Determining appropriate payment rates for non-contracted healthcare providers has become an increasingly important issue in healthcare dispute resolution. In theory, if a provider has no contract with a health plan, the plan’s enrollees would not use that provider. In reality, plan enrollees do use non-contracted providers, which then seek payment from the plan. There are other contexts for rate disputes as well, such as when a payer is alleged not to have paid according to a contract’s terms.
Patients frequently use out-of-network providers for emergency services, but they may also use out-of-network providers because of physicians’ referrals or simply out of ignorance of their insurance coverage. A provider may be out of network because of a business strategy involving narrow networks or due to a breakdown in contract negotiations. In out-of-network situations, providers usually demand full charges since they have not agreed to a discount. But health plans often maintain that they will pay no more than a “reasonable” amount, perhaps the Medicare rate or a vague estimate of the cost of the service. If a court or arbiter requires that the provider be compensated, what price should be paid?
An economic perspective can provide a principled basis for determining appropriate out-of-network rates. An economic framework can incorporate market-specific information into the analysis and provide guidance for empirically sound estimates of rates. A core part of the economic framework in today’s healthcare markets is the exchange of value between providers and health plans around the formation of networks. Health plans create value by steering patients to in-network providers through financial incentives. Providers create value by contributing to the attractiveness of the network. In the value transaction, providers are included in the plan’s network in exchange for discounted rates. Thus the economic framework indicates that absent the value exchange, a provider would not offer discounted rates because it would not receive the value of being in-network.
In these situations, a benchmark empirical analysis, using comparable situations that reflect the business and economic realities, can help address the question. A benchmark strategy relies on finding a starting point that is comparable to the circumstances at issue. Two key aspects of comparability are the nature of the payer and the nature of the provider. Close benchmarks might be rates paid to the same provider by comparable payers on an out-of-network basis or rates paid by the same payer to comparable providers on an out-of-network basis. More often than not, however, close comparability is hard to find and adjustments are necessary.
Consider a stylized example in which a provider group fails to come to a network agreement with both a large health plan and a small health plan, and as an out-of-network provider, the group demands full charges from payers. Suppose that in response, the small health plan arranges single-case agreements for the small number of its enrollees who use the group, but that the large health plan ignores the group’s demand for full charges, insisting it will pay the Medicare rate. Add one other fact: an out-of-network specialty hospital in the area has agreed to accept a modest discount off charges from the large health plan.
Two potential benchmarks for resolving the plan-provider dispute exist in this scenario. Neither benchmark is perfectly comparable, but both may be workable with adjustments. The first is the single-case agreements between the provider group and the small health plan. Adjustments would be needed for the fact that these are single-case agreements rather than comprehensive terms, and that they are with a small-volume health plan rather than a large source of patients. The second benchmark is the out-of-network rate between the large plan and the specialty hospital.
This rate is comparable for being out-of-network with the large plan, but it is with a specialty hospital rather than a provider group. Still, relying on the economic principles discussed above, it is possible to understand the nature of the adjustments that would be necessary. If the only available benchmark rates are for different types of providers (like different types of facilities or physician specialties) or different types of health plans (like those with different degrees of patient steering), it may nevertheless be possible to estimate differentials between in-network and out-of-network rates.
Other approaches that may be considered are using cost coverage or “reasonable” profits as a basis for determining out-of-network rates. However, although these approaches are intuitively appealing, they are seldom practical for health care service providers. Many providers’ cost structures cannot be dissected adequately to make determining costs and profits for a specific service possible. Organizations like hospitals or multi-specialty clinics share fixed costs across different services and payers, and attribution of costs by service is unlikely to be well founded in economics. Attempting to focus on incremental costs instead would be inconsistent with the economic realities of average-cost pricing necessary to make the sum of revenue across individual patients cover the provider’s variable and fixed costs.
As long as networks exist, out-of-network payment rates will be matters of dispute. The economic principles that determine negotiated rates guide empirical analyses like benchmarking, which is applied to the parties’ contract terms to estimate appropriate out-of-network rates. As appealing as it is to aim for a “fair” profit or to cover “reasonable” costs, such approaches are almost always unrealistic to implement. With careful consideration of the facts and the available information, and with appropriate adjustments, it is often possible to arrive at reasonable, economically justifiable out-of-network rates.