The Current PPO “Discount” Model:

A PPO is a type of managed-care system in which health care providers, such as doctors and hospitals, have made an agreement with insurance companies and TPAs to offer substantially discounted fees to plan sponsors/covered members. The intent of the system has a kind of “you scratch my back and I’ll scratch yours” feel to it. In return for this discount, the provider/facility gets a much larger group of patients to bill and more predictable income. The goal is to have a trickle-down effect of savings for the end consumers. In respect to physician charges, this model works pretty much as intended but with Hospitals, the model is deeply flawed.

Billed Charges — PPO Discount = Net Payable

Billed Charges: Hospitals maintain a database commonly referred to as a “charge master” that list revenue codes & billed charges for every procedure taken place within that facility. This database is commonly updated on a monthly basis, with pricing being arbitrary and hidden from public eyes. The problem is hospitals are squeezed by cutbacks in Medicaid/Medicare so they make up for that income erosion by charging private payers more—referred to as “Cost Shifting”. This has been around for many years but the issue is escalating with the introduction of “ObamaCare” and the new low-cost exchange plans.

PPO Discount: The discount off billed charges is also an unknown element. This information is disclosed only within the PPO contract between the PPO and the Hospital (or on a claim after the fact). Additionally, PPOs will manipulate the discount numbers as well to make them particularly attractive to payers. Common techniques are to include the member’s deductible as part of the discount, in addition to disallowed charges (duplicate billing, etc). From a practical standpoint, this makes advertised PPO discounts unusable for pricing.

Net Payable: When the Carrier or TPA adjudicates a hospital claim, their primary goal is to ensure the claim is processed correctly, according to the terms of the Plan Document signed with the plan sponsor and with the PPO contract (signed between the TPA and the PPO). The problem – the net payable amount is not based on any transparent benchmark that can be used to deter- mine if this is a fair price (generally referred to as Usual and Customary, U&C, etc.). A benefits administrator can adjudicate a claim 100% accurately and still end up paying the facility an amount many times over cost.

It’s well documented the national average Charge to Cost ratio for hospitals is well over 300%. In the most recent annual report from National Nurses United (National Nurses United / IHSP Press Release, 01/06/2014), the following key findings were observed:

  • 14 U.S. hospitals charge more than $1,000 for every $100 of their total costs (a charge to cost ratio of 1,000 percent) topped by Meadowlands Hospital Medical Center in Secaucus, NJ which has a charge to cost ratio of 1,192 percent.
  • The 100 most expensive U.S. hospitals have a charge to cost ratio of 765 percent and higher – more than double the national average of 331 percent.
  • Despite enactment of the Affordable Care Act, hospital charges recorded their single biggest jump, a 22 percentile point increase from fiscal year 2010-2011 to fiscal year 2011-2012 in the past 16 years for which the IHSP has analyzed the data.
  • For-profit hospitals continue to dominate the list of those with the highest charges. For-profit corporations average charges of 503 percent of their costs, or $503 for every $100 of total costs. The current PPO model is broken and it’s time for a different approach.
Reference-Based Pricing (RBP):

The RBP model removes the PPO contract from the equation (facilities only) and eliminates cost shifting. It relies on established pricing benchmarks (such as Medicare Rates, hospitals costs reports, etc.) and then adds a reasonable profit margin for the facility.Cost of Services Rendered + Mark-up (profit margin) Net Payable (a true U&C)

This model “typically” cuts facility claims cost by 30-50% BEYOND what a traditional PPO discount offers. It provides a transparent, logical approach to paying facility charges. Our model differs from other Medicare-based reimbursement programs in that:

  1. This ERISA based approach is based on federal case law.
  2. It only applies to high-cost Facility charges – physicians will continue to be reimbursed under the traditional PPO model (to protect the covered member/physician relationship).
  3. It indemnifies plan sponsors and covered members from harm (this plan offers litigation defense and covers any losses or damages resulting from balance billing or penalties).
  4. It offers a Member Advocate service that assists covered members with better understanding their plan benefits and lowering their Out-of-Pocket (OOP) costs.


Q: If the savings are so great, why haven’t we heard more about RBP?

A: This approach challenges the status quo and people are resistant to change; both benefit professionals and plan sponsors alike. Additionally, it has taken years of experience to create a model that has been legally tested in court and scalable for growth. With Obama Care escalating the issue of cost shifting, this model is now reaching critical mass. It’s the only viable way of protecting employer-sponsored benefit plans.Q: So the covered members will no longer have a PPO network? What about their doctors?

A: Physician charges are not the problem; they generally trend along with inflation. For that reason, and for the relief of the covered member, this model maintains the traditional physician PPO network. However, for facility (Hospital) charges that make up the majority of plan costs, no hospital or facility restrictions are in place.Q: Won’t the plan sponsor or the covered member be balanced billed for the difference?

A: Hospitals do attempt to balance bill, which explains why a legal defense team is built into this model, should an employer or member receive a balance bill, the legal team will take ownership of the matter and issue a Cease & Desist Letter to the facility that will apply until the claim is settled.Q: What’s the downside to this model? What potential problems could occur?

A: Fear of change is the largest hurdle this program faces. Members and plan sponsors need to appreciate the goal of the pro- gram and how the model works to protect them. If they receive a balance bill, they should immediately contact the member advocate service and the legal defense team will take it from there. To help educate them on this process, this model includes a member engagement process that handles this process wonderfully.