The History of Healthcare Financing in America and how you’re being fooled!

The Myths

Urban myths are false stories that keep circulating, sometimes for decades, until they become so common that we believe them to be true. About the time one thinks such a myth is about to die it is attributed to another city, celebrity, or legend and the flame is rekindled. I have heard about the tourist in Mexico waking up in a bath-tub full of ice sans kidney or other vital organs so many times that I just assumed it true for many years.

There are lots of urban myths about healthcare that, unfortunately, have been told so often that some believe they are true as well. What’s troublesome about these healthcare myths is that they affect the way we consume healthcare or worse they affect decision making about how we will manage healthcare for ourselves or our companies.

For years I heard the urban myth about the wealthy, but stranded, motorist being helped by Ma and Pa Kettle who repays them by paying off their mortgage or providing a free college education for their children. Of late, I have heard this myth attributed to those running for public office or celebrities who happened to have a new movie or recording. Right when I am prepared to believe this edition of the myth, I wake up and recognize that every politician or celebrity hires public relations professionals just so they can document every second of such chivalry for everyone to see. Again, just another myth.

The myth of PPO “discounts’ has been circulating for about 20 years now. Blind belief in the myth costs employers and their employees millions of dollars on their health plans every year. Similar to the altruistic benefactor to Ma and Pa Kettle,  were PPO discounting not a myth the PPOs would be screaming from the roof-tops and providing detailed proof of their value and successes.

The History

To understand the genesis of the PPO myth, we need to look back at the history of health plan financing in America. Prior to about 1973, US Healthcare was indemnity coverage.  The definition of indemnity is to share expenses within a group so that one expensive, but rare, event won’t have a catastrophic financial effect on any one individual or family. An employer would provide health insurance coverage for their employees and share the cost of the services attained, which at the time, were mostly priced in a reasonable way.

HMO’s came along in the early 70s mostly to encourage individuals to pursue more healthcare services like check-ups and other wellness events which were promoted as a way to reduce risks and thus cost. The catch was that the reduced costs came at the expense of limiting choice. Users of HMOs were funneled into slim networks of providers and those providers offered discounting in exchange for the steered business.

Americans don’t like to be told where we can and can’t do business or receive healthcare. The rebellion over the limited availability of healthcare services that our employers would sponsor (pay for) on our behalf sparked the initiation of Preferred Provider Organizations (PPOs). The initial intent of PPOs was to expand the number of healthcare providers than an employer’s members could access while also preserving the discounting. But wait, that sounds too good to be true…and of course, it is.

PPO organizations learned very quickly in the late 1980s that having discounts took a significant back seat to having the girth of physician and hospital participation, so they set out to contract as many medical providers as possible. After a very short period of making their revenues via actual savings created, the PPOs evolved to a subscription model where they remain being paid on a per member or per employee basis monthly. Having no financial incentive relative to discounts, the PPOs endeavored to put every possible provider in their “preferred” provider networks. The providers seeing no new business (steerage) from the networks, continuously increased their fees for services and thus the great hoax of PPO discounting was born.

As healthcare costs begin to rise for employers, the PPOs needed to be able to feign some cost saving value relative to their subscription model services so the era of illusionary discounting was born.

The Reality

Imagine this scene that has likely happened 10,000 times over the past two decades. I work for a PPO network and you are the CFO of a hospital. I say over a cocktail after golf, “hey Bob, I really need you to be in my PPO network and to keep the employers happy I need you to offer a big discount.” “Great Mike! I assume my hospital will be the only one you will promote to your members?” “Well no”, I say, “we are pretty much inviting all the hospitals and physicians to join.”

“Oh”, you say, “then what’s the value to me?” “Well, actually, nothing when you look at it like that but perhaps we can work something out, I suggest.” “Like what”, you say. “Well”, I start, “no one ever looks at hospital charges before they pay them anyway and if they looked they would not understand, so how about this, just mark your charges up by 25% and then give us a 20% discount that I can gloat about with the employers.” “That works for you?”, you say. “Sure why not?, we get paid the same subscription fee regardless”, I finish. “What if we get caught, isn’t this illegal or immoral?” “No one will ever know. We will tell our clients our relationship is proprietary and thus none of their business”. “Then count us in! you say, “ I’ll do all the deals like that you want”.

When I suggest that similar deals were cut 10,000 times I am probably being conservative. Keep in mind that 5,000+ hospitals throughout the country are cutting and renewing deals with the 5 or 6 largest networks that they renew every few years. The fix is in, and you, as an employer or an employee contributor to a health plans cost, are the patsy.

So here are the facts, decide for yourself how the numbers got this way:

Healthcare.gov describes the PPO networks this way……Preferred Provider Organization (PPO) A type of health plan that contracts with medical providers, such as hospitals and doctors, to create a network of participating providers. You pay less if you use providers that belong to the plan’s network.

Oh really. The BUCA (Blue Cross, United, Cigna, Aetna) payers reimburse out of network hospitals at about 125% of Medicare while clearly reimbursing In-Network hospitals closer to 300% of Medicare on average. Most hospitals now have cash-pay initiatives at a rate of about 135% of Medicare, and Reference Based Reimbursement pays at average levels just above 150% of Medicare.

So, if you desire to pay more for healthcare services, the PPO model is your best option. The PPOs will charge you an access fee of $12 to $20 to have that option too. One last thing, since employers sign the inane PPO agreements they are legally bound to pay the excessive provider fees by contract. No wonder your healthcare expenses are so high.

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