The PPO Claim Re-Pricing Charade

priceisright

Plan sponsors want to know which PPO network has the best and lowest costs. They hire consultants to find out.

By Bill Rusteberg

Plan sponsors want to know which PPO network has the best and lowest costs. They hire consultants to find out.

PPO network agreements between providers and those who arrange them won’t disclose contractual terms. They say these agreements are proprietary. So how does one compare pricing through contracts they cannot see?

A Flawed Methodology

Insurance consultants have spawned a clever method to fool their clients and prove their worth as valued advisers. It’s called a PPO Re-Pricing Exercise.

A random sample of claims are used in the exercise. Each PPO network is asked to reprice these claims based on their provider contracts in place at the time of the exercise.

Herein lies the problem. PPO contracts in large part are provider specific. PPO contracts change annually through evergreen clauses that guarantee providers a pay increase on each contract anniversary date. Anniversary dates are every month, 12 months per year. For example, Hospital A’s contract renews June 1 while Hospital B’s contract renews August 1.

Another problem relates to outlier clauses. Once billed charges reach a certain level, all purported discounts, case rates, etc., become null and void. Hospital chargemaster rates are not the same from one hospital to the next. And, it is quite easy to “turbo charge”, or accelerate the outlier threshold in an overall revenue enhancement scheme known to be used in the industry.

Two Consultants, Two Different Results

Several years ago we were engaged by a South Texas law firm to review the work product of an independent insurance consultant for a school district. He performed a PPO Re-Pricing Exercise and came to the conclusion that BCBS of Texas as the best choice for the district.

We reviewed the consultant’s work product and found the methodology employed was flawed. For example, one claim from a specific hospital was removed from the BCBS calculation but included in all the other calculations. ┬áThis fundamentally skewed the comparison since pricing could be better or worse depending on which contract is applied at that hospital by network.

Our analysis made several assumptions based on the information contained in the district’s RFP specifications. The reader must know that determining best value based on assumptions is not a good business practice. Therefore our analysis, like the consultant’s, only provided a unsupported indication as opposed to clearly documented results. Assuming the sample claims were indicative of 100% of all claims, assigning a percentage factor to hospital/facility claims to all other claims, we determined the consultant was probably correct. Using this methodology we determined that the total cost differenctial between BCBS and the second ranked PPO network was approximately 1.3%. In comparison, the consultant’s work product produced a 20% pricing differential.

Adding fixed costs to projected claim costs in our analysis showed BCBS the higher cost vendor overall.

In our opinion, the only method that can prove the differences between PPO networks is a careful review of contracts specific to each provider historically used by plan participants and applied to 100% of all historical claims incurred during an immediate past 24 month period.

Otherwise, quantifying the opaque world of PPO pricing is not possible.

Trapped Inside The Box

Insurance consultants who continue to use this flawed process from one client to the next already know what the results will be each time. They paint themselves into a box. If for example BCBS is “proven” to have the best pricing for Plan Sponsor A, would BCBS have the same advantage for Plan Sponsor B located in the same geographic area? How would a consultant explain why one PPO is better for XYZ Company in Little Town, Texas but another network is better for ABC Company down the street?

 

Comments are closed.