By Bill Rusteberg
The cost of convenience is high in health care. This is evidenced through managed care plans offered by most employers today. Preferred Provider Organization (PPO) plans dominate the market, providing consumers with easy, stressless access to most health care givers within their respective communities.
There is a price to be paid for this convenience. The financial transaction to facilitate the premium to be charged is memorialized contractually between the managed care organization (PPO) and medical care givers. This collaborative effort benefits both parties in the form of higher reimbursement rates and fees to be earned off each health care episode.
With the advent of Cost Plus / Reference Based Pricing several years ago, the cost of convenience has become clearly evident and quantifiable.
Cost Plus / Reference Based Pricing plans eschew managed care contracts. Instead, these plans reimburse providers on a fair, reasonable and defensible basis using well established claim benchmarking such as Cost-to-Charge ratios as reported to CMS and Medicare reimbursement rates. These plans do not utilize a network of providers, allowing plan participants to go to any provider of choice to receive the same benefit. All providers are reimbursed equally and transparently.
The only problem with these plans is two-fold. First, will a provider accept the patient and second, will the provider accept the plan reimbursement or will balance billing become an issue?
It has been our experience most providers within a community will accept patients under these types of plans, will accept co-payments from plan members, will file claims on behalf of the member and cash the reimbursement checks. Balance billing can occur, but not as frequently as one would expect. In truth it is not anymore common as was the case under indemnity plans prevalent in the 1970’s and early 80’s.
It is clear Cost Plus / Reference Based Pricing Plans are not as convenient as PPO plans. After 35 years of managed care, providers and consumers are confronted with something new and strange. Change brings stress. Convenience suffers until the nuances of inconvenience are realized and adapted.
What is the cost of convenience of PPO plans compared to Cost Plus / Reference Based Pricing Plans? How much does this mean in terms of dollars spent from general assets of the employer?
A rule of thumb indicates 45% of a plan’s total spend is for hospital claims. In the case of a small 500 employee life group, total spend for the year equals $3.5 million. Approximately $1.6 million would represent hospital claims. Assuming the average PPO reimbursement for hospital claims is 275% of Medicare in this example, the Medicare benchmark rate would equal $581,818. A Cost Plus / Reference Based Pricing Plan paying 120% of Medicare would reimburse a total of $698,181. Therefore the Cost of Convenience under the PPO plan is $901,819.
In this example the Convenience Cost Factor of $901,819 equals $1,800 per employee.
In return for the guarantee of no balance billing, almost universal provider acceptance and hassel free claim filing, this employer pays almost $1 million, a 25% premium for convenience. In return there is little or no “noise” from employees and HR is happy with the status quo.
More employers are seeing the value of adding a little bit of inconvenience to their health plans these days. Employees are seeing the value too in the form of raises and/or improved benefits. Both are learning there is a better way to spend $1,800 per employee than gifting it through managed care contracts you can’t see nor audit.
Bill Rusteberg leads RiskManagers.US, a specialized benefits advisory firm in Brownsville, TX that, while not an insurance company, works directly with health entities, medical providers, and businesses to identify and develop cost effective benefits packages, emphasizing transparency and fairness in direct reimbursement compensation methods.