California Hospitals Still Held Hostage to "Silent PPOs"
During my tenure as a former Editor of the HFMA Managed Care Forum Advisory Council's Newsletter, the issue of "Silent PPOs" surfaced frequently, without adequate resolution. At that time, it appeared to be especially prevalent in the Eastern and Southern states. It later surfaced extensively in Nevada. An Expert in dealing with “Silent PPO” problems in that state spoke to me about the commonality of this problem in most states. He also spoke to me in general terms, about how to resolve many of these problems. I wondered, “Why isn’t this also a California problem?”

Some California Experts in Managed Care billing and collections, have commented that the State Department of Managed Health Care has this Silent PPO issue “under control”, but they provided no details or support! Instead, I challenged that same “Silent PPO” Expert from Nevada to research the California law and talk with our Department of Managed Health Care – and then explain in simple terms to me why “Silent PPOs” in California were still a problem, how big and what kind.

I offer you this same challenge. After reading this Article—are you, as a California hospital, certain that you are not losing crucial revenue to Silent PPO activity?


     Efforts by the California Legislature to reign in “Silent PPO” practices have failed. A Silent PPO discount is an insurance practice where an insurer pays a hospital’s claim, one that was based on standard and customary charges, by applying a discounted rate to which it is not entitled. This surprise discount is unfair to hospitals because the insurer has not contracted with the hospital for the special rate and has not provided any patient direction to the hospital to justify use of the rate. These silent payors obtain the rate information from the original, contracting PPO or from an insurance broker, which has leased or subleased the PPO network and accompanying rate structure. Silent PPOs are skimming off hospital profits by the millions of dollars yearly.

     California hospitals are especially vulnerable to Silent PPO losses because the state is a popular travel destination. Travelers, who are out of network from their local health insurance plans, often require hospital services. The insurers playing the Silent PPO game are eager to minimize costs. They search their purchased discount PPO list for attractive rates, or contact a broker to lease a PPO network’s rate; and then apply the discount. Losses due to Silent PPO activity are particularly devastating to California hospitals because the state is the most popular state for domestic travel in the U.S. In 2002, 318 million domestic travelers visited the State. In addition, 4.5 million travelers were from overseas, 870,000 from Canada and 3 million from Mexico. Los Angeles County receives the most domestic tourism, with 49 million person trips.


An Attempt to Stop the Abuse      California healthcare providers have long sought a law with “real teeth” to stop this abusive practice. Senate Bill 559 was the product of hard work by over 30 interested parties, who, after many meetings, addressed virtually every objection raised by the insurance industry. It passed unanimously. SB 559 amends the Knox-Keene Health Care Service Plan of 1975 by adding Section 1395.6. It was initially a well-drafted law backed by good intentions. The original version provided the real teeth necessary to combat Silent PPOs. It is not surprising that the insurance lobby sought to change it, arguing that it would burden innocent payors and interfere with private contracts. And change it they did. Before it took effect, an insurer sponsored an amendment that, when passed, significantly altered the impact of the Act.

…But a Failure Nonetheless      Simply put, this law as it now stands is a failure. The private right for hospitals to seek financial penalties from insurers claiming unauthorized discounts has been removed. Further, the Departments of Insurance and Managed Health Care have not engaged in a single enforcement action. Even if they were to try to enforce the Act, it is so seriously flawed that it is likely to be found unconstitutional. This is because its definition of payors is vague, overlapping, ambiguous and befuddled. This law may actually make matters worse because it can instill a false sense of security.

     Three key deficiencies in the current act are worth noting. First, the Act does not apply to emergency care, a frequent source of unauthorized discounts. Second, required patient direction incentives are minimum. The Act requires only that payors provide their beneficiaries with provider lists “within a reasonable geographic range” of their home. Third, payors are required to describe their active encouragement only upon written request. This begs the question. The payor may be “Silent” and, thus, its identity unknown to the hospital.

     In addition, providers are unlikely to pursue the remedies under the Act because violation of the Knox-Keene Act is a crime. Providers are understandably reluctant to estrange their relationships with payors under these conditions. Further, California regulators in the Departments of Insurance, with oversight over insurers, and Managed Health Care, with oversight over HMO’s, are understandably more focused on practices that affect medical treatment. They have indicated to the authors that they regard Silent PPO’s to be a matter of private contractual dealings. Finally, they believe they largely lack jurisdiction over, and thus authority to regulate, most PPO networks.


Solving The Problem     In essence, the regulatory approach to protect hospitals from Silent PPO losses has failed in California. Yet there is one real solution that works in all states. It is effective contracting. California has since accepted this by enacting a subsequent section to the Knox-Keene Act which states that provider discounts are a matter of private contracting.