In follow up to part 1 of our answer to the question, To Network or not to Network, we will be diving into the second primary selling feature of networks in addition to access, which is the discount.
Anyone who has ever been involved in the process of shopping for an administrator for a self-funded medical plan knows that the number one item to review is the network discount being proposed. Commercial carriers and independent PPO networks compete on the size of their discount, promising plan sponsors greater savings through their network than the competition.
There are two major issues with this system however. First, it is incredibly challenging for employers to validate the claims made by the carriers. This is due to the fact that while “discount” is a relatively straight forward term, carriers define it differently in an effort to inflate the value they provide to the plan sponsor. For example, some carriers include items such as duplicate or ineligible claims that weren’t paid in their savings calculation. To me, I think getting credit for not doing something you shouldn’t be doing is a bit too far. I explain this to my children all of the time. Additionally, carriers/networks have differing levels of discount for facility and physician claims, and the definition of facility and physician claims vary from carrier to carrier. A facility claim for one is a physician claim for another, making a meaningful comparison very difficult to achieve. Compounding the issue is that the discounts vary from provider to provider making it next to impossible to project the actual savings a plan may realize through a particular network without also knowing exactly which claims are going to come from which providers.
As I stated previously, there are two major issues with the network discount model the the majority of plans use, and the second is going to make the first seem minor in comparison. While there are multiple different models networks use to achieve a discount, the majority are based on a percentage discount off of billed charges. When shopping for a plan administrator/network, this is the number that is thrown around all the time. “We have a 48% discount through our network!” Never mind that the 48% may include items like ineligible claims, the percentage sounds great. Employers and their advisors feel great about this, that they are getting a massive discount on the claims, and they quickly move on to talking about deductibles and co-pays. Here’s the issue, whatever the discount is, it is based upon billed charges.
Let’s unpack that term a little. Billed charges are the “retail charges” a provider submits to an insurance plan for payment. It is the astronomically high number you see on your Explanation of Benefits right before the “approved amount” which is the amount actually paid by the plan. The billed charges originate from a hospital database called the Charge Description Master or Charge Master, which lists every possible item or service a patient could be billed for. The prices listed on the charge master have no actual relation to cost, and are often many times higher. Additionally, the charge master is a living document that is updated regularly, in some cases as frequently as quarterly and at least annually. As you can imagine, rarely do the updates result in charges going down.
Let’s now think back to your employer sponsored plan that is getting that incredible discount off of billed charges. From my perspective, it doesn’t matter what percentage discount you are getting when the starting point is ratcheting up year over year over year. To add insult to injury, hospitals and carriers/networks actually have an incentive for the price to go up. For example, the Medical Loss Ratio, which was created by the Affordable Care Act, rewards carriers when claim costs go up by allowing them to charge higher and higher premium dollars.
In conclusion, employers should take a hard look at the value they are receiving from the provider networks that are associated with their health plan. Upon doing so, they may very well find that the two key selling features, access and discount, are actually contributing to the problem of rising costs instead of solving it.
In future blog posts we will dive into the various alternatives available to employers.
