I missed Countdown with Keith Olbermann last night, so I was watching the midnight replay. Halfway through and, ironically, in the middle of a promo for Chris Matthews’ upcoming special about the Kennedy brothers, MSNBC broke in with the news of Senator Ted Kennedy’s death. That’s when I realized that now is the time for me to stand up, and see if my knowledge can somehow serve to demystify certain components of our existing health care system for some. Although I do appreciate their efforts, one of my many frustrations with regard to the reform efforts is watching politicians and pundits cover this topic. On the other hand, I cannot even imagine trying to watch this debate without having a foundational knowledge of the issues. So, I’ll start with a fairly basic presentation of what I know best, and that’s provider reimbursement.
I spent more than 15 years of my career at a huge not-for-profit health insurance company that does business under a well-known name, but in recent years, I found myself embarrassed to tell people where I worked, and more and more, I actually used the lesser-known corporate name. Disillusioned by my company’s response to last year’s elections, as well as its apparent unwillingness to step forward and be a leader for positive social change, I finally broke free earlier this year.
I don’t miss it.
Some of this might seem obvious to the savvy consumer, but I often find that others are daunted by the "black box" in which insurance companies operate, so I hope I can shed some light. Please jump right in with a comment if you have anything to add. Also, please note that every contract, benefit plan, and state might have exceptions. What I've described below are some common standards.
Provider Reimbursement Methods in Managed Care
An insurance company typically negotiates contracts with hospitals, physicians, etc., under which the payment terms are outlined. Usually, a contract contains a "fee schedule," essentially an agreed-upon set of prices that the insurer will pay for specific procedures. With hospitals, the pricing structure might be more complex, where services are bundled together based on, for example, the patient’s diagnosis, or the surgery that was performed. This way, the hospital is responsible for using resources wisely, as it will only receive a set amount for the admission. Other times, hospitals are paid on a per diem, an agreed-upon rate per day for inpatient cases. There are usually exceptions to these rules for extreme cases, to prevent the hospital from taking a huge financial loss, and the details of those exceptions are specified in the contract as well. All of these types of contracts are commonly called fee-for-service arrangements, because the provider is paid a fee for rendering services.
Another type of reimbursement is capitation, which is prevalent in some HMOs. In the simplest form of capitation, the insurance company pays a Primary Care Physician a fixed monthly rate for each member who has selected him/her as their PCP. The doctor does not bill the insurance company for treating his/her patients, because the fixed monthly per-member payment is considered payment-in-full, with the exception of any office visit copay obligation on the part of the patient. The physician keeps the capitation payment whether or not he/she see any patients. This is somewhat controversial, because it shifts the financial risk to the physician, and may be a disincentive to provide services. There are many variations on capitation, some of which can get fairly convoluted, particularly with regard to who bears the financial risk.
The above are examples of the types of contracts I've frequently encountered. There are variations on the above, and many other methods used throughout the industry. Another common approach is to pay a percentage above Medicare rates. The objective from an insurer's perspective is to have predictability with regard to medical expenses, and that means not paying the full billed charge or a percentage thereof, when it can be avoided. By paying specified fees, the insurer can maintain a certain amount of control over payments, rather than risking a deficit in their reserves by allowing providers to dictate payment rates via their billed charges.
Managed Care Networks
As an incentive to enter into a contractual agreement, the provider is placed in a network directory, so that managed care (PPO, HMO, etc.) members are encouraged to use those providers. Problems arise if the network becomes too large, as the incentives to be in the network begin to decline, and the health plan struggles to balance leverage and marketability. This tends to be an issue in competitive markets, where multiple insurers are fighting for the business, each vying to outdo the others’ networks.
Under the terms of the contract with the insurer, the provider is not allowed to "balance-bill" the patient for any portion of its charges beyond the contractual fees. So, if a hospital bills $10,000, and the contractual rate for the service is $7,000, the hospital cannot bill the patient for the other $3,000. The patient pays his/her copay, coinsurance, etc., based on the benefit structure, the insurer pays the remainder of the $7,000, and the claim is considered paid in full.
The member’s incentive to use a network provider is that he/she receives in-network benefits by going to one of these providers. Under some benefit plans, such as a PPO, the member retains the option to go out of network, but there are two disadvantages of doing this:
- Out of network benefits, such as a deductible, higher copays, etc. This is used as a disincentive to use non-network providers.
- Here’s the biggie – no protection from excessive fees charged by the provider. I'm using the term "excessive" from the insurer’s perspective. Some level of corruption exists in all industries, but I don’t believe for one minute that providers bill patients excessively as common practice.
In the out-of-network scenario, the insurer pays the provider whatever they think is a fair value for the services, and the provider is free to balance bill the patient for the difference. (In some instances, the insurer might have a non-managed-care contract with the provider, in which rates are specified and balance billing is still forbidden, but this is often not the case.) This is where it gets real sticky. Using the example above, if the patient gets a bill for that extra $3,000, it can certainly be enough to put him/her at odds with the insurance company, and in some cases, these balances can be enormous. I do not have nationwide experience, but I do know that many states are just now starting to introduce rules to protect the patients in these situations. Furthermore, some states are trying to impose standards on what is considered a reasonable fee, or at least put a stop to low-balling.
In January of this year, New York Attorney General Andrew Cuomo blew wide open an industry practice of underpaying physicians. UnitedHealth Group, via its subsidiary known as Ingenix, owned a database that was commonly used by insurers across the country to estimate fair physician fees for out-of-network payments. As it turned out, the database was flawed in many ways, including inconsistencies in data submissions, and the trimming of high "outliers." For more information on this investigation and its results, I recommend the following resources:
Cuomo’s Healthcare Industry Taskforce website
U.S. Senate Commerce Committee’s investigative reports, specifically the executive summary.
The Cuomo investigation sent the payer world into a real tizzy, as if Cuomo had stomped his foot right into the middle of their giant ant hill of an industry. Unfortunately, fire ants sting, and I can see how this might translate into increases in premiums and other out-of-pocket expenses such as coinsurance, if higher out-of-network reimbursements are anticipated. We’ll probably never know for sure.
Profits vs. Non-Profits
I’ll leave you with some questions that I cannot fully answer. Why can’t the non-profit health insurance companies keep their rates lower than the for-profit plans, and run them all out of business? Can’t those would-be profits be used to offset premiums and administrative fees? I could speculate, but for the sake of brevity, suffice it to say that I do not believe these companies are doing everything they can to keep costs under control. What infuriates me is that they would rather pay lobbyists to fight the reforms than spend those dollars on more constructive efforts to bring down costs for all of us. My former employer could have stepped up and collaborated on the reform efforts, and I urged them to do so. Instead, they appear to have jumped on the bandwagon with the for-profit plans, sacrificing any delineation they could otherwise have claimed.
Indeed, it was time to go.