PPOs were built off the early successes of HMOs. They sought totake the savings created by HMOs and expand provider bases to allowmore choice for patients. As the PPOs started to build largernetworks and attempted to bring costs down, they met resistancefrom key providers. Rather than hold the line and set reasonableprices, the PPOs acquiesced and agreed to pay providers—especiallyhospitals—pretty much anything they wanted using adiscount-off-the-billed-charges model.

The problem was that there were no regulations on what hospitalscould bill for services, so the PPO shell game of “discounting”went into effect. Today, the average for-profit hospital chargesmore than 700 percent of what Medicare would pay for services, whilenon-profit hospitals charge approximately 550 percent of Medicare.After the traditional 50 percent “discount” provided by the PPOs,employers often pay 300 percent of Medicare—often much more. Sincethe discounting levels from the PPOs are a tightly guarded secret,employers are unaware that they are paying three times what the largest payerin the country has deemed to be fair reimbursement.

The overpayment problem

The Accountable Care Act turned a spotlight on the employer-payshealth care system, and a variety of companies started to publishdata outing the PPO industry and the ridiculous “discount”reimbursement model. In reality, hospitals readily accept 130percent to 150 percent of what Medicare would pay (sometimes less)for those willing to make cash-based payments. Intelligentemployers started asking about ways to close the gap between the300 percent of Medicare most are paying via the PPO models and whathospitals accept from cash-based payers.

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