Business & Health: When a PPO is silent - preferred provider organization - Column

When a PPO is silent - preferred provider organization - Column
Business & Health,  September, 1996  by Helen Lippman

The term "silent PPO" has been tossed around in health care circles for the last several years, mostly by the American Medical Association and the American Hospital Association. The use of the silent PPO technique is "a highly questionable means of obtaining discounts," one Congressman recently charged. And the Association of Managed Healthcare Organizations--the official voice of the PPO industry--this summer issued guidelines designed to keep its members from getting burned. To many purchasers of health care, though, the term and the controversy surrounding it remain unheard of or elusive.

That's not surprising, since it means different things to different people. To some, silent PPO is a benign reference to a "non-directed" PPO--one in which the contract between the organization and the providers says nothing about what the doctors get in return for joining a network and discounting their fees. To the AMA and the AHA, it describes the "billing schemes" brokers use to obtain "illegal discounts" for payers who aren't entitled to them. A better understanding of silent PPOs and their implications for purchasers calls for a closer look at how and why most preferred provider organizations are formed in the first place.

A bona fide PPO is an organization that contracts with providers to provide services for negotiated rates and fees. There's more to it than simply having a group of doctors come together and discount their prices, however. According to Douglas Widen, an attorney and editor of Health Care Innovations, a PPO selects a panel of providers based on a review of credentials and experience and ensures some measure of accountability. The organization also should have or be in the process of developing a system of utilization review.

After signing up the providers, a PPO in turn contracts with payers--typically, managed care organizations and perhaps some self-insured employers. In exchange for discounts on fees, the payer agrees to steer enrollees to the doctors in the network--the preferred providers--through financial incentives, lists and ID cards, for example. Providers object strenuously, however, when payers take advantage of the lower rates without signing a contract or offering any quid pro quo.

A typical scenario: An employee with indemnity or point-of-service coverage goes to the doctor or hospital of his choice, presents a membership card, pays any required copay and gets the necessary treatment. The provider then submits the bill to the insurer or TPA. And the payer sends a check for a discounted amount, say 75 percent of the bill--usually the same discount extended to enrollees in a PPO the doctor is a member of. In this case, though, the payer has not steered any patients (including the one in question) in the physician's direction-the very reason most doctors agree to discount their fees.

It's easy to see why providers are concerned, but are their complaints legitimate and the payers' attempts to home in on discounts unethical? Should employers care? In some cases, probably.

For starters, there's the question of fraud. But that depends on what's happening behind the scenes and the terms of the provider-PPO contract. In fact, many PPOs sell their list of providers to third party administrators for self-insured employers or to brokers that in turn sell the lists to payers. While that's often done without the knowledge of the doctors in the network, it only constitutes a breach of contract if the physician-PPO agreement explicitly prohibits it. Even then, the company whose employee may be an unwitting player has done nothing wrong.

By the same token, there is nothing to stop a third party payer from submitting only partial payment of a provider's bill. Indeed, a number of the Federal Employees Health Benefits Program (FEHBP) carriers appear to have used such discounting tactics, according to a letter from the Office of Personnel Management, which administers the program. The OPM has directed its indemnity insurers to "capture discounts from bills presented," and director James B. King confirmed that "Methods studied should include but not be limited to `silent' or `non-directed' preferred provider organizations." Daniel Moll, a senior policy director who works with Congressman John Mica (R-Fla.) on the Civil Service Subcommittee that oversees the FEHBP, sees it differently. In Moll's view, "The billing manipulation conducted by silent PPOs in the federal program borders on fraud."

Fraud may come into the picture when an insurer or TPA justifies a discounted payment by claiming a non-existent affiliation: Providers contend that payers often declare that the patient is a member of the legitimate PPO--in writing on the explanation of benefits or in response to a call from the provider questioning the reduced payment. Few hospitals or physicians' offices have the staff, time or information systems required to routinely check whether the information submitted with the payment matches what the patient presented at the time of service.

Although the OPM's position is that the courts are the proper arena to settle the controversy about silent PPOs, so far there has been no lawsuit in either the public or private sector. The AMA has long rumbled about a class-action suit against plans engaged in this practice, however, and has indicated that action is imminent. Some observers expect the Department of Justice and FTC to investigate as well.

Employers aren't likely to get drawn into any legal action, but involvement in unauthorized discounts, even through third party administrators, raises ethical issues. Health care attorneys advise companies to look closely at the business practices of any managed care organization, insurer or TPA they plan to work with--and to read the fine print in every contract. In some cases, employers or their workers could be getting ripped off, too. A company that shells out a lot of money so its employees can retain an indemnity plan with a full choice of providers, for instance, or a worker who pays more than her colleagues to get the benefits of a point-of-service plan, often has no idea that the health plan is paying her providers less than the authorized fees.

What's more, as corporate belt-tightening and discounting practices hit providers harder and harder, doctors and hospitals will be increasingly likely to run cross checks of their records and balance-bill their patients. When employees get asked to pay a portion of a bill that they thought their health plan would cover, they may get angry at their providers-and employers can expect to be the target of workers' outrage as well.


Guidelines, utilization review standards and financial incentives interfere with physicians' clinical decision-making, alleges a class-action suit recently filed in U.S. District Court in New Hampshire. The case--Drolet v. Healthsource Inc. and Healthsource New Hampshire-originated with a single enrollee's treatment problems. It has expanded into what D. Brian Hufford, a New York-based classaction attorney representing the plaintiffs, calls a "cutting edge" case, taking aim at the very principles that form the backbone of managed care.

Filed on behalf of Healthsource enrollees, the suit charges Healthsource with breach of ERISA duties and failure to disclose plan terms, conditions and practices. As a provider of health care through employee benefit plans, the complaint alleges: "Healthsource is a fiduciary under ERISA to plan participants and beneficiaries," with the fiduciary obligations of "good faith, fair dealing and loyalty, as well as the duty of candor and full and fair disclosure." It also alleges a conflict of interest for doctors and company personnel who own Healthsource stock, are involved in making key decisions about guidelines and treatment and retain the ability to terminate physicians without cause.

At presstime, while Healthsource awaited a response to its motion to dismiss this case, capitation was about to come under fire in Oklahoma, where pretrial hearings in a similar case--Gross v. Prudential Health Care Plan--were set to begin.

Attorneys for David Gross, a University of Oklahoma professor with spinal cord damage, charge that the HMO's financial incentives, including capitation, influenced physicians' decision to deny the plaintiff medically necessary care. The suit further alleges that Gross, who suffered from an undiagnosed disc infection, is left with permanent damage as a result. The HMO's failure to inform enrollees of its use of capitation and other profit-based bonuses, the attorneys charge, is a breach of contract and fiduciary duty.

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