2018: The Year to Reform Vendor Contracting

Premiums are down. Recent rate filings of the National Council on Compensation Insurance lower the cost of insurance by an average of 10%. The opioid scourge has been shrinking.  Now one massive cloud hovers over the industry: deceptive vendor contracting. Claims payers can clean up this mess.  Will they make a serious effort in 2018? This reform should be the biggest topic in our industry this year — if claims payers, employers and regulators wish it so. 

The black hole of vendor contracting refers to how vendors and some claims payers boost their profit margins by manipulating the pricing of services.   Industry insiders know these practices, hidden from the employer, the ultimate payer.  As we will see in examples, these manipulations distract from and arguably impair quality of service.  Reasonable people would consider them unethical if not fraudulent.

The common scheme is for a vendor to increase the spread between what it pays to deliver services and what it charges a claims payer.  The claims payer and the vendor can connive to share in the profits.   That these practices are deliberately hidden testifies to their shadiness.  Vendors, and to some degree claims payers, not only fail to but even refuse to disclose them when asked by their customers.

The overhead costs for managing claims, such as bill review, provider networks, pharmacy management and other services have grown enormously in the past 25 years.  A few years ago, I estimated that these charges have grown since the early 1990s by an average annual rate of more than 9%, while worker benefits have been trimmed.  Investors in workers’ comp vendors have been riding this wave for decades, incenting their companies to extract as much profit as possible.

A legal settlement in December of 2017 reveals in public documents the extent to which a business enterprise can be designed around undisclosed manipulations. The Independent Physical Therapists of California (IPTCA) agreed to settle a lawsuit it lodged over the physical therapy provider network practices of One Call Care Management’s subsidiary, Align. The IPTCA alleged that One Call violated the state’s fair business practice and workers’ compensation laws. It will take some months for details of One Call’s changes to emerge, one being if it will include other physical therapists and other states. But two past practices, noted in the settlement document, are revealing.

First, One Call overrode the expressed wishes of patients and their doctors by switching referrals from higher to lower cost physical therapists without disclosing the rationale. It appears that the firm gave no preference to physical therapists who delivered better outcomes. It’s not even clear that One Call measured their outcomes, despite also owning Harbor Health, a leading evaluator of quality of care.  The sole reason for the switch appears to have been to increase the spread between what it paid and what it charged its clients.

Also, One Call added charges for physical therapy for which therapists themselves did not bill. Altering the invoice for clinical services, without disclosure to either clinician or claims payer, has been rumored about for some time.  The settlement bars One Call from “mak[ing] decisions regarding specific coding and billing procedures for patient care services. 

Again, the trick is to maximize the spread between cost and revenue in ways that would not be tolerated after transparent disclosure. This is what occurs today in another area of vendor contracting, pharmacy benefit management.  I wrote about this in WorkersCompensation.com in August here and here.

The PBM makes a profit when the price it pays to a pharmacist for providing an injured worker with a prescribed drug is less than the price it charges the claims payers. PBMs have been extremely reluctant to disclose this spread. 

PBMs typically state their charges as a percentage off an artificial point of reference, “average wholesale price.” A moment of reflection will reveal the illogic.  PBMs in effect tell their clients that they charge them less than what they pay.  What they pay their pharmacies is for most drugs vastly below this artificial benchmark. So-called transparency model PBMs, which have entered the marketplace, tend to charge claims payers 30% below the charges of conventional PBMs. They can do that by eliminating most of the huge spread enjoyed by conventional PBMs.

Frank Pennachio, an advisor to employers and brokers, shared another example of profiteering in a session at the National Workers’ Compensation and Disability Conference in December. A bill review vendor of a high deductible insured employer client charged 25% of savings from simply adjusting medical provider charges to the state fee schedule, a routine computer operation.  That and other adjustments earned the vendor a $506,306 fee for adjusting 4,568 invoices.   Why did the insurer allow its bill review firm to price gouge? Did it receive an undisclosed part of the windfall?

Can we be better than this? Is the workers’ comp industry at the point where manipulation by vendors is the primary goal of corporate leadership, rather than the management of safety and injuries?  Insurers, TPAs, and self-administered employers who are fed up with these practices need to come forward.  When they do, we can be proud of our industry.

ABOUT THE AUTHOR

Peter Rousmaniere is widely known throughout the workers’ compensation industry, both for his writing and consulting experience. Based in the picture perfect New England town of Woodstock, VT, he is a regular on the conference circuit, and is deeply in tune with trends and developments within the industry. His passion is writing and presenting on issues largely related to immigration, and he maintains a blog on the subject at www.workingimmigrants.com.

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