New Models Of Payment: Going Direct, & Cutting Out The Middleman


In reaction to rising rates from providers and payers, employers – typically self-insured or self-funded employers – are rejecting participation in insurance companies’ networks.

By Jeanne Pinder ( )

This is the second part in our series of new models of payment in the health-care marketplace, touching employers and individuals. The first part is here.

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Employers, patients and other health-care marketplace parties are increasingly cutting insurance companies out of the equation.

We’ve written about cost-plus and Medicare-plus, which turn the “negotiated rate” between a provider and an insurer – the traditional PPO-HMO payment model – on its head. There are a number of other ways in which that’s changing.

A bit of background: The way insurance has long worked, the insurer, let’s say Blue Cross, negotiates separate deals with providers within its network for varied services. An example: we have learned that in the New York area, Blue Cross pays as little as $400 and as much as $2,300 (that was a few years ago) for an MRI of the lower back (HCPCS code 72148), depending on the provider.

The rates are negotiated behind closed doors by Blue Cross and the provider. The lower payment typically goes to a small provider with little market share or prestige; the higher payment goes to a big provider with big market share and prestige, who is able to negotiate with Blue Cross by saying “If you don’t give me a higher rate, I’ll leave your network.”

Quite often that rate might be based on the Medicare payment rate: “We’ll pay you 115 percent of Medicare.” But the market’s skewed by the secret nature of the negotiations (the negotiated prices cannot be revealed by the provider, by contract) and by the fact that the insurance company is paying in a closed environment, with someone else’s money, and making up any shortfalls by taking money from the employer in the form of higher rates, or taking money from the patient in higher rates or co-payments.

In reaction to rising rates from providers and payers, employers – typically self-insured or self-funded employers – are rejecting participation in insurance companies’ networks.

This is how self-insured employers have in the past often chosen to do their insurance:   the company is self-insured, but it “rents” that same PPO network, and lets the PPO make decisions about payments, eligibility, appropriate prices and so on.

Increasingly, though, self-funded employers are saying “we’re  fine with making decisions about payments and eligibility — this other way has just cost us too much.” Here’s a New York Times article by Tina Rosenberg about the trend, speaking of ways to get rid of the $1,000 toothbrush.

Also stepping outside of the traditional insurer-provider networks are big companies like Wal-Mart, which announced last fall that all its 1.1 million employees would be able to get free heart, spine and transplant surgery at one of six big medical centers where Wal-Mart has established relationships and package or bundled rates. The hospitals include the famed Mayo Clinic and Cleveland Clinic.

PepsiCo has concluded a similar arrangement for cardiac surgery and joint replacement at Johns Hopkins in Baltimore, and Lowe’s home repair chain, Boeing and several others have agreements for cardiac surgery at the Cleveland Clinic.

Other trends: Reference pricing is on the rise. This is one way of talking about price-fixing: if prices vary for that MRI in a range of $400 to $2,300, the insurance company might say to the patient and employer: “I’ll pay up to $500 for that MRI, and if you, Dear Patient, want a more expensive one, I’ll let you pay the difference.” This is harder when  the patient, has no particular idea of whether the MRI should cost $400 or $2,300, because the current system has no pricing transparency. Here’s an article by the Princeton health economist Uwe Reinhardt explaining reference pricing and praising it.

Here’s another piece, this one by John Goodman, also praising reference pricing: “Like other third-party payers, WellPoint discovered that the charges for hip and knee replacements in California were all over the map, ranging from $15,000 to $110,000. Yet there were 46 hospitals that routinely averaged $30,000 or less. So WellPoint entered an agreement with CalPERS (the health plan for California state employees, retirees and their families) to pay for these procedures in a different way.

“There was no special negotiation with these hospitals, however. WellPoint simply encouraged their enrollees to go to there. Patients were free to go to elsewhere, but they were told in advance that WellPoint would pay no more than $30,000 for a joint replacement outside the network. ”

Of course, the insurance company could refuse to pay $2,300. Or negotiate in public, even: the closed-door negotiations over price lend to hanky-panky and bad behavior. Here’s one example: a New York City hospital executive arrested for taking kickbacks.

One other new approach: Bill Rusteberg, the Texas insurance consultant, has begun to facilitate agreements based on Medicare pricing between employers wanting to cover their employees and providers who accept lower rates.

Rusteberg, 64, who started his career as a Blue Cross broker in the 1970′s,  is now an independent consultant, working on different models of payment. Texas is something of a laboratory for such practices. Rusteberg says he can save his clients as much as 40 percent on their health spending.

One of his tools is a contract between provider (a physician group, perhaps) and plan (e.g. an insurance plan run by a self-insured employer) that stipulates that the provider will  receive payments of the Medicare rate plus 15 percent from plan employees. Here’s the language of the one-page contract, which totals  190 words:

“PROVIDER will bill the Plan for services provided to employees and dependents of (name of employer, plan sponsor) covered by the Plan.  The Plan will be permitted to discount the billed charges as follows:  All charges are to be discounted no more than Medicare (RBRVS) plus 15%. 

“The Plan will pay PROVIDER, according to the above arrangement, less any deductible or coinsurance payable by the patient. provider will bill the patient for only the amount of deductible and coinsurance not paid for by the Plan.  A claim that requires no additional investigation will be paid within thirty (30) days from the receipt of the claim.”

A not dissimilar approach has been taken in Oklahoma by a third-party administrator there.  Oklahoma Heart Hospital  is one of several institutions to have  their price list here on the website of the Kempton Group, which is a third-party administrator for self-funded group insurance plans in Oklahoma and Texas. In other words, these prices apply to people whose employers are members of the Kempton Group. If you’re not one of them, and if you can find these price lists, then ask if the prices will apply to you, that’s a measure of transparency. It’s a set of unusual circumstances in Oklahoma, sparked at least in part by the decision of one hospital, Surgery Center of Oklahoma, to publish its prices.

Cancer Specialists of Oklahoma also lists itself on the Kempton price list, but is somewhat coy: you have to call for prices. In general, though, this set of published prices diverges from the common closed or PPO model.


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Next: What this all means for the average consumer, or, public prices @