Combating silent PPOs - preferred provider organizations

Healthcare Financial Management, Feb, 1998 by Judith E. Belt, J. Bruce Ryan

The term "silent PPO" refers to contracting entities that sell

access to negotiated provider discounts to parties not included in the

negotiated contract after services are provided to individuals covered by

the nonrelated parties' policies. Silent PPOs are alternatively known as

blind PPOs, discounted indemnity plans, nondirected PPOs, and wraparound

PPOs. Services provided by silent PPOs also have been labeled as secondary

market in contracted rates or nondisclosed discounting. In essence, silent

PPOs sell negotiated discounts in a secondary market.

The following example demonstrates the mechanics of a silent PPO. A patient

covered by an indemnity contract that allows access to any provider receives

treatment at Provider A. Provider A sends a bill in the amount of $10,000 to

the patient's indemnity insurer. The insurer then contacts a PPO,

third-party administrator, or discount broker that has access to a list of

contracting organizations with discounted arrangements with Provider A. The

insurer remits a discounted payment to Provider A and references the

specific PPO discount on its explanation of benefits (in this example, the

discount is assumed to be 30 percent). Provider A receives a payment of

$7,000 (the $10,000 billed for the patient less the 30 percent PPO

discount), $2,000 of which is paid by the patient as a coinsurance payment,

and $5,000 of which the insurer pays. The insurer pays an access fee to the

PPO, ordinarily a percentage of the savings. An access fee of 40 percent

would result in a payment of $1,200 to the PPO and an $1,800 cash savings to

the insurer.

One national insurer estimates its savings attributable to the use of silent

PPOs to be in excess of $1 million per year. The U.S. Office of Personnel

Management actively encourages all of its carriers to use or at least

consider the use of silent PPOs.(a)

Opinions vary as to the ethics of using silent PPOs. Since silent PPOs are

not prohibited by law per se, depending on the specific language of the

contract, it is incumbent on healthcare financial managers to protect their

organizations from associated potential problems. A two-pronged approach to

combating silent PPOs - prevention and detection - is advisable.

Prevention

Before entering into negotiations with a PPO, several questions should be

asked.

Is the PPO willing to include language in the contract requiring that all

clients who have access to the discounts have a contract with the PPO?

Patients should have minimum financial incentives for using a preferred

provider since financial incentives are needed to influence behavior of

providers and patients within the system. Lack of such incentives could

indicate a different focus (ie, brokering in the secondary market).

Will the PPO guarantee that its logo will be present on the patient's

insurance card? Such a guarantee ensures that the patient's insurer has a

standing relationship with the PPO. Without such a guarantee, the PPO is

relatively free to broker its discounts.

Will the PPO contractually agree to limit the number of providers in its

network? From a business perspective, it is desirable for the PPO to have

such a limit. Discounts should be derived on the basis of an expected level

of utilization; limiting the number of providers increases the likelihood of

achieving those levels.

Is the PPO willing to require that all of its clients use its network

exclusively in a geographic area? If an employer has contracted with

overlapping PPOs, a potential for abuse exists.

If these questions are not addressed satisfactorily (or at least to the

point of understanding the PPO's position with respect to these key issues),

it may not be appropriate to pursue contract negotiations.

Several key terms should be included in the PPO contract to prevent

potential adverse activities of silent PPOs:

Carefully define who the payer is. Often the term "payer" is defined so

ambiguously that any third party can qualify as a payer. The term should be

sufficiently focused so no abusive interpretation occurs.

Specify the required components of the agreement between the PPO and payer

clients. It is important that the payer client should be required to

implement an explicit minimum level of patient financial incentives to use

system providers and specify exclusive use of the network in a defined

geographic area.

Make the negotiated discount contingent on the presence of the PPO's logo on

the patient ID card. This provision will help registration personnel verify

that the payer is a network member before service is provided.

Reserve the right to terminate the contract on a payer-specific level. Many

contracts allow PPOs to add participating payers in new contractual

arrangements at their own discretion. This adds unknown risks for which

providers are not compensated.

Limit the network size and build in financial penalties for increasing the

network size. Most providers cannot afford to assume unknown risks of

altering the size of the network.

Attach payer client list(s) to the contract and reserve the right to approve

any additions. These lists can protect providers against unknown and