Hospital Reimbursement Solutions

Challenging Silent PPO Discounts
The term silent PPO refers to a practice in which an entity that is responsible for paying medical claims takes a discount to which it is not entitled. Somewhat of a misnomer, the term originated in the early 1990s when preferred provider organizations were usually involved. Today, the practice extends to many forms of networks, including managed care networks, insurance companies, and third-party administrators.

The term silent is used because the provider, when rendering services, either does not know that the payer will be taking a discount or is misled by the PPO that it is entitled to a discount when it is not. Only after the services have been rendered and the claim has been processed is the provider informed in the explanation of benefits form that a discount was taken. Even at this point, the payer that took the discount, or the network that arranged for it, usually continues to represent that the discount was appropriate because it was taken under a “valid agreement.”

Silent PPOs exist because some networks with direct, valid agreements with hospitals for negotiated rates “lease” or “rent” these rates to third parties or to third-party networks. In return, they receive a fee from the uncontracted payers. This increases the volume of claims the networks discount, thereby allowing them to represent to their clients and potential clients that they can save them substantial money. But these “savings” consist of unsuspecting providers’ lost revenue.

Hospital-Negotiated Rate Agreements
     Hospitals enter into agreements with entities responsible for paying for health benefits, or with networks that represent these payers. By means of these agreements, hospitals agree to provide services for negotiated rates that are less than billed charges for covered services, in exchange for the contracting party’s promise that it will require its constituency to encourage its members (patients) to use the hospital’s services.

This encouragement, called “direction” or “steerage,” is usually in the form of financial incentives to patients, such as lower copayments or deductibles. Patients are told that they will receive economic benefits by going to a preferred hospital. The entities represented by the contracting party are required to offer direction to the hospital by, for example, including the hospital’s name in their plan benefit documents, marketing materials, and telephone contacts as a “preferred” hospital.

The exchange of increased patient volume for lower rates is the very basis of the agreement for the hospital. Thus, entities that take discounts without such direction violate the hospital’s intent. Well-written agreements expressly provide that direction is the basis of this bargain, explain that it is a material term to the contact, and require that discounted rates be granted only where there has been prior patient direction. (The danger for hospitals that fail to require their negotiated rate agreements to expressly require prior patient direction is that a court may assume that the hospital intended to enter into a “nondirected PPO” agreement even if it did not.) Well-drafted contracts also carefully define payers and members to ensure that third parties that do not comply with this bargain pay full billed charges. The agreement should also include provisions for nonassignability, confidentiality, and timeliness of payment.

Contracting Parties
     To comprehend the complexity of silent PPO arrangements, it helps to understand the types of entities that contract with hospitals for lower rates. Sometimes these entities are directly responsible for paying for medical services, such as some health maintenance organizations, insurance companies, self-insured employers, or union trusts. But often they are intermediate entities, such as third-party administrators of insurance policies, insurance companies, or administrative service organizations that represent, for a fee, the entity that has ultimate payment responsibility. PPOs also negotiate rates with providers on behalf of employers or other payers. (Throughout this article, the contracting party will be referred to as a PPO, although actual situations may involve any of the entities described.)

The “Leasing” of Hospital Agreements
     Sometimes, a party to a negotiated rate agreement “leases” these discounted rates to a third party through a side agreement in return for a fee. Hospital agreements should expressly prohibit these side agreements and provide for significant penalties for breach of this provision. But even when clearly prohibited, leasing still occurs. To complicate the picture, sometimes the third party will sublease the discounted rates to a fourth party, and so on. In a properly drafted contract, these other entities are not “authorized payers” and are not entitled to take a discount.

From the hospital’s perspective, the problem is that the entity that takes the discount identifies a valid hospital agreement as the source of the discount. The hospital may be misled into believing that the paying entity is an authorized payer under the named contract. This could be prevented if hospitals would keep accurate, current lists of authorized payers entitled to access each contract.

In practice, however, this is difficult to do. Insurers are often reluctant to provide accurate payer lists, often citing confidentiality or marketing concerns. Furthermore, there may be several bona fide payer lists to any given contract, especially when the initial insurer or network represents another network of payers. Thus, both the pattern of contracting and subcontracting (the “chain of contracts”) and the identity of authorized payers may be difficult to sort out.

Silent PPO Brokers    
To further complicate the pattern, the market for such discounts is so profitable that a new type of entity has evolved: the “broker” of discounted rates. Brokers are intermediate parties that exist solely to provide discounted rate information to payers that otherwise are not entitled to take a discount.

Brokers contract with clients (networks having valid agreements with hospitals for negotiated rates) and with payers--for example, self-insured employers, or insurance/managed care networks providing claims processing or coverage to employer-sponsored plans. (Silent PPO practices are not limited to employer-based healthcare plans, however; government, individual, religious, and educational facility plans are also affected by, or engage in, the practice.) Brokers extract a fee each time a discounted rate is used by an unauthorized payer.

Brokers also may obtain confidential information about discounted rates under a valid negotiated rate agreement with a hospital by “reverse engineering” the PPO’s payment patterns. That is, they examine a particular PPO’s payment patterns and extrapolate the rate structure under the agreement. They then apply that rate to their own payments and claim entitlement to the rate under the identified contract.

Identifying a Silent PPO Discount
When a hospital receives the name of the PPO contract that was the source of the discount on the EOB, it examines that contract to determine whether the discount was properly calculated. Upon finding that it had an agreement with the PPO on the date of service and that the rate was properly calculated, a hospital often mistakenly determines that the discount is appropriate. If the hospital does not verify whether the payer or its representative is on the named PPO contract’s payer list, the hospital may unknowingly incur a loss.

Even when the hospital recognizes a silent PPO discount, its efforts to recover on the claim can be complicated by representations made by the payer (or its broker) that payment was made under a “valid agreement.” That representation is not technically false because payment was made pursuant to an agreement. But it is misleading because the agreement to which the payer refers is not with the hospital; rather, it is a third-party agreement between the broker and the original party to the hospital agreement that leased the rates.

In some cases, the payer or broker may represent that access was permitted because the third-party administrator or insurer is an affiliate of the contracting entity. Effective contracting restricts the definition of affiliate, requires frequent payer list updates, and also requires payers to fully comply with all contract terms, including direction, confidentiality, and nonassignability.

Recovery Options
     As long as the hospital can identify the various players in a particular silent PPO case and the negotiated rate agreement is sufficiently drafted, the hospital may consider bringing suit against the contracting party, the ultimate payer, and/or the broker. But a significant limiting consideration is whether federal or state law controls the case. (An exhaustive discussion of state and federal law pertaining to silent PPOs is beyond the scope of this article.) Federal law usually controls, because the most common type of health insurance in the United States is employer-sponsored, and such plans are governed by the Employment Retirement Income Security Act of 1974.

Federal Law Claims
    ERISA was enacted by Congress to administer health benefit plans sponsored by private employers. Section 502(a) of ERISA provides a federal cause of action for failure to pay claims as required by that statute and in accordance with the applicable ERISA plan. ERISA limits recovery to that which would have been available under the ERISA plan. Most state law claims are preempted; thus, federal courts, upon finding that a health benefit plan is controlled by ERISA, will dismiss state law claims, including contract and tort-based claims.

Changes to ERISA law adopted in 2003 allow certain state statutory insurance law claims to be heard by a federal court, but a strict test must be met for the court to hear these claims. Although ERISA permits recovery of some penalties, in the discretion of the judge, they pale in comparison to punitive damages available under tort law.

In an important silent PPO case decided under ERISA, a three-judge panel of the 11th Circuit found that an insurance company that had no agreement with the hospital, but claimed a reduction under a leased agreement, was not entitled to a discount (HCA Health Services of Georgia v. Employers Health Insurance Company, 240 F.2d 982 [N. Dist. Ga. 1988]).

State Law Claims
     In situations not governed by ERISA, state law claims are an excellent option. These theories include common-law claims such as breach of contract, breach of implied consent, and tort theories (with the potential of punitive damages) such as insurance bad faith, fraud, misrepresentation, and interference with business contracts. Statutory claims, which have been less successful, include false advertising or unfair trade practices.     

 Under a breach of contract claim, a lawsuit may be brought against the party to the hospital contract that has wrongfully “leased” out the rates under the contract (Mitzan v. Medview Services, Inc., 1999 WL 33105613 [Mass. Super. filed June 16, 1999; 1999 Mass. Super. LEXIS 279]). This assumes the hospital’s contract has been carefully constructed to protect the hospital’s rights against silent PPO practices. But courts prefer contract claims, as opposed to tort claims, in disputes between contracting parties where business entities are involved. And breach of contract claims can be brought only against the contracting party. This precludes bringing a breach of contract claim against third- party payers or brokers.

Alternately, a lawsuit may be brought against the insurance company, or the trust or third-party administrators that represent the ultimate payer, under the theory of breach of fiduciary duty. Claims against brokers, however, are more difficult to win. Unfair and deceptive trade practices act claims would seem to be implicated, but they have been brought without success. The state of silent PPO law remains young.

In addition, the hospital may sue a payer, such as a self-insured employer, for failure to pay full plan benefits when that payer has taken a silent PPO discount. This claim is available under both federal and state law.

State Statutes Specifically Directed Against Silent PPO Schemes
     At least two states have enacted statutes with intent to limit silent PPOs. The California legislature passed a bill “to protect healthcare providers from being forced to grant billing discounts, without their knowledge or consent, to insurance entities with which the provider has no direct relationship.” However, before the act went into effect, the California insurance lobby was successful in amending the statute. The amended version, now in effect (Section 1395.6 of the Knox-Keene Health Care Service Plan), so radically altered the original wording that the statute is barely comprehensible, making its enforcement unlikely. To compound this situation, the California Department of Insurance considers silent PPOs to be regulated by the California Department of Health Care--which considers silent PPO practices to be a matter of private contracting between business entities, as opposed to a matter affecting the public.

North Carolina also has enacted a statute against silent PPOs, which provides that it is an unfair business practice for insurers and service corporations to make an intentional representation to a healthcare provider claiming that it is entitled to a discount when it is not, or when it is entitled to a lesser discount.

Alternative Solutions
    Generally, hospitals prefer to maintain positive working relationships with their contracting parties and with payers because they are a vital source of referrals and revenue. Therefore, a hospital may be reluctant to file a lawsuit against a network that has violated its negotiated rate agreement. Instead, hospitals often opt to retrieve lost revenue caused by silent PPO activity by directly negotiating with insurers, third-party administrators, and employers.

It is also possible for the hospital to develop an “anti-silent PPO” strategy in its managed care contracting. PPOs and other payer entities can be helpful allies in thwarting inappropriate access to their contracts, if approached properly. Although such an effort can take several years to accomplish, appropriate contract language can be successfully negotiated.

Ultimately, educating hospital staff to recognize silent PPO patterns, and careful managed care contracting, can greatly reduce the chance of losses related to silent PPO practices.

 The hospital submits a claim for rendered services to a payer. However, that payer lacks status as a qualified payer because it is neither a party to a hospital contract nor listed as a payer under any other parties’ hospital contracts. In this circumstance, the payer is legally obligated to pay the hospital full billed charges.

Regardless, it seeks a discount. Usually, it will contact a broker dealing in silent PPO discounts. It may have an agreement already in place with one or more brokers, or it may seek one out. The broker has already contacted and entered into a subleasing agreement with a party (or that party’s “affiliate”) to a hospital-negotiated rate agreement. When the unqualified payer has access to rates under several contracts, it chooses and applies the best discount--that is, it “cherry picks” the most favorable rates.

Once a broker and discount are chosen, the payer pays the broker its fee and the broker provides the name of the contract to be accessed and the rate to apply. The broker then pays a fee to the entity that contracted with the hospital (the PPO, etc.) that allowed access to its rate structure. When the unauthorized payer makes its claims payment to the hospital, it identifies the contract that the hospital has with a direct party on its EOB or with its payment check.