David Hammer
William T. Phillips

Many providers assume their out-of-network claims (their "black space") are being paid at billed charges-but they often aren't. By tracking their black space, providers can increase their revenue by 8 percent to 10 percent.


At a Glance

To increase revenue from out-of-network claims, there are several things providers can do, including:

  • Identify and track all out-of-network claims.
  • Require all networks to be identified in the contract.
  • Eliminate contracts that include silent PPOs.
  • Limit authorization to negotiate discounts.
  • Establish out-of-network metrics.

As the healthcare insurance market migrated from fee-for-service to managed care in the 1980s and 1990s, a troubling development related to preferred provider organizations emerged the "silent PPO." As defined by Stephen Messinger and Terri Welter ("Tactics for Thwarting Silent PPO Activity," hfm, July 2003), silent PPOs are payer arrangements that offer patients discounted provider fees without providing incentives for patients to access the providers' services. Under a silent PPO arrangement, a third party (which is usually not offering a PPO plan or policy) obtains a database of preferred provider rates from a managed care organization or a discount insurance broker. The managed care organization typically sells or rents its PPO provider network to the third party or insurance broker.

For providers, the result of this questionably ethical payer tactic was that patients' bills were often significantly, and inappropriately, discounted-by large percentages and thousands of dollars.

In the past 10 years, however, the silent PPO issue receded in importance, replaced by the provider industry's focus on under- and overpayments. And, as hospitals and physicians became more adept at countering payers' denial and underpayment strategies, the payer community adopted new tactics.

Now, healthcare financial managers should heed a warning on the insurance industry's newest tactic-"white space" management-and its negative impact on revenue cycle results. The term white space can be misleading.

For the provider community, white space management does not imply "good." In fact, it represents a significant attack on payment to which providers are legitimately entitled. In this case, standard nuances of white and black have been turned on their heads. For providers, when dealing with this new mutation of the silent PPO, only "black space" is "good."

White Space Defined

The payer community defines white space as "the billed charge volume incurred by health plan members outside the payer's owned or primary leased networks" (Bartlett, T., "Extending the White Space Solution Set," www.whitespacesavings.com). Bartlett estimates that this could represent 10 percent to 15 percent of paid claims; consequently, the impact of white space on payers may total $65 billion annually, with out-of-network gross charges potentially adding up to more than $50 billion for commercial payers and $14 billion for Blue Cross and Blue Shield plans. Clearly, these figures are not trivial, and have captured the payer community's attention.

How efficiently payers manage their white space can have a significant impact on their profits. Therefore, to help mitigate the costs of out-of-network claims and reduce financial exposure, payers are turning to white space firms and network managers. These firms' goal is to reduce the payer community's medical loss ratio, which the insurance industry calculates as total incurred medical costs divided by total medical premiums.

How Do White Space Managers Work?

According to Karl Huff, white space firms strive to obtain the most effective coverage and the highest discount from billed charges for their payer clients, at the expense of providers' payment. Their preferred tactics include wrap network discounting; usual, customary, and reasonable discounting; and direct provider negotiations (Huff, K., "Maximizing Savings from Non-Network Exposure," AHIP Coverage, July-August 2005). This is accomplished by applying in-network discounts to out-of-network claims. Another tactic is to derive a discount using the provider's Medicare cost factor. The white space manager's (and payer's) objective is to convert as much as 80 percent of out-of-network claims from billed charges to a discounted rate.

When white space management is effective, providers' interests suffer as more claims move up the payer hierarchy. The result is lower costs for the payer, but with consequently lower revenue and payment for the provider. When providers are effective in countering payers' white space management techniques, more out-of-network claims stay on the lower levels of the hierarchy. Then providers' revenues and payment are protected, and payers pay out-of-network claims at legitimate contract rates. We have termed this side of the payer hierarchy, in which providers adopt strategies to effectively counteract white space management, as black space management.

View Exhibit 1

exh1

Exhibit caption: When white space management is effective, the result is lower revenue and payment for the provider (arrow on left). But when providers are effective in countering payers' white space management techniques, provider revenues and payment are protected, and payers pay out-of-network claims at legitimate contract rates (arrow on right).

White Space Strategies

Payers' white space management tactics use wrap networks to obtain questionable discounts for out-of-network services. To do so, the white space manager creates a quilted, stacked, or silent network arrangement. In a quilted network, a white space manager "stitches together" a network geographically to increase access and minimize out-of-network claim costs to the payer. In a stacked network, the white space manager uses more than one PPO network covering the same area to maximize the discount available from the multiple available network arrangements. Each of these approaches is designed to pay providers less that the out-of-network payment to which they are entitled.

The white space manager "leases" (either explicitly, for consideration, or implicitly) the PPO network rate from an entity that holds a contract with the provider. The PPO rate is then applied to the claim. Although there is no patient steerage, which the provider originally expected in return for its discount, the payer "silently" benefits from the discounted PPO rate. When more claims flow through the silent PPO, the payer can realize ever-greater savings.

View Exhibit 2

exh2

Exhibit caption: This hospital's in-network (participating) charges were 85 percent of the total; 15 percent were out of network (nonparticipating). But with only a 10 percent difference between in-network and out-of-network payments (in the "Payer" column, 43 percent versus 53 percent), it is evident that white space management strategies were already at work.

Case Study: Payer Tactics

A provider's recent experience offers a case study in how this works. At the provider's request, the identities of the provider and the payer have been changed to ensure their confidentiality.

A patient insured by Unified Insurance Company was admitted to St. Elsewhere Hospital. Because the patient was away from home when he required care, St. Elsewhere's bill should have been treated as an out-of-network claim. The patient's gross charges totaled $315,000. As a nonparticipating hospital, St. Elsewhere's billed charges exceeded Unified's high-cost threshold ($250,000) and should have been paid at 70 percent. Thus, Unified Insurance's contractual payment obligation to St. Elsewhere was 70 percent of $315,000. When St. Elsewhere submitted its claim, it posted a $94,500 contractual adjustment. That left an expected payment of $220,500 as the unpaid balance on the account.

However, instead of paying its $220,500 obligation to St. Elsewhere, Unified's white space manager used a leased network's contract to reduce its payment to St. Elsewhere to only $3,000! Unified's payment calculation is as follows:

Inpatient revenue code 110:
$350 per day X 5 days $1,750
High-cost pharmacy at 50% of billed charges $1,250
Implantable device carve-out 0
Total payer payment $3,000   


Before it identified the erroneous payment and successfully overturned it, St. Elsewhere posted an additional contractual adjustment of $217,500 ([$315,000 x 70 percent] - $3,000 = $217,500).

By accessing a leased network, the payer's white space manager inappropriately reduced the hospital's payment by $217,500 from $220,500 to $3,000. Given such results, it is easy to see why white space managers' incentives align well with those of payers.

Such alignment, however, does not fit providers' needs quite as well. Fortunately, this case attracted the attention of the hospital's well-run revenue cycle operation, and the payer ultimately paid the correct amount. An even greater risk, however, is from low-dollar cases in which the short-pay amount may simply be written off to contractual adjustment.

Case Study: Provider Countertactics

Another recent real-life example illustrates the potential scope of the problem. Again, the provider's and payers' identities have been concealed for confidentiality. In a 250-bed hospital, gross charges from commercial, health maintenance organization, and PPO payers totaled $100 million. In-network (participating) charges were 85 percent of the total, but 15 percent were out of network (nonparticipating). Payer and patient payments on $15 million in nonparticipating charges are shown in the exhibit below.

View Exhibit 3

exh3

Exhibit caption: In this case, total dollars discounted through wrap networks represented 50 percent of out-of-network dollars ($7.5 million). Additionally, 20 percent of gross charges were subjected to UCR discounts ($3 million), and another $3 million were subjected to negotiated discounts. Only 10 percent ($1.5 million) was paid at billed charges.

With a 10 percent difference between in-network and out-of-network payments, it is evident that white space management strategies were already at work. How was this happening?

Drilling down into the detail reveals the explanation. In this example, contractual adjustments totaled $4.15 million (28 percent of gross charges). Although certainly beneficial for the payers, this outcome was not so beneficial for the provider.

To counter these unwarranted discounts, successful black space management hinges on the provider's ability to:

  • Limit the use of leased networks
  • Ensure that all out-of-network claims are appropriately paid
  • Route high-dollar claim negotiations to skilled employees or managers

In this case study, the hospital's effective application of its own black space management strategies materially improved net revenue and cash.

Here, the provider's management of its black space opportunity reduced the payers' use of wrap networks and UCR discounts. Total payer payments increased 27.5 percent, from $8 million to $10.2 million. Total revenue from patients and payers increased from $10.85 million to $13.65 million-an improvement of more than 25 percent. Meanwhile, contractual adjustments declined to a more tolerable 9 percent of out-of-network billed charges a 67.9 percent favorable change.

View Exhibit 4

exh4

Exhibit caption:With effective black space management, total payer payments increased from $8 million to $10.2 million, and total revenue from patients and payers increased from $10.85 million to $13.65 million. Also, contractual adjustments declined to 9 percent of out-of-network billed charges.

An Ounce of Prevention

What can providers do to better manage their black space? Following are nine practical revenue cycle and contracting steps to consider.

Copy or digitally image both sides of the health plan card. Participating network arrangements are identified on the back of most insurance cards. Without specific network information, it is difficult to know if a claim is in network or not. With digital imaging, retransmittal to the payer is especially easy.

Identify and track all out-of-network claims. This may require adding claim management employees, providing more training on out-of-network claim follow-up, and using sophisticated contract management and network tracking software. As white space managers shop multiple networks to determine the most advantageous payment, providers must use all the techniques and technology tools available to them to ensure that discounts claimed by payers are legitimate and contractually valid.

Require all networks to be identified in the contract. Payers and white space managers access a number of leased or rented networks to obtain the most favorable payment methodology. If all networks are identified in the contract, the provider can better control the use of such networks. Eliminate contracts that include silent PPOs. Some PPO agreements may be designed more for payer discounts than provider patient channeling. Such contracts should be renegotiated or terminated.

Reject allegations of excessive UCR rates. When the accusation is from a white space manager, it is often a negotiating tactic on behalf of noncontracted payers. This argument should be rejected. If there is a relevant court decision in your jurisdiction, it should be referenced in your response. In California, a court refused to identify Medicare as "reasonable reimbursement" for an out-of-network payer.

Limit authorization to negotiate discounts. Not all revenue cycle employees should be authorized to negotiate out-of-network claim settlements. Because many white space managers employ professional negotiators, similar skills and training may help improve the collection performance of providers.

Establish out-of-network metrics. Although it is easy to contractually adjust out-of-network claims, it is expensive. The opportunity to achieve improved financial performance is too significant to simply accept nonvalid discounts and write off the balance as a contractual adjustment instead of closely reviewing the payment and fighting for proper reimbursement. Specific metrics should be established for out-of-network financial performance.

Limit administrative-services-only discounts. The Employee Retirement Income Security Act permits a discount for in-network providers. For ASO ERISA plans, the out-of-network benefit is 70 percent. Here, there may be no provision for a discount.

Consider outsourcing. If available employees, training capacity, or system resources are limited, it may be too costly to wait to train employees, create tracking systems, and adapt systems to monitor network eligibility. Depending on a provider's current out-of-network collection performance, providers may wish to outsource this function. 

Holding Your Ground

In the world of business, one company often attempts to gain a competitive advantage by attacking another's profit sanctuaries (Stalk, G., and Lachenauer, R., Hardball, Boston: Harvard Business School Press, 2004). Indeed, white space managers are attacking out-of-network claims, historically a profit sanctuary for many providers. Recognizing this as a source of out-of-network revenue leakage, savvy healthcare financial managers are now identifying and tracking out-of-network revenue and setting specific performance metrics.

Just as a well-executed white space program can save a payer millions of dollars, a well-executed black space program can protect and retain millions of dollars for a provider. When Sir Isaac Newton first proposed his Third Law of Motion, which states that for every action there is an equal and opposite reaction, he did not have the revenue cycle in mind. Today, however, he might well ask, "Will the white space action be opposed by an equal and opposite black space reaction?"


David Hammer, FHFMA, is vice president, revenue cycle solutions, McKesson Provider Technologies, Fort Lauderdale, Fla., and a member of HFMA's Florida Chapter (david.hammer@mckesson.com).

William T. Phillips, FACMC, CHC, is vice president and chief revenue officer, Revenue Strategies, Inc., Hollywood, Fla., and a member of HFMA's Florida Chapter (billinfll@juno.com).


Glossary

Black Space. The sum of medical charges that a provider bills to out-of-network (nonparticipating) payers. Estimated at 8 percent to
12 percent of commercial or managed care revenue.

Direct provider negotiations. The payer practice of negotiating discounts on out-of-network claims on a case-by-case basis with the provider(s) who treated the patient.

Network optimization. The payer practice of applying its primary network, wrap network, or both to achieve the lowest cost for out-of-network claims.

Out-of-network exposure. The sum of all charges for services from out-of-network (nonparticipating) providers, estimated at 10 percent to 15 percent of all paid claims for commercial/managed care/Blue Cross and Blue Shield payers, or $65 billion annually in the United States.

Primary rental networks. A network of providers used by another provider to augment its own network.

Professional negotiation. A provider claims-cost-management strategy that uses professional negotiators to contact out-of-network (nonparticipating) providers to negotiate a reduction in total billed charges. May include a signed agreement between the provider and the negotiator.

Quilted network. Created when a payer stitches together a network geographically, to increase access and minimize out-of-network claim costs.

Repricing. The payer practice of pricing claims, usually electronically, to achieve faster turnaround times, increase claim accuracy, and reduce payer costs.

Silent network or silent PPO. Created when a payer leases a PPO network rate from an entity that holds a contract with the provider; the PPO rate is applied to claims to reduce costs.

Stacked network. Created when a payer uses more than one PPO network covering the same area to reduce costs.

UCR repricing. The payer practice of using in-network contract language on the explanation of benefits for out-of-network claims to secure a lower rate, such as the lesser of usual, customary, and reasonable charges. In some cases, this may be less than Medicare rates.

White space. The sum of medical charges billed to a payer for services provided outside of a payer's owned or leased provider network.

Wrap networks. Networks created by extending a provider network to provide coverage for members living outside the network's primary geographic area, or to cover costs incurred by members while traveling outside of the primary coverage area.

Publication Date: Monday, January 01, 2007

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