Most if not all medical third-party administrators (TPAs) use “shared savings” programs to reduce the cost of non-network claims.
In the absence of a shared savings program, plans pay billed charges without any discounts after members pay the higher non-network copay/coinsurance. But with shared savings programs, TPAs use secondary (aka “blind”) networks, or negotiate directly with providers for discounts. And in return for their efforts, TPAs usually keep 25% to 35% of the savings. Are you following?
Such programs have grown over the last 10 to 20 years, with TPAs making the case that it’s a win/win: plan sponsors and members pay discounted amounts, members don’t have to worry about balance billing, and TPAs get to keep a “modest” portion of the savings. Sounds pretty good, right?
But wait. What did we do before shared savings programs? Remember the concept of “reasonable and customary” (R&C)? Before PPO networks fostered ridiculous billed charge levels and so-called discounts, TPAs used to only pay amounts that were deemed to be within the bounds of reasonable and customary. Since billed charges are no longer reasonable and their payment no longer customary, TPAs started tapping into these blind networks to limit non-network payment levels. And since some of these were already set up as shared savings arrangements, a new revenue model was born.
How much revenue? When we can see it (it’s often hidden in claims data), it has usually amounted to about 10% to 20% of administration fees — not a bad source of added revenue!
Is this really a win-win? Let’s take a closer look. One of our clients recently experienced non-network lab expenses associated with non-network substance abuse treatment. The lab billed charges of more than $300,000 over a three-month period. Fortunately, the TPA was able to tap into a blind network and apply a 38% discount for savings of $116,000. The TPA retained $41,000 (35%) of those savings.
Did pre-cert apply? No. Did the TPA (after we called them out on it) think the resulting $184,000 of lab charges was anywhere near reasonable? Definitely not. Did claim controls stop the $184,000 from going out the door (since a reasonable amount would be about $2,600)? Sorry, but no.
Did the claim auto-adjudicate? Yes, it did. Are the TPA’s basic PEPM administration fees competitive? Yes, they are. Is this the way you would want them to handle your money? We sincerely hope not.
So where do we go from here? Ironically, smaller TPAs that don’t own PPO networks (or aren’t owned by PPO networks), have figured out how to do reference-based pricing ― the modern-day equivalent of the old R&C. For some reason, the bigger PPO network-driven TPAs say they can’t do it. Which begs the question: Can’t do it or just don’t want to give up the revenue?
As a plan sponsor, what kind of arrangement do you want for non-network services?