what he perceives as a problem of lack of review, Dendy has a business based on flyspecking bills, paying the rate his company sees fit, and defending its practices based on preserving the resources and benefits of an employer’s programs, defined as maintaining fiduciary trust under the  Employment Retirement Income Security Act (ERISA), which requires high standards of conduct in protecting plan benefits .

Here’s how it works.

Employer A hires Dendy at AMPS or Waters at ELAP to manage payments under its self-insured plan. Typically, employers using this type of service are self-insured, declining to take part in the PPO or other network. Most of their work is on hospital bills, Dendy said, because that’s where 40 percent of health-care costs are, and where the most complicated billing is found.

Complying with the self-insured plan’s contracts, AMPS and ELAP scrutinize every hospital bill for evidence of overcharging and duplication, challenging or refusing to pay for duplicate sets of surgical gloves, the $1,000 toothbrush and the $140 Tylenol, and other, larger sums. Then they use a variety of resources to establish the cost of the actual goods or services delivered (industry resources like hospitals’ reports to the government, and private  resources like a company’s own software and benefit analyses exist). They add a percentage to the cost, and agree to pay that amount.

Let’s say in this case it was a $10,000 hospital bill, which – upon analysis – is found to have 40 procedures and items, of which 10 are judged to be overcharges, double-bills, or otherwise unacceptable. The 30 charges may have a sticker price (chargemaster price) of $6,000, which would be supplied at a cost of $2,000. A Cost-Plus plan might pay the cost plus a given percentage, say 25 percent, or $2,500, and declare the bill satisfied.

At that point, depending on the status of the contract binding the provider, payer, employer and patient, the provider may say “Wait, that’s not enough money.” The provider will then send a bill for the rest of the money either to the employer or to the patient.  This is called “balance billing,” with the remaining unpaid balance being billed to someone.

AMPS and ELAP in general address this issue – depending on the contract — by pointing out that overpaying for faulty bills, nonexistent charges, and prices beyond the “cost plus” sum is a violation of fiduciary trust under ERISA.

And  if the patient receives an extra bill to make up the difference, AMPS and ELAP bring legal counsel to the process to prevent payments of what they regard as inflated and exaggerated bills.

“Almost every bill might have an error, but what is the $ value of that error?” wrote Waters,   vice-president at ELAP, in an e-mail interview.  “Typically, not that much — maybe 6% – 8% of the bill.  The over-charges are the issue.  The prices are incredibly inflated, as related to cost or Medicare or same procedure in other countries.  THIS is the problem, and it is true on almost every hospital bill.”

ELAP  has a mission of deploying “a reimbursement strategy based on transparency and cost-based metrics.’

If the patient or the employer receive an extra bill to pay the difference, beyond “ allowable claim limits as determined by independent, verifiable industry standards and as written into the plan document,” according to ELAP’s web site, then ELAP disputes these bills by emphasizing that it is adhering  “to ERISA’s guidance that all self-funded plan sponsors must exercise a high standard of care in managing plan assets.”

The site adds: “we seek to move away from billed charges towards a reimbursement strategy based on transparency and cost-based metrics.”

A Texas company called Texas811, which uses the services of ELAP and GPA, was featured in a recent blog post by Tina Rosenberg of The New York Times on the Opinionator column “Fixes,” in which she described the benefits the company got from going to this plan. “Under Blue Cross’s P.P.O., the company had been paying $10,000 per visit for dialysis patients,” Rosenberg wrote, describing the new program. “Now it was paying $975. Other costs dropped commensurately. After the first year, the company lowered premiums by 3 percent and increased coverage, providing free vision, dental and life insurance to all its employees, including part-timers. ”

PPO and similar networks carry about 80 percent of insured people, and the negotiated rates are not publicized. The growing move away from PPO networks is hard to document, because there are multiple players, but it’s definitely a new and growing trend.

Dendy wrote: “Initially, PPOs played the neutral role of ‘Switzerland’ in the hospital billing and payment process, offering equal value to the payer (in the form of an actual discount) and the provider of services” by sending a guaranteed stream of patients, called “steerage” for the steering of patients.

But that equation has changed, he said, and now the PPO is typically managed in a way that gives an advantage to the insurer and the provider, who agree on a price for that service and pay it  — with the money coming from the employer, or the patient, rather than from the insurer.

“With most hospitals participating in most of the major PPOs, the value of patient steerage has diminished, and the benefit that PPO relationships offer providers is the ability to get paid quickly and easily.  This being the case, the PPOs will yield to the unfair demands of provider hospitals simply to keep them happy and increase the likelihood that the hospitals will continue to participate in their network.

“As a result, under what any reasonable person would consider absurd and unacceptable arrangements,” he said, the hospitals and the insurers “work together to prevent, prohibit or disallow the confirmation or auditing of hospital billings by the employer clients.

Dendy said his plan is fair to all parties, not favoring any particular player over another.

Rusteberg made a similar point in a phone interview. When tricks are used to raise rates, he said, it upsets him. He’s been in the industry since 1973, first as a broker, and now as a consultant, and he’s seen a lot of things.

An example: provider repricing fees. He described a contract that writes in “provider repricing fees” that work this way: Say a PPO network and a provider clinic  have an agreement under which the clinic bills $10 million in charges, but grants a 50 percent discount, so the actual received payment is $5 million. But, the contract says, there is a “repricing fee” of 4 percent. The contract he’s describing, he said, was given to him by a clinic.

“I just don’t think it’s right. for people to make money in an underhanded way,” he said. “I have no problem with anybody saying ‘here’s my fee’ and you pay it, and that’s fine. People  are in business to make money. But when you’re hiding your fees and misleading your own clients — I think that’s wrong.”

So that sounds terrific, but then the question arises: why isn’t everybody doing this? Rising health costs are perhaps the biggest problem we face today as a nation.

Others are not doing this, Rusteberg said, “Because they have a vested financial interest in the old way of doing business” — in other words, participants including the hospitals, the insurance companies, the third-party administrators that set up plans, all typically are reluctant to  jeopardize their income.

In a “Medicare plus” plan, the provider agrees to a payment based on what Medicare pays. This government program insuring the elderly and disabled calculates payments on a complicated formula relating to the description of the service,  where it was performed, and the kind of office or clinic it was performed in. (You can use the search box at the top of our front page to calculate Medicare prices for various procedures in the 70 geographic regions Medicare uses.) The Medicare price is the closest thing to a fixed or benchmark price in this marketplace, and while there is a great deal of debate about whether it overpays specialists, underpays primary-care providers, and is generally corrupt, it still exists and has power in the marketplace. So Medicare plus takes the Medicare rate plus a percentage: maybe Medicare plus 15 percent.

Among the players, according to Rusteberg, are Advanced Medical Pricing Solutions (AMPS), based in Atlanta and Phoenix; Group and Pension Administrators, Inc (GPA), a third-party administrator which has offices in San Antonio, Dallas and Houston, Texas; ELAP Services, based in Chester Springs, Pa..; Boon-Chapman in Austin, Texas; Capitol Administrators in Sacramento, Ca.; CapRock in Lubbock, Texas; and Payer Fusion and some others.

There’s also the Phia Group, a legal firm in Braintree, Mass., which has legal, claims recovery, plan design and so on as its offerings.


Editor’s Note: We are in the process of putting together a listing of Reference Based Pricing (Cost Plus, Medicare Benchmarking) vendors we know to be active in the market and will post that soon. We are pleased to see the rapid growth of Cost Plus, Reference Based Pricing with more vendors competing for business bringing innovative changes through collaboration among healthcare revolutionaries.”  www.costplusinsurance.com