PPO’s Real Customer is the Provider Community – Not The Plans That Pay Them

It has been a long time since PPO networks actually saved participating plans any cost. If you ever deal with a PPO directly, as we do everyday, it quickly becomes apparent that the PPO’s real customer is the provider community not the plans that pay for them.

In a suit filed that has a hearing scheduled for May 5, 2011, the State of California Insurance Commissioner is suing the country’s largest PPO network, MultiPlan and PHCS, with fraud. The source of that fraud is a provision the state says is used to motivate the Sutter hospitals chain of 24 northern California hospitals and its affiliates of medical care to participate in the PPO network. That provision requires a plan, through its insurer or third party administrator, to process a ‘clean claim’ without review in order to get a ‘discount’ off billed charges. The State of California is saying that this removal of the right to question or verify “medical necessity”, “reasonableness of charges”, or “the propriety of a provider’s usual and customary practices” “enables the defendant hospital to impose exorbitant charges under the cover of agreed discounts negotiated with” the PPO. The complaint goes on to state “In fact, because overall bills are vastly inflated due to the Sutter hospitals double billing, or billing for services not rendered, the negotiated discounts are rendered illusory.”

Health care lawsuitIt has been a long time since PPO networks actually saved participating plans any cost. If you ever deal with a PPO directly, as we do everyday, it quickly becomes apparent that the PPO’s real customer is the provider community not the plans that pay for them. It is also true that in any significant billing dispute pressed by a provider or an attorney for a provider the first thing they do is stated that the plan or the pariticipant is violating the terms of the PPO agreement.

The theory behind a PPO is that providers give up a discount in exchange for more business. However, a plan will not utilize a PPO that does not cover most or all providers out of fear of disrupting patients existing relationships with providers.  PPOs have responded to that desire of the plan by signing up just about all providers. If all providers are covered, signing up with a PPO gives no more business to a provider. The publicly advertised and promoted advantage to the provider to sign up has been removed. In order to make up for the loss of the advertised advantage, the PPOs have included the provision that bills may not be reviewed. We know this is true because we have been involved in more than one dispute with a provider over the right to review a bill that was obviously incorrect. Providers rely on this right granted by the PPO.

The State of California Insurance Commissioner says that this MultiPlan and PHCS agreement enables Sutter to bill 20 times the cost of a particular service and bill for that service regardless of whether or not the service was actually performed or even if such a service is appropriate for the type of procedure. Further, they have found Sutter billing this way since 2001 or 10+ years.

The reason that this is coming up now is the cost of health care.  Politicians have long berated “greedy insurance and drug companies” for making health care unaffordable. Through health care reform, they have put a pretty tight limit on the profitability of insurance companies. The drug companies are nowhere near the profit making machines they were 10 or 15 years ago. 

However, despite these successes, health care costs continue to rise significantly each and every year. Politicians do not like looking or feeling ineffective. In spite of huge political donations made by the provider community the only place left for them to look is the actual cost of care. Suits have been filed by the Department of Justice related specifically to hospital pricing in Massachusetts, Texas and Michigan. Now California is joining in.  “Cost transparency” is required under the health care reform law and these suits are related directly to that concept. All cases involve the combination of a network and hospitals being used to manipulate apparent pricing.

If this suit has any degree of success it will destroy the current PPO model by removing the very reason providers contract with them. Providers will not offer reduced pricing if they cannot make up the price reduction with volume. Success of this suit would require a thorough audit of all provider bills going forward for a plan to fulfill its fiduciary responsibility to anyone making a contribution toward the cost of the plan. The cost of such an effort will be huge and the effort would be enormous making it impractical.  Plans choosing to ignore this change will be the subject of class action plaintiffs attorneys’ dreams.

The next step for a plan is to take some form of payment that is either a direct reflection of provider cost or a fixed fee schedule such as a percentage of Medicare. There is already a bill in the Massachussetts legislature requiring this as a result of their earlier efforts in health care reform. J.P. Farley has health plans already using varied degrees of these approaches. They are working well and those plans are enjoying considerable savings over the best discount claims by PPO networks. These are good, workable alternatives to PPO networks. It is time to seriously explore these alternatives.