Efficient Market Theory…
Why the healthcare industry will eliminate PPO networks (Part I)
By: Mike Dendy, MHA/MBA
CEO/President Advanced Medical Pricing Solutions, Inc (AMPS)
I first read of the Efficient Markets Theory (EMT) while studying the work of W. Edwards Deming. Deming’s consulting efforts in Japan led to the revitalization of the Japanese economy during their reconstruction period and ultimately to their domination in manufacturing quality and productivity especially in technological devices. The healthcare insurance industry’s recent meeting at the HCAA Executive Forum in Las Vegas reminded me of the value of the EMT and also Deming’s philosophy of Continuous Improvement.
Readers of this journal don’t need to be reminded of the initiation of managed care and of the development of Preferred Provider Networks (PPOs). Initially, PPOs provided dual 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.
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 from their “hospital partners” was expressly prohibited in their network agreements. We of course made the argument that there is no possible way to confirm the accuracy or validity of a hospital billing with the minimal information contained within the UB (hospital invoice) 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.
In the legal case, California VS Sutter Hospitals and Multiplan/PHCS, the State accused Sutter and Multiplan et al of collusion to promote “illusionary discounts” via their PPO agreements which prohibits payers from reviewing and confirming the validity of charges. In fact, we know that many PPO agreements throughout the country carry similar language and our company’s review of thousands of hospital billings over the last nine years confirms that almost all hospital billings have errors and almost always to the detriment of the employer payer.
Since PPOs make their revenues off access fees with absolutely no responsibility to screen claims for accuracy and since their market value is directly tied to the number of physicians and facilities they have inside their networks, employers and their administrative payers’ demands for transparency have gone unmet over the last decade. This 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 promote 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 represent a paradigm shift but one that is long overdue. 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. 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.
Part 2 is noted below
Efficient Market Theory… Why the healthcare industry will eliminate PPO networks.
By: Mike Dendy
Warning…..PPOs contracts are bad for your health…..care plan!
For partial self funded clients, January and July mark the most significant renewal periods for our industry. Since most TPAs and broker/consultants are currently in the process of securing quotes for the January renewal period we offer some additional data on the lack of discounting being provided by the PPO networks you are attaching to your renewal quotes. We do so in hopes that you will consider alternatives or at least attach a cigarette industry type of warning to your quote such as ….warning, agreeing to the attached PPO agreement will be bad for your healthcare plan!
In most cases, to quote the State of California lawsuit against Multiplan and Sutter Hospitals, PPO discounting is “illusionary”. While almost all within the TPA payer industry are aware of this at some level, the depth and breadth of the illusion must still be somewhat opaque or you would certainly convey a “PPO’s kill” message along with your renewal packages. Here are some statistics that prove our point.
|Medicare Claim Type||Medicare Allowed||Facility Claim Charge
|Facility Claim Charge After PPO Discount
|Recommended Payment After AMPS’ Adjustment
|Facility Outpatient (APC) Services
|Ambulatory Surgical Center (ASC) Payment
|Facility Inpatient (DRG) Services
As you can see, a review of our data over the last 12 months shows clearly that a discount off of billed charges is almost worthless when hospital charges start at 414% to 1180% of what Medicare would pay. In fact, surgery center charges have gone beyond a farce to an all out attack on the sanity of anyone who thinks that paying such a rate comes anywhere close to meeting the fiduciary responsibility conveyed within an SPD requiring that plan assets be protected and that claims not be paid beyond a reasonable fee. Our data contains both regional PPO network and BUCA network information with a greater emphasis on the regional PPOs. We will release BUCA specific information in a later letter and don’t expect that you will be surprised that their “discounts” when benchmarked against Medicare are not what they want you to believe them to be.
We think TPAs and brokers should have two levels of concerns. First of all is the concern of forwarding PPO contracts without some sort of warning about the fallacy of being able to pay reasonable charges per the in place SPD and, second, the greater concern of having a TPA or Broker organization agreeing to the PPO contract on behalf of the employer group especially with the assumption of a commission or fee going to the sponsoring organization. The last thing that any of your legitimate organizations want is to be dragged into the web of deceit being perpetrated through “managed care” contracts.
Mike Dendy, Biography
Mike Dendy, who resides in Atlanta, GA. is the CEO/President of Advanced Medical Pricing Solutions (AMPS) a healthcare cost containment company. Dendy has both a Master of Business Administration and a Master of Health Administration degree and has been an executive in the health insurance field for twenty years. Based in Atlanta, GA, AMPS has helped healthcare payers, and self-insured organizations receive a fair price for healthcare services for nearly a decade. AMPS offers a single gateway approach to a suite of cost-containment services. AMPS delivers and aggregates a host of services for managing the financial risks associated with healthcare claims. AMPS’ Clients include large and mid-sized corporations, TPAs, self-insured plans, HMOs and other entities that pay claims on behalf of health plans. For more information, visit www.advancedpricing.com.
Previously, Mike served as Chairman and CEO of HPS Paradigm Administrators Inc. from 1997 until its sale in 2004. HPS is a health insurance administrative services firm (TPA) serving corporate and government employer groups throughout the country. HPS also provided outsourced cost management and administrative services to Georgia’s second largest HMO plan from 2000-2003. Under Mike’s direction, HPS Paradigm grew from $9mm to over $100mm in seven years. The company enjoyed a 22% EBITDA within an industry that averages less than 10%. HPS Paradigm was recognized during this period by multiple sources as one of the premier third party administrators (TPA) in the country. Under Mike’s management, HPS Paradigm was awarded SAS-70 accreditation, which is held by less than 12% of all TPAs, and “World Class Administrator” recognition, by the McLellan Consulting Group for overall corporate excellence.
HPS Paradigm was purchased by STI Knowledge, Inc. in March of 2004. STI Knowledge is a world-wide business process outsourcing (BPO) company serving Fortune 500 clients including Alcoa, E-Trade, Polo-Ralph Lauren, Citrix and Beazer Homes.
Prior to his purchase of Paradigm Administrators in 1997, Mike founded Health Partners Services Inc. (HPS), a consulting and healthcare brokerage firm. From 1992-1997, HPS developed community health system plans in a number of southeastern U.S. markets. Mike’s specific areas of specialty include: stop loss insurance, benefit plan design, provider negotiations, pharmacy benefit management, disease management, predictive analysis, and cost containment.
Previously, Mike served as Vice-President/Publisher of Time Warner’s- Whittle Communications / Esquire Magazine Media Group from 1984-1992. Mike became the youngest partner in the history of Whittle Communications and held a number of positions including Regional Accounts Manager, Director of Regional Account Sales, National Director of Sales for Esquire Properties and Whittle Medical Publications, and Vice President / Publisher of Whittles’ $40 million multi-publishing and broadcast media unit Special Reports, which was heralded as the most successful new business launch in media history at the time.
Mike’s educational background includes an undergraduate degree from the University of Georgia in Journalism and Psychology. Mike attained the degree Master of Business Administration (MBA) from Georgia State University in 1997, and a Master of Health Administration (MHA), also from Georgia State University in 2002. Both of Georgia State’s graduate programs are nationally ranked. Within the MHA program, Mike attained a perfect 4.0 grade point average. Mike attained both the MBA and MHA degrees while working full time by attending classes at night and on weekends.
Additional education includes executive management programs at Harvard Business School (1999), Harvard School of Public Health (2001), and Harvard Law School (2002).
Mike is a member of the Advisory Board of the Robinson School of Business at Georgia State University and also serves on the Advisory Council for the School of Healthcare Administration at Georgia State University.