The Dark Side of Leased PPO Networks

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September 18th, 2012
Categories: Insurance Industry

The Health Maintenance Organization Act of 1973 brought HMOs into place to help regulate medical costs by pre-approving medical procedures through insurance companies and paying capitation fees on an annual fixed basis regardless of the treatment provided.  There is wide agreement that HMOs were problematic for providers and patients, however they also initiated the foundation of Preferred Provider Organizations (PPOs).

Today, PPOs are the most common type of network-based managed care program.  Providers who contract with a PPO network offer a reduced fee schedule for their services in return for increased patient volume. Insurers using the network will steer patients to “in-network” providers by offering their members financial incentives.

PPO networks themselves can earn revenue by charging an access fee to insurance companies for use of their network.  According to some reports, nearly half of PPOs operating in the United States qualify as a leased PPO network. A leased PPO network provides access to a third party payer, such as insurance brokers, third party administrator, local/regional PPO or self-insured employer. Often, payers lease PPO networks to access providers in various geographic areas where they do not have an established network presence.

If the original intent of the PPO contract is maintained, a leased PPO can produce a win-win situation for the PPO and the provider by giving access to patients in an area that the payer does not have network coverage, and directing more patient volume to a physician for a discounted rate.  However, leased PPOs can also be manipulated to the disadvantage of providers. Aside from being unethical, some of these tactics are also illegal in many states. Their use can easily put health plan administrators and their clients at risk of legal and financial consequences along with resulting in balance billing to plan members.

Silent PPOs

A Silent PPO is an arrangement where on organization buys or uses a discounted rate for services from a health provider without the provider’s authorization.  The provider signs a contract giving a discount to certain payers, and that discount agreement is leased to affiliate payers of the PPO, granting access to the provider’s discounts to out of network payers.

Silent PPOs provide access to provider discounts after services are provided, evading the exchange of making patient referrals.  Silent PPOs also may not bind new, not contracted payers to the terms of the original agreement, such as timely pay, methods of payment accepted, etc.  The AMA estimates annual provider losses due to silent PPOs are between $750 million and $3 billion.

Cherry Picking

Providers often have contracts with multiple PPO networks with different pricing, relative to the benefits of contracting with each network.  Cherry Picking occurs when a payer leases multiple PPO networks to have access to the multiple rates a provider may have and then picks the lowest rate offered to apply to their claim, regardless of the PPO network identified on the patient's ID card.

Stacking PPOs

Stacking PPO networks happens when the payer contracts with a primary PPO, but does not honor its exclusivity, and contracts with several other PPOs in the same market to reduce out of network claims. This reduces the chances providers in PPOs of gaining a high volume of patients in their area since the payer has several PPO network options for their patients.

Protecting Your Practice

If used properly, leasing PPO networks can benefit the provider and the PPO network. Otherwise, when practices like the three above are used, providers can be seriously taken advantage of.  There are things providers can do to protect themselves and their business:

  1. Closely observe whom you contract with.
    Some entities (typically those who pay providers fees significantly higher than others) sole business is to make a profit off of the discount they have contracted with you through leasing.
  2. Closely review the terminology used in PPO network contracts.
    • The definitions of the payer, and its affiliates should be clear and concise, not vague.
    • Any affiliates should be defined/named in the agreement.
    • Specify the conditions under which an affiliate is able to access the rates.
    • Include clauses that require affiliates to conform to criteria of the original agreement or prohibit proprietary discount information to be accessed at all.
  3. Require that patients show an ID Card with the network they’re using at the time of service in order to receive the discounted rates.
  4. Check your state’s laws and regulations concerning leased PPO networks.
    • Oklahoma, California, Kentucky, Louisiana, North Carolina and Texas are examples of states that legally address leased PPO networks.

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One Comment

  • Spencer Boyer says:

    Good article. Good to see some practical tips from a PPO that help to protect providers in their contracting.