Achieving Workers Compensation Savings through Medical Bill Repricing

The Economics of Medical Bill Repricing

At the heart of a repricing program are fee schedules and negotiated provider discounts that determine actual reimbursement rates for medical providers. Fee schedules are the state-mandated caps on the fees that providers are allowed to charge for services paid for by workers compensation. Discounts are prearranged prices for services that are negotiated with medical providers. Discounts can be arranged directly by claim payers or by other organizations that allow claim payers to use their network for a fee.

Providers have an incentive to join a network and accept lower fees because payments are more certain and typically are received much more quickly. Joining a network may also increase referrals because the provider will be listed in the network directory, and participating employers will be encouraged to use the network's providers.

Oddly enough, providers who join networks typically make no effort to bill patients in accordance with the pricing contract. Moreover, most providers make no attempt to comply with state-mandated fee schedules when they bill. They bill at their normal office rates and will accept whatever is paid, even if in excess of a contract or in excess of the state fee schedule. The essence of bill repricing is for the claim payer to identify when the medical provider is overpricing, reprice the bill to the proper amount, and then charge its customer for achieving the "savings."

Employers might argue that everyone makes out in this deal except them because they must pay to straighten out provider medical bills. This certainly makes sense with respect to fee schedules. There is no reason employers should pay to make sure medical provider reimbursements fall within state guidelines. Providers should make certain of this, and if the fail to do so, any additional system cost should be borne by them.

Provider networks are different. If claim payers could not reprice bills and earn a return on the investment they make to develop networks, there would be no incentive to develop them. Employers benefit tremendously from pricing networks, so the fee paid to claim payers for repricing based on contracted rates is well earned. For the time being, most states do not place the onus on providers to comply with fee schedules, so the best course for employers is to make certain their claim payer is repricing bills based on the fee schedule, even if they must pay for it.

The Mechanics of Bill Repricing

Bill repricing is an automated process for most claim payers that can best be illustrated with an example. Assume that Dr. Smith has agreed to accept $35.00 per office visit under its contract with XYZ Claims Administration. The state-mandated fee schedule would allow Dr. Smith to charge up to $40.00, so XYZ is achieving savings for its customer in excess of those provided by the fee schedule. XYZ has negotiated an agreement with ABC Manufacturing allowing it to charge a fee of twenty-five percent of all savings it achieves by repricing.

If an employee of ABC were injured and saw Dr. Smith, his office would probably bill $55, totally ignoring the state fee schedule and his contract with XYX. When the bill is received by XYZ, a clerk will enter the details from the bill into a system. The system will compare the bill to the pricing data in its database and will "reprice" the bill accordingly. In this case, the system will recognize that Dr. Smith is entitled to only $35 and will send him a check for that amount along with a letter explaining the reduction. The reimbursement to Dr. Smith will then be charged to the claim file along with $5 for the bill review (25 percent of the $20 reduction). Had XYZ failed to spot the over-billing, Dr. Smith would have been reimbursed the full amount and most likely would have kept it.

Taking Maximum Advantage

Employers can maximize savings by maximizing use of contract providers. Employers can increase network usage by obtaining a directory of participating providers from its claim payer and directing medical care to listed providers. A claim payer may even be able to make this easier by providing a customized list of medical providers in the vicinity of an employer's operation or operations.

If the employer is not allowed to direct medical care, it may still be able to increase usage by suggesting that employees use network providers. An employee may not be open to suggestions about a primary treating doctor, but he or she may be indifferent as to who provides services like diagnostic testing and physical therapy.

How Much Can an Employer Save by Repricing?

There are a number of factors that will determine how much an employer can save through repricing. Some are beyond the claim payer's control and the employer's control. This means there is no concrete rule as to what employers should save from repricing. That said, an employer should normally expect savings of 20 to 30 percent of the amount billed for medical services. In other words, if an employer is billed $500,000 annually for medical expenses, it should expect to pay between $350,000 and $400,000 after repricing.

If an employer sees a lower savings rate, it should discuss this with its claim payer. There are legitimate reasons that savings could be lower or even much lower. For instance, an employer's locations may all be in a state that does not have a fee schedule and does not allow employers to direct medical control. Or, the employer may send all employees to its "company doctors" who elect not to participate in the claim payer's network. If the problem is poor network coverage, or perhaps the claim payer's failure to reprice bills at all, the employer may want to look at other partners.

If an employer does consider other vendors, they may—and perhaps should—make their medical bill savings a central part of their sales presentation. An employer can sometimes take advantage of this by asking a prospective claim payer to guarantee the savings it says it can produce in the marketing process. For instance, if a third-party claims administrator says that it achieves savings of 30 percent for its clients, the employer can ask for a guarantee that it will save 30 percent if it contracts with the administrator. If the administrator delivers only 25 percent, it will pay the employer the additional 5 percent from its own pocket.

If the prospective administrator is confident in its ability to achieve the advertised savings, it may agree. If not, it may agree to some lower amount or it may be reluctant to agree to any amount at all. Still, it is worth asking if an employer is shopping for a new claims administrator.

How Is Medical Bill Repricing Measured?

Bill repricing is almost always done systematically, and the system should readily provide reports that show how much the employer is saving. Employers should ask for a medical savings report at least annually, and quarterly is preferable. Exhibit A below is a sample medical savings report that is probably similar to those produced by most claim payers.

Exhibit A

Exhibit A shows medical savings broken out by type and by calendar quarter for 2001. Most claim payers can probably show more meaningful breakouts, like savings by type and by state or by location for multi-location employers. This gives the employer an indication where usage of network providers is high and where it could increase savings by improving network utilization. The claim payer may even be able to provide a report showing the employer's "hit rate" on the network. This would show the percentage of payments from providers in the network versus those out of the network. The report would demonstrate how much additional savings are possible by more fully utilizing the provider network.

The statement in Exhibit A appears to show an impressive savings rate of 25.1 percent for the year, but this requires more scrutiny. The first thing the employer, Ajax Manufacturing, would need to know is if the stated savings are gross savings or savings net of charges for bill reductions. If the savings are gross, the report shows how much the employer saved prior to compensating its claims payer and networks. If the claim payer's fee for bill reductions is 25 percent of savings, and the report shows gross savings, Ajax would need to subtract the claim payer's fees to arrive at the true savings rate. In this case, the rate would be a mediocre 18.8 percent (25.1 percent total savings - (25 percent x 25.1 percent) savings fee = 18.8 percent net savings).

Ajax would also need to evaluate the type of "savings" reported because some are more real than others. The first column identifies savings from identifying duplicate bills. This is the total of all bills entered into the claim payer's system that were duplicates of bills already paid. For instance, an emergency room may send a bill for $150 the day after a service is provided and then send a statement showing the same charges 10 days later. The claim payer's system will identify the duplicate and will not pay it. The amount not paid on the duplicate invoice is treated as a "savings." Of course, it is not a savings because it was never owed in the first place and avoiding duplicate payments for the same service has always been a basic claim service. Although most claim payers show duplicates on savings reports, they do not charge the employer a fee for them and should not. Still, employers should discount stated savings for the amount of duplicate bills.

In this instance, the overall 25.1 percent savings is really only 20.2 percent after the 4.9 percent from duplicate bills is deducted. If the 20.2 percent is gross savings, and the 25 percent fee must be deducted to arrive at net savings, net savings amount to only 15.5 percent. This is still a considerable savings, but not very impressive by industry standards.

The second column shows fee schedule reductions, which are reductions made to provider bills based on maximum fee schedules established by the state. Again, the "savings" are not real because the providers are not entitled to reimbursement in excess of the fee schedule, and employers have no obligation to pay it. By adjusting bills to the fee schedule, the claim payer is not producing any real savings, it is again merely making certain the employer does not pay what it never owed in the first place.

Even so, auditing bills to fee schedules is a recent change in procedures for claim payers because fee schedules did not exist just a few years ago. Repricing bills to a fee schedule is complicated process because there are so many different types of medical services, all having an individual service code and fee. A claim payer certainly deserves to be compensated for sorting it all out and making certain providers are not paid more than the law requires.

The final two columns show savings from contracts with medical providers and savings from preferred provider organizations (PPOs). These are typically savings from contracted rates that are below the state fee schedule. These savings are the best measure of the value an individual claim payer adds to the process. Every claim payer should detect and avoid paying duplicates and should reduce bills to the state fee schedule. What differentiates medical savings programs is the quality and coverage of the provider contracts and PPOs used by the claim payer. An employer should focus on this savings primarily when assessing the performance of its claim payer and during the process of selecting a new claim payer.

Should Repricing Fees Be Based on Per-Line Charges or a Percentage of Savings?

Another choice an employer may need to make is how to compensate its claim payer for bill repricing. Most offer a choice between a flat fee per line reviewed or a percentage of savings. The problem is, an employer has no way of knowing in advance which will result in the lowest total fee. Most employers elect a percentage of savings to be applied against all reductions except for duplicate billings. The employer is then assured that it will not pay anything for bill reduction if the fee is not offset by much greater savings.

Per-line claim charges may be a better option for "big-ticket" items, like hospital bills. Some providers may allow employers to select different review charges for different types of bills, so an employer could elect to pay for routine bill repricing on a percentage of savings basis and hospital bill audits on a per-line basis.

Although an employer cannot guess in advance which method is most cost effective, a claim payer may be able to generate savings reports showing net savings based on both methods. The employer can then determine which method to use in the future.

The Problems with Bill Repricing

Although bill repricing may seem an effortless way to save money, it has two drawbacks. First, it can indirectly impact the quality of care. Second, the method for calculating savings is flawed and can create an apparent conflict of interest.

Bill repricing can impact the quality of care if an employer controls medical care and refuses to allow employees to seek treatment outside the claim payer's network. This sometimes prevents employees from seeing the best providers because some may refuse to join the claim payer's network. This sometimes happens because the incentives for joining a network—patient referrals, quick and certain payment—may matter little to the physicians recognized as the best in their area. As anyone who has tried to see the best physician in any specialty can attest, their waiting rooms are jammed, and they have no need of referrals. They can also see patients on whatever terms they dictate, including payment in advance. This leaves little incentive to join a network.

On the other hand, less experienced physicians and those with lesser reputations may be interested in more referrals and are often eager to join a network. Additionally, some providers may make up for discounted rates through additional volume. This means more patients and less time with each. If nothing more, this leads to patient dissatisfaction if not poorer medical care.

These are some of the criticisms of managed care in the group health setting and may be as much of an issue in workers compensation, at least in some instances.

The flaw in the savings calculation is that it rewards poor claims handling because it assumes every medical payment is appropriate and entitles the claim payer to a fee if the bill is repriced. A claim payer that fails to properly scrutinize claims will pay more medical bills than one that is more careful; it will pay more medical bills as a result and earn more fees for generating "savings" through repricing.

For instance, assume that an employee suffers a work-related strain to the thoracic spine. The employee elects to treat with his personal physician, who is already treating him for a congenital problem in his lumbar spine. Six visits later, the physician begins submitting bills for the lumbar condition to the workers compensation insurer. The thoracic condition resolves in a month, but the lumbar condition requires continued treatment for several weeks and ultimately surgery.

A competent adjuster or medical case manager would immediately notice when the provider began submitting bills for the lumbar condition and would deny coverage. The bills would not be entered into the medical bill review system and would not result in any calculated savings or fees. Conversely, if the claim payer sends all medical bills to a bill-processing clerk, he or she might not notice the different nature of the treatment and may inadvertently "accept" the lumbar injury as part of the workers compensation claim by paying the bills. If the physician, surgeon, and hospital ultimately bill a total of $30,000, and this amount is reduced to $20,000 through bill repricing, the claim payer will report a savings of $10,000. If it retains 25 percent of savings as a fee, it will "earn" an additional $2,500 for managing the claim.

In reality, the employer will have saved nothing. It will have actually paid $20,000 in medical expenses not related to its claim plus, ironically, an additional $2,500 to its claims payer for achieving the "savings."

This may seem a largely theoretical problem, but the reality is that many costly claims result from an expansion of the allowed condition after a claim is reported. It is highly unlikely that this occurs because claims adjusters, medical case managers, and medical bill processors are attuned to the economics of the repricing process and are trying to maximize the revenue of their employers. It is more likely that it results from poor or inadequate training, a lack of continuity in claim handling, or medical experts making decisions on compensability issues that they are not qualified to make.

From an employer's viewpoint, resolving these issues should be a top priority. That is how the employer will save money. A claim payer's primary incentive, however, would be to focus first on improving the reach and scope if its provider contracts and networks. That is how it will earn more money.

Again, it is important to emphasize that this does not suggest that claim payers have nefarious motives. It merely suggests that a claim payer will react to its incentives as any business would. In this instance, its incentives are not aligned with its customer's. While that is not necessarily bad, it certainly is not good.

Conclusion

Medical bill repricing leads to legitimate and real workers compensation savings. All claim payers should avoid paying duplicate bills and should achieve savings by reducing bills to state fee schedules. Claim payers can also achieve savings by establishing provider networks that contract for discounted medical services. Claim payers have varying levels of success achieving savings from their networks. Employers can increase the amount saved by monitoring savings using quarterly reports provided by their claim payer and encouraging injured employees to use contract and network providers.

The bill repricing process does have drawbacks. It can result in a lower quality of medical care in some situations. It can also misstate the actual benefit a claim payer is providing on claims. On balance, however, employers are far better when their claim payer provides bill repricing. This should be one of the criteria used to select vendors, and employers should negotiate a savings guarantee, if possible.