Hospitals Look At “Paid to Billed” Ratios

Justifying your managed-care discount levels with PPOs

February 10th, 2010

by Maria K. Todd, MHA, PhD

As an interim contract negotiator for several hospitals throughout the country (none of which compete with one another in the same market), I often receive assertions from PPOs, TPAs and others that the hospital’s discount is not competitive with so-and-so up the street, in the nearby community or (fill in the blank).

Speaking from first-hand experience, I strongly suggest: the next time someone claims that your discount isn’t competitive, first determine if what they say is true, and then determine what you want. Don’t just react. Respond with a critical evaluation of the deal. It’s time for reform; one contract at a time, if necessary.

Case in point: Consider one of my own recent experiences.

Earlier this week, a PPO network representative called claiming that all the other hospitals had increased their discount off charges. I knew for a fact that his claim was not true, nor was it any of my business, as that is supposed to be confidential. I also knew that we didn’t really care if the competitor hospital had increased the discount to this network. I also knew that based on the previous payer performance associated with this PPO network that there was no defense to change anything, except perhaps raise the price and lower the discount.The caller first started with accusations that we were not competitive and that he was offended that we had put him off to discuss the matter until after the first of the year. His contract was not compelling given that we had other more pressing issues with payers and networks of much larger bottom-line influence. Still, he had to bring his sarcasm and condescending attitude to the team. Wrong move.

When asked for new data that might support an argument that we should reconsider our position, he stated that he provided employers and member counts the previous August, (before open enrollment might have lessened the counts from non renewals) and that he had no intention of going to the trouble to get them again. At that point, I responded that my attempt to defend his case to the CFO would be rather short. (Those who know me know that any other response would have been out of character for me.)

Then I asked what the top 10 payers and employers he represented had spent at the hospital per year for the past three years. He said he had no way to know. I followed this question with how much he anticipated the change in spend to be this year. He said he had no way to know. Now I ask you this: If he didn’t know what they spent the past three years, and he had no projection of the impact to the hospital for the upcoming year, why does he need a bigger discount? Where is the defense that there should be any change warranted at all?

One of the TPAs that processes claims for a group he represents within his network caused a lot of grief and expense to the hospital by not following the contract. Heck, they didn’t even follow the law. The hospital submitted a proper bill for a service. The first thing the TPA did was to suggest that the hospital change the DRG submitted to a complex version of that DRG, for which the claim did not exactly meet criteria. The TPA stated that if we changed the DRG and wrote off the remaining balance, the plan would issue another $10,000. The remaining balance was in excess of $40,000 (after the discount was applied). Had the hospital done that, it would have been guilty of a federal offense and possibly charged with fraud, false claims, and a myriad of other wrongdoings. The hospital instead verified its charges with a colleague of mine who has an RHIT credential. She said it was coded correctly and to stand firm on the courage of our convictions.

The next defense was that the TPA claimed the charges were correct but in excess of usual and customary charges and that the plan had a limitation of payment on this service. Highly unlikely, but okay…whatever.

To address this, in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), the hospital then prevailed upon the patient who might be subject to the balance of the charges not covered by their plan to execute an Authorized Representative designation so that the hospital could obtain the document in question to see if such a limitation really existed. The patient signed the form and the form was submitted to the employer’s representative at the TPA to request a copy of the Summary Plan Description. The TPA representative then advised the Plan Administrator at the Employer Human Resources department not to comply. I am certain that had we been able to obtain the document, that no such specific limitation existed on the date of service. In fact, under ERISA if they refuse to comply or delay, the Plan Administrator can be held liable for $110 per day for every day after the thirtieth day from the date of the request owed to the Authorized Representative (the hospital). The cost to do this for just this one case in time, staff and lost opportunity from not having the case was several thousand dollars.

The PPO network representative claimed he had no knowledge that the above had occurred. I maintain that he brought them to the table to enjoy the discount from the hospital, therefore it was his responsibility to see that they followed the contract as it was negotiated. I also told him that I did not want any more business like this. “Thanks, but no thanks…we’ve had our fill of those wonderful opportunities.”

Finally, I pulled our data for a payer report card on this contract. In this, we measure not only the ease of dealing with the contract and its recognized payers, but also problems like the above and the timeliness, accuracy and paid-to-billed ratios from the top 10 payers and employers on this contract. We not only measure how the payer pays, but also qualitatively how the plan members pay their coinsurance and deductibles. Do those amounts go to bad debt? Is the hospital’s cost to collect low or high? Do they go to an outside collection agency that then receives 28 percent of the amount they are able to collect?

So here’s the bottom line:

1. What did they spend last few years? Is there an anticipated change? Fewer episodes of care? Fewer benefits? Lower percentage of plan responsibility (higher deductibles and co-insurance)?

2. Of what they spent, how were they as a trading partner? Did the hospital have to commit time and staff resources to enforce the contract? Those costs should be translated to dollars and added to the negotiated discount to see the true “discount” effect.

3. How did the plan members honor their cost share responsibility? Any write offs, collection service fees, or additional discounts should be applied to the net contract performance.

Maria K. Todd, MHA PhD, is ( is a consultant, speaker, author and health care industry thought leader who specializes in managed care contracting. She’s the author of The Managed Care Contracting Handbook, 2nd edition and the Physician Employment Contract Handbook (1999).

Editor’s Note: This gives a good behind the scene look at PPO negotiating skills. A good negotiator takes a position of strength, not weakness. We think the above scenario is common and par for the course. Who do you think is negotiating from a position of strength?  We think that the one holding the check book should be the one with more clout, but unfortunately in our current healthcare system that does not seem to be the case.