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May 2015

Discounting Discounts – One Way Health Plans Reduce Their Payment Obligations to Hospitals

Health plans generally spend months and sometimes years negotiating discounts to the usual rates that hospitals charge for services rendered to patients. So e.g. if the usual rate for an appendectomy is $10K, it is possible for a health plan to negotiate a special rate of say 60% of $10K or 6K.  What we have discovered here at SAC is that despite these discounts, health plans help themselves to even more discounts in an effort to even further reduce their payment obligations.

One way health plans give themselves additional discounts from a hospital’s usual charges is by “disallowing” certain medically necessary charges from the bills of their members. In the example above, with the plan’s negotiated rate, it would be entitled to a 40% discount of $10K. However, before taking the discount, the plan may first disallow say $2K from the usual rate of 10k and then apply the 40% discount. So instead of paying the 6k as the contract requires, they pay $4800 ( 60% of $8k). In other words, the health plan will unilaterally disallow certain charges BEFORE applying the contracted discount rate.

Clearly, this concept of “disallowed charges” seems counter-intuitive to a ‘discount.’ If the parties have already agreed to specific discounted reimbursement rates for hospital services, why would health plans take it on themselves to further reduce their payment obligations? This leads to a lack of predictability when it comes to knowing exactly what hospitals will receive as payment for services rendered to plan members. Arbitrary payment amounts and delays are just a few of the ways health plans save money. As a result, our recommendation here at SAC is that hospital providers challenge this concept of disallowed charges in those instances where they have already provided a discount to their usual charges. At the very least, the supply or service that may be disallowed by the health plan should be clearly identified in the parties’ agreement..

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