Author Archives: Michael Hartman

About Michael Hartman

Michael Hartman is a senior analyst of risk management for L'Oreal USA.
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The Cost of Savings: Checking Medical Bill Review Charges

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Here’s a provocative question for all the risk managers out there: what did you pay last year in workers compensation medical bill review charges?

Stumped? The answer may be more elusive, and more expensive, than it would initially appear.

Medical bill review is an essential service typically performed by an insurer, claims administrator, or outside vendor. The service provider reviews medical bills related to claims and audits the bills for accuracy, duplication of charges, and reasonableness. The costs for these services are allocated claim expenses, meaning they get charged directly to the claim file. This makes figuring out what you’re paying more difficult, as bill review charges tend to blend in with other expenses and bills.

Bill review charges are typically calculated in two ways. First, for each bill, there is a standard review charge. This could be a flat rate or calculated by the number of lines. Second, for bills that are outside of medical provider networks and are negotiated, a percentage of the savings are charged.

This last piece is critical, because it means that charges for a single bill review can be thousands and sometimes even tens of thousands of dollars.

Here’s an example. Suppose an employee injures his back and is forced to have surgery, but does so at an out-of-network facility. The hospital bills $200,000, an amount it has no illusions of receiving. As part of the medical bill review process, the bill is negotiated down to $50,000, netting a savings of $150,000. The charge for the bill review is a percentage of the savings, typically between 20-30%. If we assume conservatively that the rate is 20%, in this example, the charge for the bill review service would be $30,000. For self-insureds and those with large retentions, this a cost paid directly out of pocket.

This example highlights two important facts. The first is that network penetration is of prime importance—when a patient is treated at an in-network facility, the bill is generally reduced to the pre-negotiated rate at no cost to you. Second, the medical billing process in this country has created an immensely profitable enterprise for skilled medical bill reviewers.

This is not to say that paying a percentage of negotiated savings is unfavorable to a risk manager. This system aligns the interests of the bill reviewer and the party paying the bill. The more the bill reviewer can lower a bill, the more you save, even if you are ceding a percentage of that savings to claim handling expenses.

And to be fair, the above scenario is more of an anomaly than the norm—in most cases both the savings and fees are much lower.

Still, the entire medical billing strategy employed by hospitals is rather discomforting. In what other industry are bills sent out and routinely negotiated down by 50, 60, or even 75%? Certainly, there are financial motives for hospitals, many of which are owned by private equity firms, to bill higher amounts than they ever expect to receive. Not only will the unsuspecting recipient occasionally unwittingly pay the full amount, higher bills allow hospitals increased write-offs for charity care and other unpaid services. And while fee schedules in some states have attempted to address this problem, this has further contributed to hospitals and insurers, each employing competing billing experts with the respective goals of maximizing and minimizing amounts paid for the same services.

The net result is higher processing expenses for everyone.

Accepting the fact that the medical billing system in this country is the way it is, let’s return to the ,000 medical bill review charge.

As risk managers, we need to continuously be concerned with our expenses. At the same time, these fees represent only a percentage of savings, and theoretically, the higher the bill review charge, the higher the savings. But the knowledge of that fact may not be enough to eliminate the sticker shock. Because medical bill review services are so essential, the only recourse is a better negotiation of fees—paying a lower percentage of savings is a good start, and a hard cap on the maximum charge for a single bill is even better. Of course, the first step is sitting down with the data and figuring out how much you’re actually paying.

That way, when someone asks you the question about how much you’re paying, you’ll not only have the answer, you’ll also have a plan to make it less.

Picking Up the Insurance Tab

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Your broker will help you determine your insurance needs, go out to market, and obtain competitive quotes. She’ll guide you through the buying process, price negotiations and policy terms. She might even take you out to a nice lunch and introduce you to the key players at your carrier. There’s no debating it – your broker is a great help when you’re purchasing insurance.

But the one thing your broker won’t help you with is paying your insurance bill. For that, you’ll need a budget.

Preparing an insurance budget is a lot like splitting the tab after an expensive meal. You’re pretty sure that everyone sitting at the table should pay something, but how much? Should the bill be divided evenly? Should each person pay according to what he ordered? Should you skip all the awkwardness and just pay the thing yourself?

The answer, or course, depends on your company’s structure and costs.

Chances are, you’ve purchased multiple lines of coverage, and your broker or insurers have billed you for each.

Furthermore, unless you’re running full speed ahead with a full guaranteed-cost program, you have claim expenses as well. For each line of coverage, then, you need to somehow allocate the costs of claims and premium among all your dinner guests, even the one who somehow always manages to make it to the restroom just as the bill is coming out.

Normally, at a restaurant, the bill is split up after the waiter drops it off. But when making an insurance budget, many items need to be forecasted. Future premiums are best estimated by your broker, using either her expectations for your own policies or general market trends. Future claim costs, on the other hand, can be estimated based on past activity and an adjustment for inflation or growth. In most cases, it’s better to slightly overestimate than underestimate.

Once your forecasting is complete, the next thing you should determine is just who should be at the table. Should your bill be divided by operating companies, divisions, brands, cost centers, locations, groups or in some other manner? Can you provide a general allocation that will further be subdivided by each participant, or will you need to get to a more granular level of detail? Figuring out the best way to do this may be more work than just doing it “however it was done last year,” but in the long run, it will save you time and aggravation.

Once you’ve settled on just who is going to pay for the bill, you’ve got to determine how much each should pay. For most companies, insurance is a significant expense, and you must be prepared to answer questions from disgruntled division heads about their charges.

Your initial temptation may be to divide costs based on headcount, and for many lines of coverage this is both simple and practical. If one division comprises 20% of the company’s employees, that division is charged 20% of the cost. But allocating all your costs on this principle runs into a couple of pitfalls. First, your insurance utilization may not agree with your headcounts. For example, a division without a single car will be charged a portion of the automobile liability premium. Second, this does not reward divisions that have better loss experience.

Premium costs are best charged to the division that actually generates the premium. In the breakdown of each premium bill, you should be able to see how the premium was calculated. In all likelihood, your workers compensation charges are based on your payroll; your auto may be based on vehicles or listed drivers; product liability may be based on sales; property may be based on building values. This methodology better matches the costs of insurance to the divisions that benefit from it.

For insurance premiums billed at a flat rate – well, pick a methodology, be it sales, headcount or something else – and stick with it as long as it makes sense.

If there’s enough data to support it, claim costs may be best distributed based on loss history. This both assigns the costs to the divisions that are creating the risk and creates accountability. A particularly troublesome division may grumble about this, but the explanation is an easy and effective one: tell them to reduce their claims. For lines of coverage without sufficient loss history, claims costs may best be distributed in the same manner as premium.

Making your insurance budget doesn’t need to be a highly-choreographed version of the check dance. Pick the bill up, tell each person what he owes, and be prepared to explain why. And when one of your guests starts complaining about his portion, remind him that if wants to order the triple-chocolate almond crème brulee, he has to pay for it, too.