The truth behind network discounts

Just like clockwork, another year passes and the rate of rising health care costs continues to be staggering. You’ve got to decide how to adjust to the financial realities of health care in 2024.

Do you tighten the corporate belt and absorb the higher payments? Raise premiums for employees? Redesign their benefits package to exclude expensive coverage? Or do you decide that the arrangement with your existing administrator has become untenable, and it’s time to look at the market?

Every year, countless self-insured employers will choose the latter option, hoping to benefit from market competition to get a more affordable benefits package that better meets the needs of their employees. Too often, employers will whittle the possibilities down and choose the administrator with the highest discount rate, because they think that’s what will be best for employees and for the employer.

The truth is that discounts don’t tell the whole story

First, administrators do not agree on the definition of “network discounts.”

Sometimes, a discount is what you’d expect – a discount off billed charges that participating providers will award to your employees. But often, there’s much more going on behind the scenes to arrive at the marketed network discount. The truth is, a higher discount often costs more for employers and the entire health care system.

Discounts often include claim denials and claim editing

Many administrators overstate their discounts by including claim denials and aggressive claim editing practices. While these practices serve a legitimate purpose to catch errors and prevent waste and abuse when used appropriately, if a carrier is too quick to deny claims or is overly aggressive in claim editing, health care costs increase because the provider will likely file an appeal, which will be overturned. In the meantime, the administrator claims a discount of 100% for the denied claim.

Egregious practice by administrators can cut into legitimate and necessary treatment, resulting in a terrible experience for your employees and an administrative headache for the Human Resources team.

To make matters worse, a recent study by The Commonwealth Fund points to administrative costs as the single most significant contributor (30%) to the reality that the United States spends twice as much per person on health care compared to peer nations. About half of these costs are activities related to eligibility, coding, submission, and rework, all of which inflate expenses for everyone – often without increasing value to anyone.

Repricing exercises are retrospective

The pricing exercise that has long governed the discounting model must keep up with the dramatic year-over-year increases the industry is now experiencing. Pricing has been retrospective, which is inappropriate in an age when future increases will most definitely exceed the past increases by double digits. For administrators to expect companies to have faith in retrospective pricing is disingenuous at best.

Discounts are typically aggregate numbers.

Even if administrators agreed on the term “network discounts,” the discounts are almost always aggregate and averaged discounts, utilizing the network administrators’ best contractual rates. This approach is inherently flawed for several reasons:

• Discounts vary by service. To begin with, a 40% discount rarely means that every service is discounted by 40%. Some services may barely be discounted at all, while others are discounted steeply – which is great only if your employees will be taking advantage of the latter services.
• Payment methodologies vary by administrator. There are many ways to pay for services. A flat discount, a fixed fee, a percentage of Medicare rates, or a daily rate are just a few. When each administrator utilizes a different payment method for the same service, a discount comparison is very challenging.
• Utilization patterns vary widely across employers. Utilization patterns cannot be simplified into averages because no workforce is the same as any other workforce.
• And finally, inconsistent fee schedules make discounts impossible to compare.

Finally, fee schedules are different between providers, so discounting doesn’t have an industry standard base line.

If a discount seems too good to be true, it probably is.

A large discount can be a red flag for subpar service and poor provider relationships. For an employer, this directly impacts your employees, creating the potential to steer top talent away due to dissatisfaction with their benefit plan.

A large discount could be hiding dissatisfied members and providers, and it could also reflect poor administration of claims or that the company doesn’t invest in staffing to manage claims properly and expeditiously. Poor administration generally creates a poor relationship with the plan providers, which can create stress and confusion for employees.

So are there any other options?

Ask about future increases

To course-correct the outdated retrospective pricing process, companies can ask administrators for their expectations for future increases as a point of comparison. While initially they may be unable or unwilling to make such prognostications, it would be a strong signal that companies have lost faith in the old model and are calling it out.

Use standard Medicare rates as a benchmark

One quick fix would be to adopt standard Medicare rates as a starting point for rate comparison rather than provider fee schedules or charge masters.

Savings would be expressed as a factor of Medicare rates (250% of Medicare, for example) rather than discounts on provider fees, necessitating a mind shift where a smaller percentage of Medicare is sought rather than a larger discount percentage off provider fees. Unfortunately, this approach has not yet gained significant traction.

Standardize fee schedules

Alternatively, standardizing the starting line (provider fee schedules or charge masters) would be helpful, but historically this has been too overwhelming because there are literally thousands of codes to compare, and providers and health systems have differing cost structures.

However, in the wake of landmark hospital pricing transparency rules and regulations, new services are using software to bring comparable pricing data to the industry. This option is certainly one to keep an eye on, as it will help reduce or eliminate biases that come from self-reported data.

What can employers do?

The current system is deeply entrenched, but that doesn’t mean employers are powerless; they can benefit from the macro trends already at work in health care, namely the momentum around cost and pricing transparency.

Employers have the power to demand clarity and change. “Confidentiality” and “proprietary information” are legal tactics that have long shielded the underbelly of health care costs and pricing, but those shields are showing early signs of eroding due to federal rules and regulations, such as gag clause prohibition. Furthermore, new rules require hospitals to list their standard charges for items and services publicly.

Finally, employers should seek the help of a trusted advisor who understands the challenges and can work through the “noise” to reach a level playing field in their analysis. Make sure the consultants work for you and are not biased by payment arrangements with the administrator directly.

Related: Let new business come to you: 10 add-on sales strategies for benefits pros

Know what to look for and what questions to ask.

A big part of the solution is for employers to advocate for themselves and probe for deeper information when comparing plans. This may include asking for administrator member and provider satisfaction scores. A low score can be an indicator of overly aggressive administration.

Valid questions to ask include what percentage of the discount comes from claim denials, the administrator’s expectations for future price increases, whether the analysis include final claims only, and how much of the discount comes from medical management or population health initiatives.

Even if you don’t get great answers to these questions (or any answers at all), when more brokers and employers regularly ask them, the truth will begin to emerge.

Hillary Galyean is the Chief Sales and Marketing Officer for First Choice Health