Insight, analysis & opinion from Joe Paduda

< Back to Home


Companies need strategies, Execs need success

And those two often don’t match up very well.

Example.  Work comp insurance companies benefit when medical and indemnity costs are lower than expected.  So, lower medical costs = better “outcome” for the company.

Many – if not most – managed care executives are evaluated in part based on “network penetration” and “discount below fee schedule”.  Thus, the more dollars that flow thru their network, and the deeper the discount those providers give the network, the “better” the executive’s performance is.

Superficially, this makes sense – more care thru lower cost providers equals lower medical cost, which benefits the insurance company.

“Superficially” being the key word.  Here’s the problem with this model.

Insurers contract with PPOs, which in turn contract with providers to deliver services at a discount. Most PPOs get paid a percentage of the savings that is delivered by that discount, typically 15 to 22 percent of the savings. So, the more the PPO ‘saves’ the more it makes. On the surface, this sounds good: the system rewards the PPO for saving money and does not pay it when it delivers no savings.

Under a percentage-of-savings arrangement, reducing total medical cost is ignored in favor of saving money on unit costs. The PPO gets paid for savings on individual bills. Therefore, the more services that are delivered and the more bills generated, the greater the ‘savings’ and the more money the PPO makes.

The system encourages over utilization because it is in the PPO’s best interest financially to have numerous providers generate lots of bills for lots of services. Also, the providers, squeezed by a per-unit fee schedule that is lower than fee schedule/Usual and Customary Rates (UCR), have a perverse incentive to make up for that discount by performing more services.

The fact is few carriers, TPAs, or employers have realized that per-bill ‘savings’ is the wrong way to assess a managed care program – or the executive running medical management. And unless senior management changes their evaluation methodology, their managed care departments will have no incentive to change their program to one that actually does reduce total costs.

This is by no means the only example out there; I’m quite sure you can come up with more than a couple off the top of your head.

What does this mean for you?

Take the time to understand  – really understand – what success is, and what drives success.  You may be unpleasantly surprised to learn your execs’ motivations are diabolically opposed to your company’s success.

12 thoughts on “Companies need strategies, Execs need success”

  1. Joe, you are a lonely voice on this issue. I just returned from WCI in Orlando. It was like someone hit a piñata, and a bunch of con artists, and rubes fell out.

  2. There are many of us out here measuring outcomes — not the alleged medical savings — with our clients. To echo Frank’s LoL! piñata comment above, you have to work hard to get thru all the ‘candy’ to find us – unfortunately many in our industry would rather eat candy… Your point here is exactly what has been driving the creation of our OBN’s over the past FIVE plus years — measuring providers on dozens of outcomes, and not a single one of the measurements is how many bills or alleged savings is achieved. Also, let’s not overlook one very guilty party in this alleged scheme…. it takes providers — doctors and hospitals — to start the whole process with “the more services that are delivered and the more bills generated”… THANKS for your continued passion for our industry…. and staying away from the political twists and rants today (:

  3. Joe , I am soooo glad you wrote this segment. As a worker’s comp medical provider for over twenty years, I have realized for some time this situation. The employers are essentially being led to believe that all medical providers are the same and thus better quality is provided by lowering our payments. The insurers keep the savings without any risk. Most employers are led to believe these silent ppo networks / rental networks save them money. They do not realize the saving is coming from reducing the medical providers. Because we will not allow these type of reductions we have been removed from panels and the employers think we are the bad guys. Senior network managers don’t want to change this practice. We get paid by state comp fee schedules and don’t ask for less. These types of medical comp cases can be some of the most difficult to treat. Quality of care does not equal lowest care with peer review, delays, low cost DME and Therapy providers. Thanks for this discussion , hope for more. The AMA published a paper on this subject The tangled web: the rental network PPO industry: Its very informative.

  4. Joe – you are, as usual, spot on.

    While a PPO or MCO has the potential to lower individual bill costs, the interests of a PPO/MCO, while not “bad.” are not always perfectly aligned with the ultimate payers. They have the incentive to at least not curtail the number of visits/treatments – doing so reduces their ability to make money.

    And, the reduction in reimbursement levels incent the medical providers to limit their access to those PPO/ MCO patients because they are paid less, and have additional communication hurdles to jump through.

    When we changed our model, we found far greater acceptance and access for our injured workers as patients, and significantly improved communication regarding administrative issues between us and the medical providers offices.

    Maybe this is a small market issue, more so than a large market issue, but it does point out that one model, does not fit all.

  5. Joe,
    You have scratched the surface of a fundamental issue that, as you point out, begs for an indepth, independent assessment. Thanks. It will take enlightened claims executives and honest managed care executives to accurately measure and report the total costs, and thus “true” savings of managed care. If one were to account for the frictional costs resulting from managed care services delivered piecemeal – especially those where fees are shared with the customer – a picture emerges where it may be more cost effective in total to eliminate the service altogether. An example is UR in those instances where the cost of what is being requested is de minimis compared to the cost of the UR intervention itself and any appeals process. The same can be said of those medical services that slip through causing more harm than good. There’s plenty of blame to go around. Nevertheless, as you point out, only a detailed look at the total up-front costs of the combined services plus the costs that are direct sequelae of those services, will yield even a glimpse at the true effectiveness of managed care.

  6. You have been correct to continue to highlight the problem of mis-aligned (read, perverse) financial incentives for a LONG time, Joe.

    The fact is that nothing is going to change until someone, probably from OUTSIDE of the WC industry, shows up with an entirely different value-based approach to claims and medical management. Tick tock…

    In the meantime, employers should wake up and recognize that when they pay fees on the flow, the money will go.

  7. Has anyone come up with a reliable way to measure outcomes? I wish we could but I’m a doubter.

  8. Solutions are readily available, but too many companies that sponsor events and buy trade show space are making too much money on the problem. Whose going to call out the biggest offenders? RIMS???

  9. The big case management companies are also in on this scam. It is a tremendous money maker and the companies are actually directing case managers to prolong the life of a case solely in the interest of the bottom line. If you have any interest in the view from an “old school” case manager, just ask!

    1. I assume that you are referring to NCM, no?

      Nurse case managers definitely have a place in the system…their value is particularly high when involved in complex cases.

      Unfortunately, case managers are often involved in tasks which do not require their expertise. Ask any nurse case manager whether they have been treated like an ‘assistant’ to the adjuster rather than solely as an expert on medical management. For example, should a nurse case manger be scheduling appointments or asking for visit notes? If that is what they are asked to do, is it an activity that is worthy of $110/hour? Any “old school” adjuster would say ‘no.’

      In the TPA world, NCM can be a tool for pushing admin costs off onto the claim expenses (ULAE to ALAE) Yet another example of misaligned incentives…

      1. It is worse than that….there are supervisors padding bills; treatment being intentionally prolonged so as to keep the case management file open; cases being billed as CAT cases when they are not; soooo much more…..and no one is interested in looking at case management bills much less questioning them.

Comments are closed.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



© Joe Paduda 2024. We encourage links to any material on this page. Fair use excerpts of material written by Joe Paduda may be used with attribution to Joe Paduda, Managed Care Matters.

Note: Some material on this page may be excerpted from other sources. In such cases, copyright is retained by the respective authors of those sources.