16
COST CONTAINMENT
The de-evolution of the
PPO model
In the early 80s, the Preferred
Provider Organisation (PPO) model
was embraced as a more flexible and
customisable option for healthcare
plans. PPOs continued to gain widespread
acceptance and significant membership
throughout the country in 1986 and 1987
for two principal reasons: PPOs offered
greater cost savings than conventional
indemnity insurance plans, and they
offered more flexibility than staff or IPAmodel HMOs.1
Generation next
First generation PPOs offered an
upfront discount off billed charges
with few strings attached. This model
was fairly quickly replaced by second
generation PPOs, which tried to add
accountability to the contracts with
Diagnosis Related Group (DRG) or per
diem-based rate structures.
The use of DRGs is noteworthy because it
gives hospitals a major financial incentive
to keep their stays short and their use of
ancillary services low.2
At one point, over 55 per cent of
PPO contracts were based on per
diem or DRG rates. The future was
bright for PPOs, but they still needed
to show that they could provide
cost management versus discount
management. This would include
removing abusive providers and payers,
if they were found to be compromising
the PPO’s value proposition.
In fact, the success of second and third
generation PPOs will be strongly
influenced by the capacity of information
systems to interrelate quality assurance
programs, utilisation statistics, and costmanagement techniques. The emphasis
will be cost-effectiveness rather than cost
cutting.3
If they are also able to control costs, PPOs
could become the system of choice for a
very large number of people.4
We believe that these organisations are
only likely to succeed in the long-run if the
PPO management is independent enough
to control both hospitals and physicians
who are subverting the cost-containing
goals of the organisation. This must
include the ability and desire to remove
abusers from the system.5
Despite an initial acknowledgement that
PPOs needed to add accountability to
their contracts, the model has by and
large since regressed back to a ‘no strings
attached’ platform.
Can PPOs actually steer
members?
Traditionally, steerage has not been
perceived by the provider community as
1 Peter Boland, Health Affairs, winter (1987): 76
3 Peter Boland, Health Affairs, winter (1987): 80
2 Thomas Rice, Greg de Lissovoy, Jon Gabel and Dan
Ermann, The State of PPOs: results from a national
survey, Health Affairs, 34
4 Rice et al, The State of PPOs: results from a national
survey, Health Affairs, 26-40.
5 Ibid.
Jason Davis takes us through
the history of the PPO, from
its earliest setting, through its
current usage, to how it might
evolve following proposed US
healthcare reform
an effective driver for profit. Relatively
few providers increased their patient base
enough to justify the level of discounts
negotiated during the first round of
preferred provider contracting.6
One prestigious health system was
particularly dismissive of PPO networks,
characterising them as ‘nothing more than
just a guy with a rate sheet’. However,
these responses also reveal that most PPO
networks, with the exception of Blues6 Peter Boland, Health Affairs, winter (1987): 77
sponsored ones, generally have less leverage
(and smaller discounts) with providers
than HMOs do because they have weaker
steering mechanisms.7
This lack of leverage due to weak
steerage has resulted in poor discounts
for the PPO, and correspondingly, a
broad spectrum of payers has been
impacted. Today, steerage does not seem
to have improved substantially and the
7 Robert E. Hurley, Bradley C. Strunk and Justin S. White.,
The Puzzling Popularity of the PPO, Health Affairs, 23
no. 2 (2004): 56-68.
There is perhaps no more glaring indictment
that PPOs have failed to deliver quality and cost
containment that we are now introducing the radical
concept of accountability in medical care.
Gigi Galen Grobstein, President, Star Healthcare Network
“PPOs have evolved over the years and one day everyone thinks they
are wonderful and the next day they are old news. PPOs have a time
and place to offer discounts to a wide range of participants. Most
PPO plans offer steerage to in-network providers and offer discounts
in return. Hospitals do not increase their charge master per patient
regardless of domestic or international or if the patient has a PPO,
EPO, EPN, etc.”
COST CONTAINMENT
PPO concept does not seem to be firmly
anchored in the minds of Americans.
According to the American Association
of Preferred Provider Organizations
(AAPPO), 158 million Americans are
enrolled in PPO plans.8 However, in a
recent consumer survey, 80 per cent of
respondents did not even know what PPO
stands for, let alone how to maximize their
savings within the plan (in fact, most
respondents had not even read their plan).9
Initially, PPOs were conservative in
their contracting campaigns, capturing
between 30 and 35 per cent of a given
market’s provider outlets, which was
higher than the HMOs, but the market
demanded more unfettered access. As
such, it is now not uncommon for some
PPOs to capture 75 to 80 per cent of a
given market. In this situation, a provider
is in a wide pool, which dilutes the value
proposition of being in-network, which
ultimately weakens the discount.
17
billed charges can often be adjusted
(increased) without the involvement
or even knowledge of the PPO and
its subscribers. Beyond any statewide
transparency initiatives, these rates
are also confidential. The following
is a standard clause in most PPO
agreements: “The rates in our provider
agreements supersede all other rate
calculations for covered services and
those rates are confidential.” In other
words, a PPO’s undefined rates are
authoritative and final, and no other
reviews and adjustments are appropriate.
However, the following is another
standard clause in most PPO agreements:
“PPO does not make determinations
Some contracts will add provisions
whereby pre-certification determines
eligibility and/or medical necessity of
the treatment. Some contracts may
also impose limitations and regulations
Providers feel their charges are fair
because they are the same as other
providers in their area, and they
often do not recognise unbundling
(“We understand that you think we
unbundled our charges, but if we
bundled these charges in accordance
with your so-called ‘standards,’ we
would still charge the same amount”).
A hospital’s charge description master
(a list of billable items) can range
between 12,000 and 45,000 according
to Medpac.10 As there is such a wide
variance of what constitutes a billable
charge, the notion of ‘unbundling’
seems to be a reality.
Without standards for billing, any
discussion for fair and reasonable pricing
is superfluous. The Centers for Medicare
and Medicaid Services (CMS) represent
the single largest payer of hospital and
other healthcare expenditures and
they have instituted safeguards against
unbundling. CMS understood that they
needed to establish what constitutes a
payable service, and assign a fee for that
service. Some providers will not recognise
these standards as applicable for private
payers, but we have seen examples
where the courts consider the Medicare
platform or floor as a market standard:
The ACO model
appears to be a
significant step away
from the volume
paradigm toward
the quality/value
paradigm
their charges significantly in order to
capitalise on their small percentage of
charge-based contracts, and make up for
the limited profitability of their other
payer mix.
Charges have less and less meaning each
year. Policymakers need to realise the
chargemaster does not mean as much
as it used to – we are getting only 10
to 15 cents for each dollar we increase
our charges. Focusing on managed care
regarding claim audits, like requiring a
payer to pay in full (or a high percentage
of the claim) in order to perform an
audit, and the payer must also pay an
audit fee. Some contracts even expressly
forbid audits. Further, many contracts
require that the PPO contract rate
cannot be challenged if it exceeds usual,
customary and reasonable charges.
That is, if you are being billed for a $60
Tylenol, too bad; you have signed away
your right to protest.
If the PPO contract removes all
constraints, a provider can, by mere
adjustment of its charge structure,
increase and unbundle charges without
providing value for the consumer.
“The reimbursement at 150 per cent
of the comparable single surgery rate is
not arbitrary or capricious. The 150 per
cent modifier for bilateral procedures
has been adopted by Medicare and state
insurance law as an acceptable floor on
reimbursement for multiple surgeries
performed in the course of the same
operation … While … not dispositive,
they support the defendant’s argument
that the application of a 150 per cent
modifier is standard procedure in the
insurance industry. I am not prepared to
conclude that Medicare’s floor is arbitrary
and capricious.”11
Most PPOs, however, do not monitor
billing standards in their contracts. Also,
concerning benefits or eligibility.”
PPO calculations may supersede
all calculations for covered services,
but the PPO has no role in making
determinations on what constitutes a
covered service. As such, a payer should
not be pushed away from its rights to pay
in accordance to its policy.
Appropriately, a provider’s usual and
customary (U&C) rates are formulated
to ensure their ongoing sustainability
and profitability. Providers must factor
governmental programmes, per diem
arrangements, PPO/HMO contracts,
rising costs, new technology, and
bad debt. Most provider payments
are fixed payments, and so only a
small percentage of their claims are
paid though charge-based contracts.
Correspondingly, they must increase
contracts is far more important to us than
charge master adjustments.12
Our key goal with the charge master is to
help the hospital meet its profitability and
cash flow needs. We try to take advantage
of those payers on a per cent of charge
arrangement, so we capture all the revenue
codes.13
Contract language can
compromise payer rights
10 Ibid. p i
8
9
www.aappo.com
MyHealthGuide Source: eHealth, Inc. (NASDAQ:
EHTH), 1/3/08, www.eHealth.com
11 Krauss v. Oxford Health Plans, Inc. 418 F. Supp. 2d 416
involved setting the reimbursement for bilateral surgeries
performed at one time by an out-of-network provider.
Gigi Galen Grobstein,
President, Star Healthcare
Network
“PPOs today still offer per diems,
DRGs, percentage off charges
depending on the provider
contract. Do not say goodbye to
the PPO but watch the steerage
and identification become more
paramount for PPOs to stay
competitive in the marketplace.”
PPO Value?
The value of most PPO contracts has
undoubtedly dwindled. At Global
Excel, we routinely see out-of-network
negotiations exceeding most in-network
arrangements. The above referenced
factors have all contributed to the
commoditisation of the PPO industry. 
12 A Study of Hospital Charge Setting Practices – A study
conducted by the Lewin Group for the Medicare Payment
Advisors Commission. Dec 2005 No. 05-4. p 7
13 Ibid. p. 12
18
COST CONTAINMENT
This, in turn, has lead to numerous PPO
mergers and buy-outs. The following is a
brief list:
Midlands Choice / Midwest Select
Coventry / First Health / CCN
Multiplan / PHCS / VIANT
Concentra / Beech / PPO Next
Interplan / Accountable Health /
HealthSmart
Coalition of America / MedAvant
Cofinity (Sloans Lake / PPOM)
Venturenet (Arizona Foundation /
California Foundation / First Choice /
Healthcare Direct/ Universal Healthcare
/ Nevada Preferred.
Unfortunately, payers are now joining
PPOs and are (at times) being penalised
by paying some of the highest rates in
the market. This is seen as acceptable.
One benefit consultant suggested that
instead of being called ‘managed care
companies’, most organisations offering
PPO options should be characterised as
‘discount management firms’.14
One TPA executive noted that ‘the PPO is
retail now. Anyone who isn’t in a PPO is
paying above retail’.15
In many instances, the higher the
billed charges, the worse a payer’s PPO
deal becomes. If one has a per diem
arrangement in place, once the charges
hit a pre-established dollar threshold
or ‘cap’, then your discount reverts
to a fixed percentage off charges. If
your claim is a trauma case, you may
automatically revert to a very low
percentage of charges.
It is no surprise then that prior to the
recession, hospital profit margins were at
their highest level since 1997.16
Unintended consequences
By reducing the value portions of PPO
contracts, providers are pushing the
market to other and typically larger
payer groups who, by leveraging their
size, pay less. As such, the provider
community has an incentive to keep
some level of competition in the PPO
market, and they are faced with the
decision of taking short-term gains or
insuring long-term yields from PPO
payers. They have also created a terrible
situation for the uninsured who are left
to face egregious bills. Interestingly, we
are starting to see providers offer flat
discounts (e.g. 25 per cent) for anyone
that is uninsured regardless of income.
Many plans may want to verify if
they have exclusions for expenses that
would not be charged in the absence of
insurance, as these kinds of discounts
may be of interest.
14 Robert E. Hurley, Bradley C. Strunk and Justin S. White.,
The Puzzling Popularity of the PPO, Health Affairs, 23
no. 2 (2004)
15 Ibid.
16 Source: American Hospital Association aha.org cited in
Modern HealthCare By the Numbers. p 16
So now what?
In our experience, and subject to the
particular circumstances of the bill,
providers are willing to work with payers
directly towards settlement on in-network
claims, and would prefer a frank and
professional discussion versus a short
payment through a ‘bill review’. This
process can be effective, but is seen by
and large as intrusive from the provider
community, and should therefore be used
sparingly. Many providers recognise that
the market is broken, that PPOs represent
the new retail, and that charges are just
the artifice created to support ‘no-stringsattached’ discounts. In response, providers
are extending discounts beyond the PPO
contract on high-dollar claims to ensure
that PPO payers have a fair chance of
competing in this market. Providers
also understand that inordinately high
claims can deplete a plan participant’s
lifetime maximum, which could spell
financial catastrophe for the participant.
Payers need to have processes in place to
review high-dollar claims where there is
a percentage off contract. High-dollar
claims have a major impact on overall
claim dollars. We routinely see 20 per cent
of claims ($5,000.00+) representing 50 to
75 per cent of claim dollars.
The new reform package is loaded
with new changes and new acronyms;
none more intriguing perhaps than
the push from CMS and DHHS for
the formation of Accountable Care
Organisations (ACOs). What is an
ACO? The answer is not as easy as one
would think, as it appears that ACOs
are in dire need of definition. In fact,
the model seems so broad that it could
be more aptly characterised as a goal,
namely to integrate providers in a real or
virtual organisation that improves care
and reduces cost for a defined population
– and the ACO can receive a share of the
savings it generates. It is worth noting
that the model is being designed for use
for the Medicare programme exclusively
at this point, but we can expect that
if the model is successful it may be
replicated in the private market. Not
to mention that many big players are
administering the pilot projects. Before
we delve into what exactly ACOs are,
let’s discuss what they are not. There is perhaps no more glaring
indictment that preferred provider
organisations (PPOs) have failed to
deliver quality and cost containment than
that we are now introducing the radical
concept of accountability in medical
care. For two decades, we have designated
some providers as ‘preferred’ or ‘not
preferred’, not on the basis of quality care
but rather on the basis of volume. The
ACO model appears to be a significant
step away from the volume paradigm
toward the quality/value paradigm,
and I am a huge fan of that. For years,
I have negotiated claims at lacklustre
facilities and they have tried to get me to
pay absurd sums on their bills. In these
negotiations, I was essentially buying a
garbage car, but being told to pay the
price of a Ferrari because my client is
not a big buyer at their shop, which
is ridiculous, especially on emergency
claims. I think that traditional PPOs
will struggle in some areas, and will all
produce lower access Exclusive Providers
Networks or Organisations models to
improve their contracts and rates in cost
sensitive markets. But this will be only
a short-term fix as they would have to
reinvent their provider selection process
to be based on quality instead of the
steepness of a discount.
As we have shown, the PPO evolved
quickly, but a lack of cost controls, weak
steerage mechanisms, and poor payer/
provider accountability has contributed
to the commoditisation of the PPO
model. Until more satisfactory qualityversus-cost paradigm models become
the norm (like ACOs), payers must
be cautious with their dollars, and
may have to introduce more tangible
benefit limitations to their policies.
More often than not, the market is
producing contracts that add value for
providers, but not for PPO payers. If
left unchallenged, payers that rely only
on PPOs for savings will not remain
competitive in this market.
Gigi Galen Grobstein, President, Star Healthcare Network
“There is a dual issue with insurers not being more stringent in giving
a PPO/assistance company more accessibility to direct a patient to a
specific provider with a more generous discount. Without this steerage,
discounts will suffer due to lack of involvement on where the patient
ends up and therefore discounts will continue to not be as aggressive.”
Jason Davis is a research and development specialist for Global
Excel Management, Inc. (Global Excel) and is highly active
in Global Excel’s market analysis and business development.
He is an expert on cost containment and claims negotiation
strategies, and has authored numerous articles on these topics.
Mr Davis currently resides with his wife Kimberly and his two
children Aleithea and Kairus in Sherbrooke, Quebec, Canada.