Lower Rio Grande Hospital Pricing Study Shows Plan Sponsors Getting Screwed

Recently we ran 100% of 12 months of paid hospital claims through several payer systems, both inpatient and outpatient, on a group of 225 employee lives in the Lower Rio Grande Valley, Texas. We used a firm that reprices claims for a number of PPO networks as well as out-of-network claims using Medicare and Medicaid benchmarks.

The results are interesting but not surprising. The exercise confirms what we already knew about the true value of PPO discounts.

The hospitals involved include Upper Valley, Mid-Valley and Brownsville hospitals, a good cross sampling.

Total billed charges in the aggregate (inpatient and outpatient claims) were $2,018,665.46. Everyone should know by now that billed charges have no correlation to cost much like a sticker price on a car.

Since PPO’s first came out in the early 1980’s the medical industrial complex has been touting “discounts.” Discounts off arbitrary, inflated prices are meaningless yet a useful marketing tool. “My PPO discounts are the best in the market!” Have you heard that before?

Running these claims through several PPO networks produced two facts: (1). Pricing differential between networks were about 1% and (2). Average PPO discounts are 42% off billed charges.

From our experience negotiating hospital claims, a cash price discount of 50% or more is common. In fact, a 90% discount is not uncommon.

Billed Charges = $2,018,655.46 PPO Allowed = $1,163,817.74 Discount = 42%

In the case of this small 225 life employer, it appears the PPO “saved” them about $854,838. That’s is quite a bit of savings isn’t it.

But it could have been much larger if the billed charges were inflated even higher. That’s the game being played by the carriers through their networks – “My discounts are the highest because our billed charges are the highest around!”

So lets assume the game is being played on unsuspecting plan sponsors in the following exercise:

Billed Amount = $2,018,655.46 X 1.15 Load = $2,321,543.70

PPO Allowed = $ 1,163,817.74

PPO Discount = 50%

How do you feel now about your super duper PPO discount? As a Lower Rio Grande Valley employer providing traditional managed care health insurance for your valued employees, you are probably paying on average 300% to 700% of Medicare while being told you have a good deal.

This article was first published by this blog 11 years ago (2012). Since then we suspect the Disco Discount Game has achieved even greater results at the expense of clueless plan sponsors.