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Comp networks and hospital costs

A few weeks ago I wrote about the big profits hospitals get from workers comp, and closed with the observation that comp payers are overpaying hospitals. The question is why?
Glad you asked.
Since OUCH (predecessor organization to First Health, now Coventry) first started the work comp network business in a major way (although AIG’s managed care sub had one in the DC area in the mid-eighties, OUCH’s entry really got things going in the late eighties) the business has exploded, with pretty much every work comp payer using a PPO nowadays. The idea is payers get to reduce their expenses and only pay the PPO for ‘savings’.
So, are networks actually saving medical dollars?
Lets run the numbers. National PPO penetration averages around 58-62%, with wide variations among the states (NJ and FL are up above 90% with NY down below 45%). Savings (below FS or U&C but not net of PPO fees) runs about 10-12%, and PPOs charge from 16-23% to their ‘retail’ customers.
Total work comp medical spend this year will be about $32 billion. PPOs are ‘saving’ about $2.4 billion and getting paid about $480 million for that service.
But medical costs in comp are still going up faster than group health medical inflation, and considerably faster than the medical CPI. The biggest contributor to that inflation is facility costs.
According to the latest stats from NCCI, comp medical trend was 6.0% in 2007, 8.6% in 2006, and 6.2% in 2004. By way of comparison, the CPI was 4.4% in ’07, 4% in ’06, and 4.4% in ’05. Anecdotal information from several payers indicates trend is heading up in 2008, with facility costs particularly problematic. And that anecdotal information is backed up by national figures, which indicate facility costs are the fastest growing component of the medical CPI at an annual rate of 4.8%.
In contrast, drugs and supplies were up 0.1 percent in June after dropping 0.7 percent in May. Professional services increased 0.3 percent in June after a 0.7 percent increase in May.
Facility costs in workers comp make up between 35% to 55% of total medical expense (depending on the state) – a pretty significant chunk. As they continue to rise faster than other sectors, that ‘share’ will also rise, making facility costs increasingly significant.
Why aren’t networks able to deliver better results for facilities? Market share. Workers comp makes up less than 2% of total medical costs in the US. When a workers comp network calls on a hospital, the red carpet isn’t exactly rolled out – the managed care contracting department is pretty uninterested in offering a deal to a network that might deliver one percent of their total revenue. While workers comp can be very profitable for hospitals, most facilities look at the revenue numbers and set priorities accordingly.
This isn’t going to change – work comp network deals (with a few minor exceptions) are specific to workers comp. A PPO owned by a group health company may try to leverage the group business when negotiating with a hospital, but get real – the group contract is way more important to the insurer/network than work comp, so when push comes to shove during the contract negotiation process, work comp discounts will be given up to get a better group health discount.
Although there is consolidation going on as one would expect in what is a mature market, there is little in the way of innovation among the larger generalist network vendors. Even though their results are declining, the big PPOs have nothing to gain from innovation, and a half-billion dollars to lose.
What does this mean for you?
Until payers decide they are sick of being pushed around by networks producing increasingly crappy results, this isn’t going to change.

6 thoughts on “Comp networks and hospital costs”

  1. A further point to support your claim that hospitals aren’t interested in providing deep discounts to workers’ comp networks: Most of the work comp dollars a hospital sees come through the door of their ER. When there is a catastrophic accident, the ambulance doesn’t ask which hospital is in the PPO…they go to the nearest hospital.

  2. Your article is all wrong.
    Discounts are driven by the climate of hospitals and healthcare relationships in that particular state. It is clear that most hospitals are held hostage by the monoply that the healthcare system is creating in our country and the number of lives they drive to a group of facilities. If you want PPO’s to change and have a bigger impact on the facility reductions you must go to the more regional PPO’s who can dominate a sector or region and do a great job for that WC insurer in that region.(like the healthcare guys do). There is no national healthcare provider! The problem with that is procurement from the WC insurer is becoming national and unless you can show national coverage the regional players don’t get a shot. That perpetuates the First Health kind of relationship which creates the diluted discounts and increases the cost to the insurer because there is a middle man (First Health).
    So if insurers want better discounts without the middle man costs they need to be willing to spend some time and money for creative interfaces and work more regionally on this PPO business.

  3. We know the “savings” from PPO’s is an illusion. Providers pick up the slack through utilization and protracted durations. Payers may well end up paying more because they haven’t made an adequate push for outcome based credentialed networks.

  4. I am curious, Mr. Paduda, whether your estimates of PPO savings take into account the extraordinary costs faced by the payors for balance billing. In California alone the existing liens seeking reimbursement for services billed above fee schedule has long been out of control, made the system bog down, and generates a very large percentage of the appearances before the WCAB, driving up allocated costs. Many of these balance billing demands are entirely unwarranted and represent legalized extortion, allowing bill bundlers to buy bills at a steep discount from contracted providers then seek leverage the cost of litigation to obtain settlements above the contracted rate. The complexity of the contract structure extending from the provider to the bundler to the bill review reseller makes it very difficult to sustain the discount at litigation, particularly as each party asserts that the contract which it signed is proprietary. As you know, the issue of so-called “Ghost PPO” agreements is the subject of much legislative attention nationwide. My sense is that no statistics exist that adequately address the costs associated with these balance bills and their administration. What are your experiences in this regard?

  5. Yuo should as well credit the hospital community as being more sophisticated at contract negotiation.
    Also, I will that Ted Penny would explain better the phenomenon of bill bundlers. Who are these people? Why refer to “balance billing”?

  6. Petet, I used the term bill bundlers to describe the businesses who buy the right to access and seek payment for bills that have already been submitted for payment and that have received payment at a discounted rate. Since receiving a payment is not dispositive of the issue whether the payment is correct, bundlers buy great numbers of bills and assert that the provider was entitled to receive more than was paid. This claim of entitlement to what is the balance of the retail bill after payment of the contract rate is what I term ballance billing.
    Hope that this clarifies my comment.

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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.



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