How Usual, Reasonable and Customary Rates are Adopted by Health Insurers

The AHA! moment of 2019 for many healthcare providers in America.

Once upon a time, providers sent in their usual and customary charges to insurers only to be told that their charges exceeded the Usual, Customary and Reasonable rates for the area in which they did business.

In Kansas, at a small whistlestop town on the railroad line, a small critical access hospital, the only one for 60 miles in any direction was told this. They called me to ask me how to argue back. When your hospital is the only hospital in a 60 mile radius, you ARE the usual, reasonable and customary standard of the area because there is no other provider.

What I told them was that the problem was not with them or their charges. The problem was that they failed on due diligence when contracting with the health insurance company.

What you must ask the health plan

"How do you calculate your interpretation of UCR?"

Health plans buy or lease ‘modules’ or uniform pricing schedules, that provide whole dollar payment amounts for each percentile (for instance, the 80th percentile) for given medical procedures in various locations.

For a real eye opener, read this document online from the US GPO. Then go have a stiff drink and come back ready to learn.

If they create it internally, they aggregate historical charge data for surgical and anesthesia procedures from data contributors (providers who submit claims). The information compiled consists of four data points—the date of service, the Current Procedural Terminology (“CPT”) code, the billed charge, and the geozip.

They then talk to underwriters and actuaries to determine their potential risk of utilization. Based on the premiums they collect, they predictively model how many claims they will receive in a given premium year.

Here's an example of the information they receive from their actuaries and underwriters:

1. From 2010 to 2017, spending on planned orthopedic surgeries increased 44 percent and accounted for 47 percent of all orthopedic spending. The number of knee implants increased 6 percent and the number of hip implants increased 5 percent over the same time period.

2. The average price for inpatient knee implants in 2017 was $30,249, compared to $19,002 in the outpatient setting. There was a significant gap between inpatient and outpatient spending on hip replacements as well; average spending on hip replacements was $30,685 in the inpatient setting and $22,078 in the outpatient setting.

3. The outpatient setting represents a 30 percent to 40 percent savings for knee and hip procedures.

4. The outpatient complication rate improved by 23 percent for knee surgeries and 36 percent for hip surgeries from 2013 to 2017; at the same time, there were comparable complication rates in the inpatient setting.

Source: BCBSA Predictive modeling

So how much can they afford to pay (per procedure) based on the money they collected in premiums minus overhead and plan running costs?

This information then informs the plan of whole dollar payment amounts for each percentile (for instance, the 80th percentile) for given medical procedures in various locations.

The disconnect in communication

Provider agreements generally state that the provider will be paid for their services based on the Usual, Customary and Reasonable amount allowed by the health plan. Let's break that sentence down and you'll see the problem.

A. The provider submits the bill for their normal price that they charge everyone. They read that sentence and incorrectly assume that they will be paid 100% of the 99th percentile of that amount. Not so!

They will be paid an amount of money based on the Usual, Customary and Reasonable amount allowed by the health plan.

So for argument's sake let's assume that the reference point is 80% of the 125th percentile of the current Medicare Allowable Fee Schedule for a geo-locality where the plan has chosen the reference price allowance. That place happens to be in the cheapest rent district in a rural area in upstate New York.

But the provider's medical practice is centrally-located in the most expensive residential neighborhood in Manhattan. Rents are higher, utilities are higher, staffing costs are higher, taxes are higher, commuter costs are higher. Therefore, prices are also higher. And they are that providers usual, customary prices. Reasonable is a discussion for another day.

How to do the math

The contract terms: The plan must state (best practice, in the contract) that the allowable fee maximum for claims payment is 80% of the 125th percentile of the 2019 Medicare Fee Schedule for Zip Code 12345. To interpret this meaningfully, the provider must obtain the Medicare Fee Schedule for 2019, look up the geographical practice cost index (GPCI) rate for the zip code 12345, calculate the 125th percentile of that number and multiply by 80% of that number.

Assuming the deductible has been satisfied, of this calculated UCR amount, the plan pays the provider 80% and the other 20% is due from the patient.

What do the formulas mean in terms of checks in the bank?

To understand how the money flows, the provider should make a spreadsheet of all their usual and customary procedures and their usual and customary prices. It should be arranged as follows (one spreadsheet for each contract you sign)

1. Column A: the Procedure Code
2. Column B: the Medicare allowable rate for the CPT Code
3. Column C: The rate adjusted for the GPCI locality.
4. Column D: Column C adjusted to 125th percentile
5. Column E: Column D adjusted to 80% of Column D
6. Column F: Providers usual and customary price
7. Column G: Comparison between Column E and Column F

Decision: Acceptable? Yes or No?

You must do this due diligence and modeling for every contract you analyze.

Evaluate impact

Next, establish a weighted average for your patient base:

In your practice you have 4000 patients.

1. 1500 are Medicare but these are distributed across 7 Medicare Advantage plans and Traditional Medicare. The plans each pay a different amount.
2. 700 are from UnitedHealthcare commercial plans both HMO and PPO. The formula is written in the contract as 80% of the 140th percentile of the 2007 Medicare Fee Schedule for Zip Code 12345.
3. 240 are from Humana commercial plans both HMO and PPO. The formula is written in the contract as 82% of the 150th percentile of the 2009 Medicare Fee Schedule for Zip Code 12345.
4. 130 are from Aetna commercial plans both HMO and PPO. The formula is written in the contract as 76% of the 125th percentile of the 2010 Medicare Fee Schedule for Zip Code 12345.
5. 618 are from Blue Cross Blue Shield commercial plans both HMO and PPO. The formula is written in the contract as 72% of the 120th percentile of the 2012 Medicare Fee Schedule for Zip Code 12345.
6. 127 are from CIGNA commercial plans both HMO and PPO. The formula is written in the contract as 90% of the 117th percentile of the 2003 Medicare Fee Schedule for Zip Code 12345.
7. 174 are from various other insurers with which you have contracts. You have no idea where these contracts are or how many there are.

• 162 patients report no insurance

Your patient base is 3651 patients spread across 14 contracts. You'll need to create 14 worksheets after you've researched each of the reference-based prices.

Each pays a different UCR allowable with a different formula. It's been years since the last time you even looked at your contracts. None have been renegotiated or maintained since then. Your previous office manager retired and moved to Florida. You've hired an outside billing service. They are expected to bill insurance and follow up on unpaid claims.

Checks come to the office and your receptionist dutifully posts the payments, adjusts the amounts discounted and moves the patient responsibility for the balance to the patient's ledger. She endorses your checks and deposits them in the bank. The billing service downloads the deposit registry for the day, sees the balance transfers and generates bills to the patients for their cost share.

A. How do you know the amount from the payer is correct if you don't have the spreadsheet created?

B. How does the billing service determine if you've been fully paid and the account balance from all expected sources is zero?

C. How do you prepare to ask to renegotiate your contracts?

D. What if some of the procedures you currently offer were not a twinkle in anyone's eye last time you negotiated and there was no price in the Medicare Fee Schedule, so there's no negotiated rate for that service?

You call me and I bring a wooden stake and a silver cross. I wear a bulb of garlic around my neck to ward off whatever bad juju you have going on because your practice is a mess! Your contracts are a mess. Ain't no fairy godmother magic wand I can wave to fix this. How long will it take me to get you squared away and fix this?

It depends. But I can't do anything until someone from your practice gets me all 14 contracts, attachments, exhibits, amendments, and other correspondence and notices from each plan. I'll also need the relevant Medicare Fee Schedules and GPCI adjustments for the reference geozip locality for each year in question. I will also need a list of all your CPT codes, and current prices.

I'll start by analyzing each payor contract file. That's 7-10 hours per contract, on average. In that time I read the contracts and create my edited version with in-line comments, not a separate report. Most doctors and hospitals have me review their key contracts. The mixed bag of contracts from those other 174 patients are not reviewed as they just don't bring enough revenue to warrant the expense.

Then, I'll create the database in Airtable for all 14 contracts. That way, I don't have to create a flat file for each contract and enter duplicate information for each contract. The initial research, calculations and data entry and file table infrastructure will take me about 40 hours across all 14 contracts.

The database I create will be a relational database. It will be reusable for every new contract you are offered going forward and the infrastructure for the modeling will be done. Just enter in the reference fee schedule and formula and your model will be a simple comparison output.

You'll have to maintain the tables for new procedures, codes and your retail prices. If you don't, shame on you.

And when you are ready to model new contracts you'll ask the plan representative, "How do you calculate your interpretation of UCR?" With that answer from the plan rep, and some uploaded information using the Medicare or other reference source, in seconds you'll press a few keys and a report will tell you how far off the anticipated payments will be, post-deductible, from the plan.

Then to refine your analysis, you'll consider the deductible amounts in the context of the population demographics and their ability to pay the deductibles and copayments. Any amount not collected raises your "effective discount" and bad debt risk. If the money part is acceptable then you are safe to invest in a consultant's analysis of the contract language to find loopholes, ambiguities, request and analyze clarifications, negotiate any recommended or required changes based on your practice business rules for contracting, run the pre-final version past your legal adviser, and based on the feedback you get, move forward to the contract signature execution.

Now that you have all your numbers, you can begin analyzing your leverage to see if you can prevail on requested changes and how long it will take to win. A jump from 2007 prices to 2019 prices could easily take gradual steps over a 3 year period. Then again, ask for too much in one jump and the plan may decide they are unable to meet your requirements and move to terminate your contract(s). This is a risk that is not attributed to a bad negotiator. It is attributed to waiting too long to renegotiate and maintain your contracts to the USUAL AND CUSTOMARY rates paid to healthcare providers in your specialty in your area.

I hope I don't have to come with the garlic around my neck, but if you need help, let's chat.