Why The Healthcare Industry Will Eliminate PPO Networks

“…..all elements within a market that do not add value to the overall market will eventually be eliminated……………….companies must work constantly to eliminate any cost factor that does not add value to a business process. ”

MyHealthGuide Source: Mike Dendy, MBA, MHA, CEO/President of Advanced Medical Pricing Solutions (AMPS), Inc, 2/22/2013, www.advancedpricing.com

I first read about the Efficient Market Theory (EMT) while studying the work of W. Edwards Deeming. His consulting efforts in Japan led to the revitalization of the Japanese economy during their post-war reconstruction period and ultimately to their global domination in manufacturing quality and productivity especially in technological devices.
Our industry’s recent meeting at the HCAA Executive Forum in Las Vegas reminded me of the value of the EMT and of Deeming’s guiding philosophy of Continuous Improvement, which in its most basic form says that companies must work constantly to eliminate any cost factor that does not add value to a business process.


Development of PPOs
Readers don’t need to be reminded of the initiation of managed care and of the development of Preferred Provider Networks (PPOs). Early on, PPOs provided true value both by steering patients to doctors who needed to build their practices or hospitals with beds to fill and by providing actual discounts to employers who utilized the service.

  • Employers and their broker/consultants quickly eroded the value of PPOs by demanding that not only did they want discounting but that they required access to specific doctors and hospitals that may have initially shunned the concept.

Employer demands shifted the balance of power to those providers that were deemed to be superior and put the PPOs in a position where they had to take any possible arrangement to have those providers in their networks. For the most part, the intrinsic value of the nations’ largest healthcare payer organizations are coupled with the size and scope of their network agreements much more so than the employer corporations they represent as administrators. This creates a significant conflict of interest for almost all payers in their fiduciary role for the employer’s healthcare funds.

Alleged Network Agreements Inhibit Transparency

I recently participated in a three way meeting between a Blue Cross/Blue Shield Plan and the consulting broker for one of their clients. The intent of the meeting was to determine how our company could confirm the validity of payments from the employers’ plan primarily to hospitals.

The meeting turned contentious almost immediately when the representatives of BC/BS emphatically stated that their requesting itemized statements and medical records would upset “their hospital partners” and was expressly prohibited in their network agreements. We of course made the point that there is no possible way to confirm the accuracy or validity of a hospital billing with the minimal information contained within the UB which they pay from regardless of the size of the claim.

The consulting brokers’ appeal that their client owns the data and has a fiduciary responsibility to confirm that plan assets are being expended appropriately fell on deaf ears even though the BC/BS representative noted that they took no such specific action to do so.

  • It is noteworthy that we reviewed the BC/BS contracts prior to the discussion and in fact they are not prohibited from providing such data to their clients for third party audits.
  • In fact, all BUCA payers employ a pay and chase model allowing them to hire external auditors to chase money as they see fit.

State of California Files Complaint Against Hospital and PPO

Many of the issues discussed above are highlighted in a current law suit brought on behalf of the State of California (State of California vs Sutter Hospitals and MultiPlan/PHCS) . In that case, it is alleged that Sutter engaged in billing fraud and that Multiplan aided and abetted Sutter by effectively shielding the hospitals bills from meaningful review.

In addition, the State of California has claimed that Multiplan directly defrauded its own customers by selling access to “illusionary discounts” under PPO access agreements; the theory being that Multiplan was selling access to discounts that it knew were meaningless because they would be more than offset by hospital overbilling that would be hidden from view by the terms of their PPO agreements which purport to prohibit payers from reviewing and confirming the validity of charges.

The overwhelming majority of PPO agreements throughout the country include such similar provisions, and our company’s review of thousands of hospital bills over the last eight years confirms that nearly all hospital billings contain material errors to the detriment of the employer payer. Hospitals will bill as they choose, the problem for employer sponsored health plans is the lack of transparency and review of those charges, and PPO networks are the lynchpin of the issue.

PPOs Need Transparency

Since PPOs make their revenues off of access fees with absolutely no responsibility to screen claims for accuracy their market value and thus their priorities are directly tied to the number of physicians and facilities they have inside their networks. Employers and their administrative payers demands for transparency have gone unheeded within this environment over the last decade. This market opaqueness has led to the significant movement to eliminate PPO arrangements altogether as they not only provide no real value to the healthcare equation but in many cases create a negative value.

  • This is the efficient market theory at work, all elements within a market that do not add value to the overall market will eventually be eliminated. Eliminating the PPO domination of healthcare financing will upset the status quo for employers and administrators alike (as all paradigm shifts do) but is essential to both cost control and proper fiduciary management.

School Board Pleads for Equivalent Pricing from Hospital

Another recent discussion involved a broker, his school board client, and the consultant for a county owned hospital. The hospital provides favored nations pricing to the local BC/BS plan and refused to offer the school board’s employees equivalent pricing if they moved to a much less expensive third party administrator.

Like many school boards throughout the country, this local organization is facing significant budget constraints and has had to terminate teachers to balance budgets. My suggestion of the school board moving to a Reference Based Pricing model and eliminating any PPO intervention was met with both surprise and disdain by the consultant. My argument was why in the world would a local school board’s employees not automatically receive their own county hospital’s best pricing and why would the hospital demand that they over pay BC/BS to receive that concession.

The truth to the previous question is apparent.

  • Hospitals throughout the country are using PPO network organizations as a way to hide and deceive the public about their charges.

The overwhelming topic of discussion at the recent HCAA forum was the advent of reference based or cost plus reimbursement strategies for employer sponsored plans. We wholeheartedly support such an effort of healthcare transparency as long as reimbursements are fair and just for both parties.

About the Author
Mike Dendy is the CEO/President of Advanced Medical Pricing Solutions (AMPS), Inc. Mike is the former CEO of HPS Paradigm Administrators a Georgia based third party administrator for both self funded and HMO plans. Mike has a Masters of Business Administration (1997) and a Masters of Healthcare Administration (2001) both from Georgia State University. Mike serves on the advisory board of Georgia States’ Robinson College of Business’ School of Healthcare Administration.
About AMPS AMPS, a privately held company, is working with clients across the U.S. to audit and confirm the accuracy of billings by hospitals for healthcare services provided. Founded in 1995, AMPS has offices in Atlanta, GA; and Phoenix, AR. Over the last five years AMPS’ reviews have yielded a net to payer average cost savings of 19.75% (over and above PPO discounts). With an average size of claim reviewed of $52,500, this has yielded an average additional dollar reduction of $10,368 per claim. AMPS average success (hit) rate on claims greater than $15,000 reviewed is 88.5%.  Visit www.advancedpricing.com.