Farnsley Responds To Forbes Article

farnsley John Farnsley

“We learn from history that we do not learn from history” – George Hegel

By John Farnsley

The article  (Have PPO Networks Perpetrated The Greatest Heist In American History?points out the reality that PPO networks are one of the major problems with the healthcare delivery and finance system.  While that is correct, it is important to provide the historical context of “why” the PPOs are the problem, because that was not always the case. 

It is easy to simply sit back and beat up the PPOs, but the reality is that TPAs, brokers, consultants, and stop loss carriers probably did more to create the issue than anyone.  Ironically the entities that helped create the problem are the ones who are now the most vocal about the failure of PPOs.  PPOs  morphed from their original business paradigm which was actually very effective, into the “unholy alliance” we have today.  Today’s PPO networks are not only ineffective, but they are essentially the biggest driver of spiraling healthcare costs.  If you understand history, you will understand that PPOs, as originally conceived, were NOT the problem, but in fact provided a viable solution to the rising cost of healthcare.  PPOs were actually pushed into the current “unholy alliance” by two primary drivers.  (1) PPOs did not understand the business principal behind “pigs get fat, hogs get slaughtered and; (2) TPAs, stop loss carriers and consultants were too short sighted. 

First it is important to understand the history.  When PPOs began in the late 80s, and early 90s the premise was essentially volume for discount, which is a sound business practice (yes, I completely get the “discount off of what” argument – hold that thought we will get to it).  The original PPO design was that an employer group directly contracted with a set of providers and/or a hospital (note, they did not contract with ALL hospitals because that diluted the value proposition).  The value proposition to the hospital/provider was good.  You (Mr. Hospital) give us (The Plan)  a fair reimbursement and we (The Plan) steer you (Mr. Hospital) more volume/business/revenue.  This is a simple and efficient business model that works in most settings.  Because the revenue created by the PPO depended upon the depth of its contract with a provider, PPOs made sure the contracts were truly generating the required savings.  This system originally worked very well.  In fact, this original model was oftentimes done WITHOUT A PPO NETWORK.  In the early stages of this business model, TPAs/brokers/consultants  would work on behalf of their client to implement direct provider contracts for an individual employer group.  The ability to direct contract with a hospital was seen as a value add from the TPA/broker/consultant.  Interestingly, if  we look at the market today we see this same business model returning.  So the question is,  how did this original business model go off track?  It is important to understand how that occurred so that we do not repeat the same mistakes.

When originally implemented almost all PPO networks were paid based off of a % of savings fee.  Originally, PPOs were paid only off of what they actually saved the client. Because the business model described above actually worked, the provider savings were significant.  In this model we never saw all hospitals in network.  Select hospitals who gave valuable contracts were included.  When the industry realized the savings and revenue that could be generated, a new cottage industry was born.  Rather than TPAs/brokers/consultants entering into direct contracts on their own, “PPO networks” came onto the scene as a simple way to quickly add valuable cost containment provider agreements to a health plan without the plan administrator or plan doing any work.  In this fee arrangement, PPOs made a considerable amount of money.  The model worked well, but  PPO networks failed to understand the “pigs get fat, hogs get slaughtered” axiom.  PPOs generated significant savings and typically charged 25%-30% of savings as a fee.  PPOs were generating huge revenues (of course they were also saving huge dollars for their clients).  High PPO revenues and profits soon became an industry spotlight.  Rather than make a fair and reasonable reimbursement for a valuable service, PPOs overcharged and made obscene revenues/profits.  While this strategy was good, it was short sighted.

This of course led to issue number two as described above.  Both stop loss carriers and consultants saw the PPO revenues and viewed that revenue as “fat” in the system (which it was).  Many of these brokers decided that a good way to save their clients’ money was to go out and find a PPO that would be paid on a low PEPM fee.  Stop loss carriers simultaneously determined to no longer reimburse the % of savings fees charged by the PPO network.  While it sounded good to say we are cutting out the obscene profits of the PPO networks, the premise was short sighted as it removed all incentive for PPOs to actually procure the lowest reimbursement.    PPOs were quickly moved to a $3 – $4 PEPM fee arrangement.  While this initially saved the plans on PPO fees, it also fundamentally changed provider contacting philosophies.  When PPOs were paid on a % of savings fee their incentive was clear and direct.  PPOs worked to generate the highest savings possible (therefore the lowest provider reimbursement possible) because that in turn generated the highest savings and that of course led to the highest revenue.   These incentives were perfectly aligned with the plans interest to pay a fair provider  reimbursement. Put simply PPOs worked diligently to keep discounts effective and deep when there was financial incentive to do so.  Once the PPO world was forced to move to a low PEPM reimbursement, the business model was permanently changed.  No longer were PPOs incentivized to generate a high savings for the clients.  Savings were no longer the focal point of the PPO.  PPOs began a shift to contacting the broadest PPO panel around to provide a marketing advantage to their firm.  The original value proposition of “volume for discount” with providers was eliminated and PPOs began a new strategy of contracting every provider.  Of course when you contract every provider, there is no value to the provider and therefore you receive no value (discount) from providers.  This evolution has now played out in almost every PPO network we see.  All networks include almost every hospital, and every hospital provides a token discount off of nebulous and unexplainable charge master (which they raise every year).   Thus the unholy alliance was born.  PPO networks provide contracts to all hospitals under the pretense of lowering cost, when in reality they are simply empowering the hospitals to charge whatever they choose because neither the PPO nor their contract is of any value.

The industry moved from a system where lowering provider reimbursement was the focus, to a system I often describe as the any, any, any mindset.  We want to see any provider, any time, any place with no thought to the cost.  This model is completely unsustainable.  It is the equivalent to providing donuts to diabetes, in that it only exacerbates the problem.  That is our world today in healthcare delivery and finance.  I send this brief overview as a reminder that it is important to learn lessons from history.

History Lesson number one: It is very important for the plans cost containment vendors to be aligned with the plans interest.  We all see cases where plan vendors are diametrically opposed to the plans goals.   If the Plan is working from the premise that the vendor being paid a flat fee and is working as hard as they can to save them money, they are probably going to see claims costs continue to skyrocket.     You can be assured that the PPO network that you are paying a PEPM fee of somewhere between $4 – $24 is not working daily to create lower reimbursements for your Plan.  The network is simply collecting your fees and trying to maintain a token discount off of an undefinable charge master.  Vendors need to make a fair, reasonable reimbursement, but if their business is truly cost containment, then they should be paid according to results, not intentions.  We can provide a short term gain by squeezing a vendor to the plan, but if doing so allows a provider to bill whatever they want then ultimately we have stepped over a dollar to pick up a dime.   

History Lesson number two:  We as an industry must begin to think big picture.  The industry is now back to the future where employers/consultants/vendors  are developing direct contracts, narrow networks, and “I will accept agreements” on behalf of their clients rather than contracting with PPOs.  History proves this strategy will work.  Educating employers to the fact that you DO NOT have use a PPO should be one of our primary objectives.  TPAs/Consultants/ and entities such as AMPS can work with clients to build a sustainable long term solution for clients.  It is NOT new, it is simply going back to the future.  It is a challenge to move employers out of the any, any, any mindset, but history shows us it works. 

John Farnsley
EVP Sales – Caprock Health Plans
Office: 806.698.5804
Fax: 806.783.9991


If there is a fee schedule for all services, there is no need for PPOs – Harvey E. Billig III, M.D.