Smoke & Mirrors – Comparing PPO “Discounts”

Many independent fee based insurance consultants are sucked into the PPO “discount” vortex……………..

The carriers are very good at playing this game and my belief is that most consultants don’t get it or pretend not to get it, thus doing a great dis-service to their client.”   – PHO Sales Representative

By Bill Rusteberg

Plan sponsors who are interested in learning how one PPO network discount compares to others often rely on experienced fee based insurance consultants to assist in peeling back the onion of the opaque world of health care pricing.

The Set Up

Third party intermediaries have hijacked the term “discount/s” in order to maintain the status quo in a manner to instill confidence in their objective analysis of cost comparison shopping for payers (employers).  “We have greater discounts overall than anyone else and we can prove it!!” is an oft repeated claim among competitors vying for business.

The Mark

Many independent fee based insurance consultants are sucked into the PPO “discount” vortex. “PPO “A” has an average discount of 62% while PPO “B” average discount is 55% .Therefore we should go with PPO “A” for an estimated savings of $2.4 million over last year’s spend!”

A common method used by consultants to evaluate PPO discounts is determined through a claim –re-pricing exercise.  I have written extensively about the flaws inherent in these exercises. There are many.

Deep Throat

For example, an email I received from a BUCA representative several years ago stated, in part,

Per our conversation the other day, when I had claims repriced by XXXX the repricing was done on an n M.S.A. basis. In my territory, it would be too easy to identify a specific provider and XXXX has always held the provider discounts as proprietary information. We were told that this promise of confidentiality to the providers was contractual and we would not provide discounts or any information that identified what a specific provider charged us for their service. Therefore, to the best of my knowledge, all of our repricing was code specific, based upon an opposed to a specific provider.”

“I have seen some repricing reports that did not meet the minimum discounts shown by XXXX in a specific market. The thing to remember is that these reports were for specific codes whereas the discounts XXXX reported were for over-all discounts reported by XXXX. This specific report had hospital code discounts that were in the twenty percent range for the codes reported, while XXXX was indicating an over-all discount well in excess of 50% for hospital services. This was rather embarrassing to us as we had talked to the prospective client about discounts in the 50% plus range for hospital services in this area and the repricing was in the twenties. Obviously, we didn’t get this case.”

The email ended with:

“I hope this is what you need and that it answers your questions. Again, I am not alleging anything with these responses, just answering your questions to the best of my knowledge. I would appreciate it if you would keep me out of all this. I had a great career with XXXX and as a retiree, I still have many financial ties to the company. I don’t want to jeopardize that.”

Note: M.S.A. means Management Service Area. This BUCA divided up Texas into 20 M.S.A.’s. Each area was assigned average discounts. For example, from the report we have this BUCA assigned an average inpatient hospital discount for Amarillo M.S.A of 62% while the Waco M.S.A. was assigned a 49% average inpatient discount. When this BUCA is asked to do a repricing exercise they simply use the average discounts assigned to each M.S.A.

In another email, a rental network sales representative (Physician Hospital Organization, PHO) complains about getting “screwed” by a consultant who analyzed competing networks for a large Corpus Christi client:

The carriers are very good at playing this game and my belief is that most consultants don’t get it or pretend not to get it, thus doing a great dis-service to their client. Perhaps if consultants were made to be financially accountable for their glowing recommendations (or lack thereof), there would be a lot less of these games being played. Now there’s a thought! How about at the end of the year 1 under the consultant’s recommendation, they have to pay back a percent of their consulting fee if their glowing recommendation doesn’t hold up.”

The sales representative went on to document her findings “proving” the repricing exercise was flawed and produced the wrong recommendation. In a return email I asked her if she was going to publicize her finding. “Are you kidding me, they would view it as sour grapes.”

Flawed Methodologies

The basis many consultants use in comparing “discounts” centers upon a starting point known as a hospital chargemaster. A chargemaster is an arbitrary price listing made up by hospitals to which “discounts” can be applied. This (1) Allows third party intermediaries such as insurance companies to prove their value to their customers. The inference to be conveyed is “without insurance you would have never received these significant discounts”, (2) Creates hidden revenue streams to be earned off the “spread.” This has spurred a billion dollar industry that is costing the middle class (who is ultimately paying for all of this) enormous economic spend that could have been better utilized in the other 4/5 of the national economy.

As the reader will understand, charge based reimbursement methodologies hinge upon what the charges are to be paid by a payer in the first place as determined by the provider of services. Commercial retailers commonly use the same strategy in consumer sales – Special today, 50% discount off all goods! Hurry, Come On In!”

Although chargemaster pricing is a starting place, are all payers charged the same chargemaster pricing? In other words, are all payers billed the exact same amount or are payers billed in varying amounts for the same goods and services based on a credit or debit applied to chargemaster rates before contractual discounts are applied? The principle of comparing PPO “discounts” necessarily hinges upon the former.

Peeling back the opaque world of health care pricing, clues may be found in various publications geared to hospital administrators and staff. For example, it is known providers can make chargemaster pricing changes in a Claims Dictionary. A claims dictionary is a file that applies unique billing requirements for each payer based upon an insurance code. These unique billing requirements may indicate billed charges to be changed to “Allowed Charges” to which contractual discounts are then applied.

Years ago I was a consultant for a Texas municipality. I was tasked with finding the best cost effective network in the area. The group was insured through a BUCA. I took a paid claim report to a local hospital administrator and asked,

“Please look at this report and confirm to me the discounts shown at your hospital are indeed averaging 79%.” He reviewed the report, looked up and simply said “this report is not accurate.”

I then asked the BUCA representative at a subsequent insurance committee meeting,

“Please tell me what this column means. It is titled “Allowed Amount.” Is that the same as billed amount?” Her answer floored the committee: “No, certainly not. If we were to show you billed amounts you would then know what our discounts are. Those discounts are proprietary!”

Chargemaster Secrets

Then there are “Point Off” codes. These are charges that can be billed for all non-Medicare payers.  Providers can either change the Medicare codes for a specific payer or change existing codes to be Medicare compliant.

Through these internal strategies one may find multiple sets of charges based on the payer. Claims are assigned the codes based upon the patient’s payer before “discounts” are applied.

Lastly, are all of the discounts passed on to the consumer? You may be surprised to learn that the answer is probably no. There have been numerous lawsuits filed across the United States exposing this best kept industry secret. It has been proven third party intermediaries skim money off the top as health care dollars move through the American health care maze. These revenue streams are not disclosed and are hidden on the claim side of the ledger.

For example, in Weslaco Independent School District vs Aetna, the original pleading represents Aetna earning 9.6% fee off the difference between billed charges and the Aetna PPO allowed amount. A $100,000 billed amount, with a 50% “discount” would mean the consumer would pay $50,000. But, since a side agreement between the third party intermediary (Aetna) and their provider partner required a 9.6% kickback on the differential, the net discount to the consumer would be 45%. Yet the claim report to the employer may show an inflated discount of 50% versus the true discount of 45%.

There are many publications geared to hospital CFO’s that provide clear evidence of dual health care pricing (Chargemaster vs “separate companion manuals”). For example I get solicitations from vendors like the American Medical Association (ever since I purchased a software package from them I am constantly getting solicitations in the mail). Their catalog of products includes billing practices. The one I like best is entitled “Maximizing Billing & Collections.”

I recently read a manual on becoming a Chargemaster Coordinator. The manual outlines chargemaster protocols to be used for private third party payers such as TPA’s and carriers with billing done through a separate “Companion Manual” that the chargemaster is referred to through a “back-end” billing system. What this means is hospitals can charge private payers whatever they want specific to each payer.

A payer who demands a greater “discount” to be competitive in the market simply gets the hospital to agree to charge more for the same services with a greater “discount” to be passed on. Claim costs remain static or slightly increased yet the “discount” shown to the consumer is intended to show greater value than competitors can provide.


The only way to compare PPO network discounts is to review PPO contracts. Since these contracts are confidential and proprietary, it is rare, if not impossible, for a plan sponsor can get their hands on these elusive contracts for detailed review.

The second best way to compare the value of a PPO network is to reprice all claims benchmarked against Medicare allowable rates and other data points. For example, The Edinburg Independent School District, a group of 4.500 employee lives did so several years ago. It was proven their average PPO discounts over 16 months of paid claims show the PPO allowed amounts for facility charges equaling 338% of Medicare. Yet the “discounts” amounted to over 50% in “savings.”

In a subsequent competitive Request for Proposals for PPO network pricing, the Edinburg Independent School District reviewed the valuation of “discounts” without the benefit of the evaluation methods noted above. (A new consultant was hired). The question Edinburg Independent School District, or any other plan sponsor should ask, is a 65% discount equating to 300% of Medicare better than a 55% discount equating to 250% of Medicare?

Health care finances are complicated. There is a reason that is so.

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