“Reference Based Reimbursement, while not perfect, provides a clear and distinct effort to bring attention to the actual cost of healthcare goods and services.” – Scott Haas
MyHealthGuide Source: Ron E. Peck, 5/5/2018, Money Inc,
Once upon a time, cost containment for health benefit plans was comprised of random pre-payment claim audits, application of network discounts, coordinating benefits with other payers, and recouping funds from liable third parties (aka subrogation). Other than that, not much in the way of “innovation” seasoned the cost containment stew. Maybe a really ambitious health plan sponsor or insurance carrier would examine a person’s prescription drug usage, and if it was branded, notify them that a generic was available. Woah there! Don’t go crazy now.
Today, cost containment has more flavors than a Baskin Robbins. The old “stand by’s” are still in play, but so too are new approaches. Carve outs – a process by which a health plan will in its plan document or insurance policy explicitly state that it takes claims for particular services, and processes them in accordance with a completely different set of rules, compared to other covered claims. For instance, the plan will apply preferred provider organization (PPO) network rates to in-network claims, pay out of network (OON) claims based on an averaging of what area providers generally accept as payment in full… but it will pay dialysis (and ONLY dialysis) claims based on a percentage of what Medicare pays. In that example, dialysis is “carved out.” Along the same lines, some other plans are working with vendors to shrink – or eliminate entirely – their PPO or other contractual arrangements with providers, essentially treat all claims as OON, and use a percentage of Medicare (or some other objective external pricing methodology) to determine the allowable, payable rate. These plans are affectionately called “reference based pricing” plans or “RBP” plans.
As you might imagine, prices paid by health plans and insurance carriers can vary. On one end of the spectrum you have the health care provider’s “full billed charges.” Ouch. On the other end of the spectrum, you have zero ($0) payable (aka “excluded” or “denied”). Between those two extremes, you see network discounted rates, usual and customary rates, reasonable and appropriate rates, RBP prices, yo momma’s rate (leave my mom out of this), and any other number of calculation used to determine what constitutes the “maximum payable amount.”
Why are payers relying less on networks?
So – as benefit plans and insurance carriers rely less and less on network discounts, and get more and more creative regarding how they determine their maximum payable rate, the patients are being pinched. Why are payers relying less on networks? The general rationale is that the discounts they receive (which tend to be a percent off of billed charges) aren’t increasing. Meanwhile, the billed charges are growing exponentially. The result? The discounts are less valuable and the network contracts bind the plans to pay more than they think is fair.
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Scott Haas, Senior Vice President with USI Consulting Group, shared with me his belief that, “Consumers believe price transparency in healthcare is lacking. The traditional manner in which health insurance carriers, hospitals and providers have contracted through Preferred Provider arrangements has proven to be ineffective in providing a market competitive environment for healthcare services. If anything, these arrangements have served to fix healthcare prices at the highest possible levels with no relation to the actual cost basis. This failure has resulted in unacceptable increases in the cost of health insurance, which is the market barometer of the cost of healthcare services. The thought that you can have competitive health insurance is short sighted if there is a lack of price competition of healthcare goods and services.”
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Enter the aforementioned RBP. Mr. Haas continued, “Reference Based Reimbursement, while not perfect, provides a clear and distinct effort to bring attention to the actual cost of healthcare goods and services.”
A few daring claims administrators and employers that self-fund their health plans started the trend, reducing the size of their network (or eliminating it entirely), and using Medicare rates to benchmark what their own plans would be willing to pay (i.e. 150% of Medicare payables, etc.). This resulted in these plans paying far less to the provider than they would have paid, even with a network discount. A few providers took notice. Some appealed to the plans for more money. Others balance billed the patients. Most ignored it.
For those that pushed back against the plans, they soon learned that – as long as no contract binds the payer – the plan terms dictate what the plan pays. As such, they couldn’t get more from the plan, as long as the plan document was well written and was air tight. This then left the provider with the other two options mentioned – do nothing, or balance bill the patient.
For many providers, the patient really has nothing with which to pay them, and thus the juice wasn’t worth the squeeze (the cost of pursuing the patient). This then left relatively few providers who wanted to “prove a point,” and were willing to penalize the patient for the plan’s (they felt) unfair pricing practices. These plans, and their partners, responded by either letting the patient take the hit (not very nice), or, combating the provider until even the most bull headed provider knew when it was time to quit. This doesn’t even take into consideration the plan’s ability to offer some small (voluntary) additional payment (a settlement) to achieve harmony, and see the provider walk away from the patient.
Some Stop Loss Carriers Adopting RBP for Calculating Reimbursements
This model has worked well for some time. Previously unknown complications, however, have since impacted the operation of such programs. First, if and when these claims – despite being seriously reduced – still hit “catastrophic levels” other carriers become involved. Health benefit plans often carry a form of financial insurance called reinsurance. In particular, the self funded plans I discussed above carry a form of reinsurance called stop loss. Stop loss will reimburse these benefit plans for claims the plan pays beyond a pre-determined specific deductible. These days, many stop loss carriers are thrilled to see the plans they insure attempt to contain costs via the use of programs such as RBP. In some instances, however, some carriers actually use RBP and similar methodologies when calculating what is the proper payable rate – even when the plan they insure doesn’t use that approach; meaning, the plan will sometimes pay a PPO network rate, the stop loss carrier will reprice the claims using RBP, and ultimately decide the amount paid by the plan was excessive – reducing or eliminating the stop loss reimbursement to the plan. In other instances, however, after the plan applies RBP pricing, they will look to stop loss to not only reimburse the plan for amounts it (the plan) ultimately paid to the healthcare provider, but also submit to stop loss the fee paid to the RBP vendor, as if it was a claim for healthcare services. Allow me to expand…
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Example: Many vendors will charge a percent of savings. This means if a medical bill arrives for $400,000, the stop loss specific deductible is $50,000 (meaning all payments beyond $50,000 is submitted to stop loss for reimbursement to the plan), and the vendor reprices the claim down to $100,000, they have created savings of $300,000. If the vendor’s fee is, in this example, 10% of the savings, they will charge $30,000 (10% of $300,000 savings). So – $100,000 is paid to the provider, and $30,000 is paid to the vendor. The plan submits a claim for $80,000 to stop loss for reimbursement (the total $130,000 it paid to the provider and vendor, minus their $50,000 deductible). Stop loss argues that they don’t reimburse vendor fees, and thus, only a claim for $50,000 should have been submitted to them (the $100,000 paid to the provider, minus the $50,000 deductible). The plan argues that, but for the vendor’s services, the stop loss carrier would be paying the difference. This, the plan says, is because all the plan was ever going to pay is the $50,000 deductible, and thus, the savings created by the vendor – for which the fee was paid – benefited only the carrier.
Oh dear, what a mess.
Add to this the recently debated issue that comes up when the vendor’s fee is actually greater than the amount paid to the provider. Consider the same example above, but instead of a $400,000 bill, the provider’s bill is $4,000,000.00! If the $100,000 payable remains the same, that is a savings of $3,900,000. 10% of that is $390,000; almost four-times what was paid to the provider! When stop-loss sees that, they hesitate to pay the fee. Indeed, if the healthcare provider discovers this, they too will likely be less than thrilled.
Scott Bennett, Medical Reimbursement Consultant and Principal with Sixprints, LLC, provided me with the following assessment:
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“While the overall savings for an employer can be unprecedented in today’s health care market; Reference-Based Pricing (RBP) is not without risk and individual tragedy for some unlucky plan beneficiaries. Over the past year a few (seven) lawsuits have surfaced in Oregon, California, Colorado, Nebraska, Utah, and Florida against patients, employers, employer plans, third party administrators, and the repricing vendors. Some of these cited cases are narrow (a specific claim) and some are global (all past RBP activity at a major hospital system spanning multiple years). The numerous claims alleged in these cases include fraud, breach of contract, misrepresentation, unfair business practices, and ERISA violations. That said, these cases are all in early stages, appear vigorously defended by the vendors, and could settle or be dismissed prior to any damaging precedential decision. Further, with hundreds of plans implementing reference-based pricing and hundreds of millions of dollars in savings at stake, there is definitely a utilitarian argument for these products. At this early stage, it is difficult to determine whether these few cases are campfires in the forest, or small forest fires near a campground. I recommend cautious optimism for any plan, and a willingness to pivot or compromise in order to protect the fund, and most importantly, the beneficiaries.”
ERISA Paradox: Managing Plan Assets and Avoiding Excessive Expenditures
To this end I’d argue that the courts, statutory and regulatory law have created a paradox. The Employee Retirement Income Security Act (ERISA) requires self-funded plan administrators to prudently manage plan assets, meaning they must take steps to avoid paying excessive rates for services and audit expenditures to protect the plan from abuse… but at the same time… precedent entitles providers to charge seemingly arbitrary rates and avoid the basic legal tenet of Quantum Meruit, which requires all other providers of goods and/or services (other than healthcare providers) to either collect as their fee a pre-determined and agreed upon fee (aka the contracted price), or, collect an objectively fair and reasonable amount for their service – calculated by examining numerous factors (including but not limited to: the normal range of fees for the work in question charged by this provider, as well as similar providers in the same area for the same or similar services, the fee the provider would have collected [if any] from another customer had this customer not occupied their time, the price the customer would have paid another provider, the actual cost of supplies and labor incurred by the provider, as well as the complexity of the transaction and the actual value that the client had received), when no pre-determined and agreed upon fee exists.
This concept ordinarily works in the vendor’s favor to avoid unjust enrichment. In other words, the law envisions a scenario where a vendor provides services of value, but because no price was agreed to ahead of time, the consumer seeks to underpay or not pay the vendor for the services rendered (in part or whole). The law creates a means by which the “fair” value of the services rendered are calculated, and the price payable to the vendor emerges. If an enforceable contract exists, its terms control. Absent such a contract, this legal construct jumps in.
Yet – as mentioned – in healthcare, providers in an uncontracted situation may collect whatever fee they wish, regardless of the elements we’d normally look to in a Quantum Meruit scenario, with the courts deferring instead to that individual provider’s charge-master. As stated above, this unfettered right to charge whatever they (providers) wish runs headfirst into the plan administrator’s duty to cap spending – and leaves the plan participant/patient stuck in the middle of this clash; with that participant/patient responsible for the unpaid balance. Politically expedient suggestions that the plan is responsible to protect the patient from such balance billing, and bear the financial burden created by this situation, conflicts directly with the plan administrator’s fiduciary duty.
RBP Fees Based on Savings Can Be Inequitable
RBP attempts to right the ship, and apply Quantum Meruit without the assistance of courts or law. My concern, however, resides in my worry that the fees associated with RBP may – so long as they are based on a percentage of savings – become too rich, and in their own right, be inequitable. Might the RBP vendor become the thing it was created to defeat? Moreover, if a fiduciary plan administrator pays such fees, is that a prudent use of plan assets? If stop-loss refuses to contribute to said fee, despite benefitting from the RBP vendor’s efforts, who then is to blame for the plan paying a fee when it could have paid the provider’s billed charges and allowed the stop-loss carrier to chew on that bone instead.
About the Author
Ron E. Peck has been a member of The Phia Group’s team since 2006. As an ERISA attorney with The Phia Group, Ron has been an innovative force in the drafting of improved benefit plan provisions, handled complex subrogation and third party recovery disputes, healthcare direct contracting and spearheaded efforts to combat the steadily increasing costs of healthcare. Considered to be not only one of the nation’s top ERISA lawyers, Attorney Peck is also viewed as one of the nation’s premier self funded health plan consultants and health benefits attorney; lecturing at and participating in many industry gatherings including but not limited to The National Association Of Subrogation Professionals (“NASP”) Litigation Skills Conference, Society of Professional Benefit Administrators (“SPBA”), the Health Care Administrator’s Association (“HCAA”), The Health Plan Alliance, and SIIA. Ron is also frequently called upon to educate plan administrators and stop-loss carriers regarding changing laws and best practices. Ron’s theories regarding benefit plan administration and healthcare have been published in many industry periodicals, and have received much acclaim. Prior to joining The Phia Group, Ron was a member of a major pharmaceutical company’s in-house legal team, a general practitioner’s law office, and served as a judicial clerk. Ron is also currently of-counsel with The Law Offices of Russo & Minchoff. Attorney Peck obtained his Juris Doctorate from Rutgers University School of Law and earned his Bachelor of Science degree in Policy Analysis and Management from Cornell University. Attorney Peck now serves as The Phia Group’s Senior Vice President and General Counsel, and is also a dedicated member of SIIA’s Government Relations Committee
