Generally speaking, insurance represents an indemnity arrangement.  What does this mean?  Insurance compensates an insured for a loss with the fair market value of that loss.  In many cases, that loss can be damage to or theft of personal property - from a car to a home.  In our society, the ease with which the value of the loss is determined depends on how easily that property can be replaced. 

Health insurance is so very different. 

First; there is assignment of benefits.  Imagine if your $20,000.00 sedan were totaled in a car accident.  You walk into a luxury car dealership, hand over your auto-insurance ID card (complete with a network logo), and are told that you need an $80,000.00 automobile.  Great news!  Your network secured a 10% discount, so the price is now only $72,000.00.  Is it more car than you need?  Sure.  Is the replacement worth more than the value of your loss?  Clearly.  The consumer and payer are different entities, however, and both rely on the retailer to determine what is "necessary."  The consumer is the one most able to assess the situation, but is not incentivized to ask questions.  Their car insurance, after all, receives and pays the bill directly thanks to an assignment of benefits.  You (the insured) never see the bill, so why should you care?  Upgrade the surround sound system while you're at it; it's paid for!

Second; there is no transparency.  Upon the destruction of your $20,000.00 sedan, and visit to the dealership, the dealer insisted that you need the luxury sedan.  You need the plush leather upholstery and moon roof.  Who are you to question them?  They're the experts.  Maybe it is necessary; maybe your needs have changed.  Maybe the dealer (aka provider) sees this as an opportunity to secure more funds.  Maybe the dealer (aka provider) is worried about missing a need, and later being accused of malpractice.  Regardless, you likely ended up with more car than you had prior to the accident.  How much, you wonder, will this cost?  If you dare to ask the dealer what the car costs, you'll likely be told, "Only $500.00 (your deductible) and a mere $30.00 co-pay.  What a deal!"  How much - however - will the ultimate payer spend on the car?  They can't tell you until you buy it; it depends on which dealership you go to (despite the fact that the car is the same); and the discount is adjusted based on who your insurance carrier is.

Third; there is no consistency.  Last year, your cousin in Iowa totaled his $20,000.00 sedan, walked into a dealership, and drove away in a lovely new luxury sedan.  Upon the destruction of your $20,000.00 sedan in New York, and a visit to the best New York dealership, you drove away in the same model.  Little did you know that while your cousin's auto-insurance carrier paid $50,000.00 for his sedan, your carrier paid $72,000.00 for the same car.  You didn't even get an extra cup-holder! 

You and I appreciate that these things don't happen in the world of auto-insurance.  Why?  Because you - the insured - receive compensation from your insurance carrier, and are then left alone to make your own decisions as a consumer.  The market for cars, bikes, and even homes has evolved around that fact - the buyer is the payer.  Regardless of whether it's your money, insurance money, or your rich uncle's gift to you; you - the consumer - gain and lose based on your decisions.  If the purchase is insured, the contract exists between the carrier and you.  The contract obligates the carrier to pay you a sum of money equal in value to your loss.  The car that was totaled was worth $20,000.00?  You get $20,000.00.  What you do with the money is up to you.  The applicable industry molded itself to that fact. 

Now that you have $20,000.00 in your pocket, will you buy a luxury sedan?  Maybe.  But that decision is one for you to make.  Chances are, you'll buy a $20,000.00 sedan.  Furthermore, the dealerships in your area probably want that $20,000.00 to travel from your pocket to their pocket, so they take steps to proactively cut costs, innovate, and do whatever they can to offer the most for the least... to beat the competition and earn your business.  If two dealerships offer the same car - one for $72,000.00 and the other for $50,000.00 - no one is paying $72,000.00; and that dealer can't feed himself or his family.

Great!  Let's eliminate assignment of benefits, pay the insured directly, and force providers to compete for business; (insert laugh track here).  No matter how badly we wish it were true, buying cars and bikes and houses is different from buying healthcare.  Due to the uncertain nature of the care itself, it's impossible for the provider to say - with certainty - what the cost will be.  You can't predict what you need, you don't always have time to "shop around," and every customer's needs are different.  Unlike a car off a lot, your surgery is one of a kind.  Plus, in some fields of medicine providers of care are far and few between, resulting in regionalized monopolization of the market. 

Regarding "price variance," in an attempt to address some of these issues, health benefit plan sponsors and claims processors ("plans") are trying to tie down the wild variance in cost by tethering charges to a fee schedule.  The maximum payable rates are determined by the plan using a set of parameters, including (but not limited to) the cost to the provider, MSRP, average wholesale prices, the charges the provider usually submits, the amount the provider usually receives, charges usually submitted by similar providers for similar care, the amount similar providers usually receive for providing similar care, and - of course - Medicare payable rates set by CMS.  Most plans agree that, upon taking all of these elements into consideration, the Medicare rates are a bit thin.  As a result, they end up offering providers a certain amount above and beyond Medicare rates.  The goal is to set a baseline price index that can be applied to all providers, tame the variance, and offer - as addressed earlier - fair market compensation to remedy an insured loss.

Imagine you own and operate an ice cream parlor.  Your flavors are limitless; your cones without equal.  How would you react when a customer ignores your prices, and offers you payment equal to an amount other vendors accept?  Worse; they already entered your establishment, indicated they'd pay your fee, consumed your ice cream, and only now want to dicker the terms of said exchange.  While this is hardly a perfect comparison, it does reflect the knee-jerk emotional reaction many providers have had to such fee schedule based payments. 

This type of arrangement will not work as long as emotion comes into play.  It is further hindered by a complete lack of understanding.  The health care payer system has been discount driven for so long; people can't shift their focus from it.  The problem with discounts is that by increasing the amount charged, the discount can always be nullified.  A 20% discount can be voided by an increase in the actual fee.  Without a market-wide fixed price, from which discounts can be taken, there is no way to truly apply a value to said discount.

If a lesser amount is paid, and no deal is in place ahead of time, the provider will ultimately balance bill the patient for the difference.  The only way to prevent a provider from billing a patient for the difference between an amount charged and an amount paid (aka "balance billing") is: (1) pay the remainder on the patient's behalf, or (2) agree via contract - prior to payment - on a reduced amount the provider will accept as payment in full.  The second option (contract) is what preferred provider organization (PPO) networks strive to do.  They focus on discounts, however, rather than fixed-point fee schedules - and thus (for the reasons shared above) - many payers are disenchanted with the approach.

Absent a contract, payers can attempt to disincentivize providers from balance billing (by revoking assignment of benefits and paying patients directly, steering patients to other facilities, and leaking stories of the facility's abuses to the press), but when push comes to shove, disincentives are not prohibitions.  Because there is no guaranteed way to prevent balance billing, many payers are loathe to implement such a reference based pricing methodology, and resort to the network contracts that - albeit expensive - also provide comfort and security.

For this reason, we are now seeing many benefit plans consider implementation of a reference based price fee schedule for all claims, however, they also explicitly state that the plan will pay "negotiated rates" above all else.  They subsequently create a narrow network including only a few providers willing to accept payments only slightly greater than that allowed by the fee schedule, in exchange for prompt payment, steerage, and other non-monetary consideration from the plan.  As a result, a number of firms are popping up who specialize in negotiations with providers, whose services are now being deemed to be valuable additions to reference based pricing programs.

Taking it further, some vendors promise to protect the patient from balance billing.  Some have argued that a vendor cannot truly function as a legal advocate of a patient without considering the filing of a claim against the plan, and thus, they cannot both be the patient's counsel and work for the plan without running head-first into a conflict of interest.  Regardless, whether you are advising the patient (but leaving ultimate responsibility to deal with the balance billing in their hands), negotiating on the patient's behalf but with the plan's money, or simply paying the balance on a case by case basis; you are executing the plan's will on the plan's behalf, with the patient being a third party beneficiary.  In any case, the patient is still being balance billed.  Having a system in place to deal with it is not the same as preventing it.  For many, anything but a 100% guarantee that balance billing will not occur is not good enough.  For them, reference based pricing is impossible.

The IRS' §501(r) is one of many supposed "solutions," for balance billing however, upon closer inspection you will find that it merely requires providers to offer financial aid to self payers, limits how much providers can demand of certain individuals entitled to aid, and only applies to §501(c)(3) organizations.  Many providers argue that even if the health plan pays less than the full charges, or pays the patient directly, that patient isn't a self-payer... and thus §501(r) doesn't apply. 

In isolated instances, the law does indeed state that if a provider receives payment equal to or beyond a fixed point, they cannot demand more - from anyone; (see dialysis, end stage renal disease patients, and the Medicare Secondary Payer Act for details).  Unless and until this type of cap is placed on payments across the board, however, benefit plan sponsors, administrators, and employers - at first enchanted by the possible savings - will slowly but surely shy away from this methodology as their participants are balance billed. 

Many entities are now also offering (or tossing around the idea of) taking over the plan administrator's fiduciary duty as it relates to these reduced claim payment decisions.  It is important that everyone understand and appreciate the difference between adopting a fiduciary role and protecting a patient from balance billing.

A fiduciary, as defined by the Employee Retirement Income Security Act of 1974 ("ERISA"), is obligated to administer the applicable benefit plan in accordance with that plan's terms, pay claims appropriately, and without any arbitrariness or capriciousness.  A fiduciary must answer to its plan participants, defend its actions, and make amends if and when it strays from those duties.  Thus - so long as a plan is bulwarked by strong plan document language, provides ample notice to individuals via ID card, EOB, and SPD provisions, and other preemptive action - it would be highly unlikely that a payer will be deemed to have violated its fiduciary duty by paying claims based on a fee schedule; even if the payment is less than the provider's charged amount, and even if the patient is being balance billed.  As long as you obey the plan terms, you don't violate your fiduciary duty.  Thus, adoption of the fiduciary mantle merely means that a re-pricing vendor is willing to put its money where its mouth is, pay claims in accordance with the terms it has had you insert into the document, apply its data and defend its decisions.  It has nothing to do, however, with the provider's subsequent right to balance bill the patient for the amounts the plan (rightfully) need not pay.

The bottom line here is that balance billing and fiduciary defense actually feed into each other.  Consider this...  If a plan could not defend its pricing, the plan - and not the patient - would be called upon to pay the provider an additional amount.  Thus, the more confident I am to take on the fiduciary mantle and defend the plan's payment (knowing that nothing will force the plan to pay another cent) - the more likely it is that the underpaid provider will need to resort to balance billing.

A final important thing to consider is how this all impacts stop-loss.  Stop-loss carriers are thrilled to witness efforts on the part of payers to reduce their expenditures.  The less payers pay; the less likely they are to exceed their deductibles and submit claims for reimbursement to stop-loss.  Unfortunately, due to the uncertainties described here and elsewhere, and a lack of historical data, stop-loss carriers are having a hard time determining the true savings plans will enjoy using such methodologies, and in turn, are having a tough time calculating discounts they can offer when underwriting coverage for such benefit plans.

An issue that comes up, after such a plan is adopted and reinsured, often has to do with negotiated payments.  Some plans restrict payment to a fixed percentage of Medicare.  Later, in an effort to cease balance billing of a participant by a provider, the benefit plan pays an additional amount to the provider, beyond said percentage of Medicare.  Sadly, the stop-loss carrier - who explicitly protects the plan and its terms - deems the additional negotiated payment as having exceeded the allowable amount, and thus, being excluded from coverage by the stop-loss carrier.

In addition, what happens if negotiations with a balance billing provider take so long, a negotiated payment is eventually made (to cease balance billing) after the applicable stop-loss policy expires?  This is yet another payment the plan may make, outside the scope of protection offered by the stop-loss carrier.

Stop-loss carriers appear to be dealing with these issues in two ways.  Some carriers will assess a plan document that generally limits coverage to 140% of Medicare rates, underwrite the program assuming that the plan will actually pay an average of 180% Medicare (or some other inflated amount), and quote a fee based on this assessment.  Other carriers underwrite based strictly on the plan terms - in our example, 140% Medicare - but also provide such a competitively low rate, the plan sponsor is willing to sign on, knowing that additional negotiated amounts are entirely on them to pay.  In these instances, the savings from the bargain stop-loss fee is enough to make up for the occasional negotiated amount paid outside the terms of the plan document.

For the reasons shared above, the rationale behind industry efforts to define fair market values, set fixed prices, and work with reference based fee schedules is noble, honest, responsible and common sensical.  Unfortunately, we cannot force the providers to accept these payments as payment in full.  While efforts to disincentivize balance billing are ongoing and legal arguments have been made to suggest that providers should not be able to demand more than a reasonable profit, nothing concrete has been accepted nationwide which protects patients - absolutely - from balance billing after their plan pays less than the provider's billed amount.

This is what we're seeing in the industry today; and this is why providers will continue to balance bill.  Providers do not balance bill to obtain additional funds.  Providers balance bill to disincentivize plans from using fixed price, reference based fee schedules.  To date, it is a winning strategy.  It has become increasingly clear, therefore, that the only reference based price fee schedule programs left standing are those that belong to sponsors that are either willing to have their participants be balance billed, are willing to pay fees to organizations that will "deal" with the balance billing, or are willing to negotiate and pay additional amounts to providers - on a case by case basis.  In all three instances, most benefit plans are seeing savings over their past network dependent structures.  The question for most, however, is whether the savings are enough to counter the headaches suffered along the way.