In the complex world of corporate health insurance, the Preferred Provider Organization (PPO) model is often hailed as the go-to solution for employers seeking to provide comprehensive healthcare benefits to their employees. With promises of nationwide access to top-tier hospitals and enticing “discounted” rates, it’s easy to see why PPOs are so widely adopted. However, beneath this appealing facade lies a troubling reality: PPO discounts are frequently inflated prices disguised as savings, leading employers to overpay for healthcare without even realizing it.

In this comprehensive blog post, we will delve into the intricacies of the PPO pricing model, exposing the mechanisms that perpetuate this illusion. We will also explore how employers can leverage Medicare pricing as a benchmark to uncover hidden costs and implement more effective strategies, such as direct contracting, to regain control over their health plans.

The Illusion of PPO Discounts

At the heart of the PPO model is the promise of discounted rates on medical services. Employers are often presented with reports showcasing impressive savings percentages, such as “We saved you 48% on claims through our PPO network.” However, this figure raises an important question: 48% off what?

The answer lies in the chargemaster, an internal price list maintained by hospitals that outlines the costs for every service, procedure, and supply item. Unfortunately, these chargemaster rates are not standardized or regulated, allowing hospitals to set their own prices arbitrarily. For instance, a CT scan might cost $4,000 at one facility but only $950 at another. This lack of consistency creates a scenario where the “discounts” offered by PPO networks are based on inflated prices that bear little resemblance to the actual cost of care.

As Rich Westermayer, founder of BeneSmart, points out, “When a PPO claims to save you 50%, they’re saving you off a number that was 300% too high to begin with.” This deceptive pricing strategy leads many employers to believe they are saving money when, in reality, they are still overpaying for healthcare services.

The Profit-Driven Incentive Structure

So why does this flawed PPO model continue to thrive? The answer lies in the profit-driven incentives that permeate the healthcare supply chain. Hospitals benefit from inflated chargemaster rates, allowing them to negotiate down to a price that still exceeds the true cost of care. PPO networks, in turn, profit from administrative fees based on the “savings” they negotiate, while brokers and third-party administrators (TPAs) may receive a percentage of total claims or savings.

This creates a system where everyone profits from the illusion of savings, except for the employers who are left to foot the bill. Many employers receive annual reports highlighting average network savings or total discounts negotiated, which can create a false sense of success. However, these reports often fail to provide the necessary context to evaluate the true value of the plan.

Using Medicare as a Benchmark

To break free from the cycle of overpayment, employers need a reliable benchmark to assess the true cost of care. This is where Medicare comes into play. Medicare rates are publicly available, grounded in data, and consistent across providers, making them an invaluable reference point for evaluating healthcare costs.

While it’s unrealistic to expect employer plans to pay Medicare rates, these benchmarks can help employers identify whether they are being charged reasonable prices for services. For example, if Medicare pays $6,500 for a knee replacement and your plan is billed $22,000 after a 45% discount, it’s clear that you are not saving money; you are paying significantly more than necessary.

By comparing actual claims data to Medicare benchmarks, employers can uncover areas of overspending and identify opportunities for cost savings. This process, known as claims benchmarking analysis, is a crucial first step in regaining control over health plan expenses.

The Advantages of Direct Contracting

Once employers have a clear understanding of their healthcare costs, the next step is to explore alternative contracting strategies that bypass the traditional PPO model. Direct contracting is one such strategy that empowers employers to negotiate rates and terms directly with hospitals, surgical centers, or provider groups.

The benefits of direct contracting include:

• Transparent Pricing: Employers can agree to clear, upfront prices for services, eliminating hidden markups and deceptive discounts.
• Aligned Incentives: By cutting out the middlemen who profit from confusion, employers can create a system where all parties are incentivized to deliver high-quality, cost-effective care.
• Benchmark-Driven Contracts: Many direct contracting arrangements are benchmarked to Medicare rates, ensuring that pricing remains grounded in reality.

As Rich emphasizes, “Direct contracting isn’t radical; it’s responsible and strategic. Your costs in equal your costs out, and it’s how you finally take the wheel back.” Smart employers are already leveraging this approach, contracting directly with surgical centers for bundled case rates or partnering with local health systems for predictable pricing.

Taking Action: Claims Benchmarking Analysis

If you’re ready to stop overpaying for healthcare and take control of your health plan, the first step is to conduct a comprehensive claims benchmarking analysis. This process involves a thorough examination of your actual claims data and a comparison to Medicare pricing benchmarks.

As Rich explains, “When we can perform a claims benchmarking analysis, it gives us a crystal clear view of where the plan is leaking dollars. For employers tired of guessing, that kind of visibility changes everything.” By identifying areas of overspending, this analysis lays the groundwork for a cost containment blueprint that can transform your health plan.

Ready to Transform Your Health Plan?

If you’re tired of the PPO pricing game and want to build a health plan that delivers true value, it’s time to schedule a call with the team at BeneSmart. They will guide you through the claims benchmarking process, help you uncover hidden opportunities for cost savings, and develop a customized strategy to put you back in control of your healthcare spending.

Don’t let the insurance industry continue to profit at your expense. Schedule your call today and embark on the journey toward a healthier, more cost-effective group health plan.

By taking these proactive steps, you can ensure that your health plan is not only sustainable but also aligned with the best interests of your employees and your bottom line.