oversight

Report on the Use of Silent PPOs In The Federal Employees Health Benefits Program

Published by the Office of Personnel Management, Office of Inspector General on 1998-02-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                                                                  ENCLOSURE





                                               REPORT OF REVIEW



                                    OFFICE OF THE fNSPECTORGENERAL
                                    OFF[CE OF PERSONNEL MANAGEMENT

                            REPORT ON THE USE OF SILENT PPOs
                                         rNTHE
                      FEDERAL EMPLOYEES HEALTH BENEFrTS PROGRAtV1



                        REPORT NUMBER 99-00-97-054                               DATE February 26, 1998




                                                                                       Harvey D. Thorp
                                                                                       Assistant Inspector




                                                               ··CAUTION·· .

Thrs audit report may contain proprietary data whIch !s protected by Federal law (l8 USC 1905), therefore. while Ihls report is available under
the Freedom of lnfcrmauon Act, C3UlI0l1 shouldbe exercised before releasing the report to the public
                                                                  Report Number 99-00-97-054


                         OFFICE OF THE rNSPECTOR GENERAL

                         OFFICE OF PERSONNEL MANAGEMENT


                       REPORT ON THE USE OF SILENT PPOs

                                   rNTHE

                 FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM



L lNTRODUCTION AND SUMMARY OF RESULTS

As a result of interest initially expressed by Chairman Mica, House Subcommittee on Civil
Service, Committee on Government Reform and Oversight, the Office of Personnel Management
(OPM), Office of the Inspector General (OIG) has performed a review of the use of "silent" and
"non-directed" Preferred Providers Organizations (PPOs) in the Federal Employees Health
Benefits Program (FEHBP). The committee expressed the concerns of the American Hospital
Association and American Medical Association who suggested that health care providers are
being victimized by schemes that create payment discounts for payers who are not entitled to
them, These schemes are purportedly carried out by "silent PPOs." Thus, the principal purpose
of our review was to determine whether "silent PPOs" were used by FEHBP carriers to capture
discounts to which they were not entitled, Our review did not disclose any evidence that FEHBP
carriers used "silent PPOs" to capture discounts or that health care providers were otherwise
victimized by FEHBP carriers. Nevertheless, we observed that for 1.3 percent of the claims we
tested, discounts taken were inconsistent with agreed upon contract terms. We do not consider
these errors to be material nor are they indicative of a systemic problem.

At the committee's request, we also determined how wording in OPM's annual carrier call letter,
which encouraged carriers to seek discounts on providers' bills, came to be included in the call
teller. We found that the wording was included as a result of discussions between the House
Appropriation Committee's staff and OPM's former Associate Director for Retirement and
Insurance.

A detailed discussion of our review objectives, scope, and methodology is presented in Section
tV, Substantive comments made in response to a draft of this report from several affected
parties are included in the appendix.

II. BACKGROUND

The FEHBP was established by the Federal Employees Health Benefits Act (Public Law 86­
382), enacted on September 28, 1959. The FEHBP was created to provide health insurance

                                                1
benefits for federal employees, annuitants, dependents. and others. OPM's Retirement and
Insurance Service has overall responsibility for administration of the FEHBP. The provisions of
the Federal Employees Health Benefits Act are implemented by OPM through regulations which
are codified in Title 5, Chapter I, Part 890 of the Code of Federal Regulations (CFR). Health
insurance coverage is made available through contracts with various health insurance carriers
that provide either service benefits, indemnity benefits, or comprehensive medical services.
Health insurance carriers provide these benefits on either a fee-for-service or a prepaid basis. For
calendar year 1997, there were 14 fee-for-service plans and about 460 prepaid plans in the
FEHBP In a fee-for-service plan, the medical provider is paid a fee for the specific service
provided. The size of the fee will vary depending on the complexity of the service. The
subscriber's group insurance premiums reflect the composite cost of all fees paid to medical
providers on behalf of all subscribers in the group. In a prepaid plan, the providers are generally
paid a fixed amount which is intended to cover all the services required by individual
subscribers Because of the fixed nature of the payment, the providers are at risk of not
recovering all their costs. This risk is an incentive for prepaid plans to control their costs.

During the last decade, the health insurance industry has been undergoing rapid change in
response to rising costs. The rapid growth of prepaid health carriers, generally referred to as
Health Maintenance Organizations (HMO), who, through their ability to better control costs via'
utilization control and managed care techniques, have caused fee-for-service carriers to seek
better ways and means to control their costs so that they can remain competitive. One cost
control method used by fee-for-service carriers is known as a Preferred Provider Organization
(PPO). A PPO is a group of medical providers who agree to provide medical services to the
subscribers of an insurance carrier at a lesser cost than would have been otherwise charged. The
perception is that in a traditional PPO, the PPO would employ some method of controlling
benefit utilization by subscribers and would manage medical care more cost effectively. Thev
might also establish controls to improve the quality of care, In exchange for a preferred status,
lower fees, and better care, the carrier would attempt to steer its subscribers to the PPO's medical
providers through such methods as financial incentives, !D cards, and preferred provider lists.
Thus, significant savings could be achieved by the carrier which would reduce its premium costs.

ln recent years, a new variation of the PPO concept appeared. This variation is known as a "non­
directed" PPO as distinguished from the traditional PPO which has become known as a
"directed" PPO. The terms "directed" and "non-directed" are references to the steerage or lack
of steerage of patients. As explained above, in a traditional directed PPO arrangement,
subscribers are steered to the PPO to take advantage of the lower costs. In a "non-directed" PPO.
even though the medical providers have agreed to charge a lower fee, the contract the PPOs enter
into do not require that the carrier's subscribers be steered to them. In some non-directed PPOs.
the PPO may benefit from this arrangement as a result of prompt payments or advances. In other
non-directed PPO arrangements, the benefits to the provider may be less clear.

In the case of both the directed and non-directed PPOs, the terms of the arrangement are
committed to a contract between the parties. Also, there may be intermediate organizational

                                                 2
 layers between the insurance carrier and the providers of medical service. In a typical non­
 directed arrangement in the FEHBP, an insurance carrier contracts with a third party vendor for
.non-directed PPO services. The vendor assembles the network of non-directed PPO providers by
 either contracting directly with individual medical providers or by contracting with networks of
 medical providers who in turn contract with individual medical providers (Exhibit I). Very
 frequently, the vendors and the provider networks also contract with other carriers for directed
 PPOs. Therefore, non-directed PPO services may be provided to FEHBP carriers while directed
 PPO services may be provided by the same provider or provider network to non-FEHBP
 Insurance carriers.

Concurrent with the evolution of non-directed PPOs, a new term, "silent PPO" became
commonplace. The term, "silent PPO," means different things to different people. Initially, the
term "silent PPO" was merely a reference to a non-directed PPO where the contract was "silent"
with regard to the steerage of patients to the provider's facilities. However, in more recent times,
the term has acquired a more restrictive meaning. As a result, to some people, "silent PPO"
describes a payment scheme used to obtain illegal discounts for payers who are not entitled to
them. In discussions with interested parties and in industry literature, the terms "fraud," "illicit,"
"manipulation," "falsely," "unethical," and "scheme" are frequently used to describe silent
PPOs. Consequently, the term "silent PPO" has come to mean an unethical and/or illegal
practice. and the term has been loosely extended to inappropriately encompass non-directed
PPOs. For the purpose of our review, we have differentiated between the terms "non-directed
PPO" and the more restrictive term "silent PPO." Since "silent PPO" activity would be
inappropriate for the FEHBP, we were concerned with the implication that it may exist in the
FEHBP.

."'- "silent" PPO IS distinguished from a "non-directed" PPO by the nature of the contractual
relarionship between the parties. As stated above, in a "non-directed" relationship, discounts are
taken pursuant to contractual arrangements that can be traced from the payer (i.e., the insurance
carrier) to the medical provider. In a "silent PPO," a contractual relationship can not be traced
from the payer to the medical provider from whom the discount is taken. Typically, in a silent
PPO arrangement, another PPO will sell its medical provider's names and discounted fee
information, often without the provider's knowledge and permission, to a secondary market of
vendors. These vendors then access the information on behalf of their payer clients,
recalculating the provider's fee based on the discounted fee information. It has been alleged that
sometimes, the payer may claim a non-existent affiliation with the provider by inaccurately
declaring that the patient is a member of a PPO to which the provider is a member.

In 1993, when the distinction between a non-directed PPO and a silent PPO was less clear, OPM
became aware of market place arrangements that resulted in the capturing of discounts from
provider bills. As a result, in its March 1993 caUletter to FEHBP carriers providing rate and
benefits instructions for the 1994 contract year, OPM stated, "In addition, OPM is aware that
price concessions are available from non-network providers, e.g., hospitals, so carriers are
expected to obtain the lowest price available for all goods and services, including non-PPO

                                                  J




                                                                                                         .,
providers." The committee is concerned that this OPM requirement may have encouraged the

use of improper payment discounts thereby causing an fEHBP provider to grant a discount to a

payer that it is not contractually obligated to give.


ru   DISCUSSION OF RESULTS

Our review disclosed that substantial savings have been and can be achieved by both directed and
non-directed PPOs. We further found these saving can be achieved in an ethical manner; in that,
we found no evidence in the fEHBP that "silent PPOs" were a factor or that provider discounts
were otherwise taken on the basis of any schemes to victimize medical providers. In addition,
we found FEHBP carriers and their vendors were, except for some minor exceptions, accessing
discounts in accordance with the terms of their contracts with providers. Based upon the
aggregate of our observations, we believe given the complex environment in which PPOs
operate, it is understandable why the expectations for patient steerage by medical providers is not
always fulfilled. With regard to OPM's call letter, we found that language which encouraged
carriers to seek discounts on providers' bills was the result of discussions between the House
Appropriation Committee's staff and OPM's former Associate Director for Retirement and
Insurance.

A. Substantial Savings Can Be Achieved through both Directed and Non-directed Preferred

Provider Arrangements.


 As we indicated earlier, a principal reason why carriers enter into preferred provider
 arrangements is to reduce their costs. Lower costs translate into lower premiums for the FEHBP,
 the federal government, and its employees. In our survey of FEHBP carriers, we asked carriers
 how much the FEHBP saved by using directed and non-directed PPOs. Carriers reported
 substantial savings (See Exhibit 3). The great majority of the savings were realized under
 directed PPO arrangements. For the six-month period ending June 30, [997, six carriers reported
 gross directed PPO savings totaling $390.5 million. This represents 19.7 percent of premiums
.1'Or those carriers. For the same period, a different mix of six carriers reported gross non-directed
 PPO savings totaling $25.5 million representing 2.2 percent of premiums. We conclude that
 substantial sums can be saved through directed and non-directed PPO arrangements. In view of
 the fact that directed PPOs provide for steerage of patients, as would be expected, directed PPO
 savings are significantly larger than non-directed PPO savings. While non-directed PPO savings
 are substantially lower than directed PPO savings, in absolute terms, they too are significant and
 offer additional opportunities to reduce FEHBP costs that should not be overlooked, assuming
 they can be achieved in an ethical and lawful manner.

B. No Evidence Found to Connan the Use of Payment Schemes that Victimize Health Care

Providers in the FEHBP.


Based on our test of insurance benefits paid in August 1997 by FEHBP carriers, we found no
evidence that "silent PPOs" were used as a method of capturing discounts or that providers were

                                                   4
being otherwise victimized.

The Committee on Government Reform and Oversight has expressed the concern that medical
providers are perhaps being victimized by an alleged practice which accesses provider discounts
using subterfuge or misrepresentation. As explained previously, this practice involves the selling
of provider names, and the discounts they provide to their directed PPO clients, to third parties
who access the discounts by misrepresenting their subscribers as members of the provider's
directed PPO. This report uses the term "silent PPO" to describe this practice. In these cases,
there is no contractual relationship between the payer of insurance benefits (or their
subcontractors) and the medical providers who are providing the medical services to the payer's
subscribers. Such misrepresentation, in our opinion, would constitute, at the very least, an
unethical practice in the FEHBP. OPM regulations set forth the minimum standards for health
benefit carriers. The standards provide that carriers must perform the contract in accordance with
prudent business practices which include, "Legal and ethical business and health care practices."
(48 eFR 1609.70(b)(2». Failure to adhere to minimum standards could be cause for terminating
a carrier contract Consequent]', ' the principal focus of our review was to determine whether any
FEHBP carriers, or their subcontractors on behalf ofFEHBP carriers, participated in the above
described practice.

As explained in the background section, the terms "non-directed PPO" and "silent PPO" have
been used interchangeably. Therefore, it was generally thought that those vendors who offer
non-directed PPOs also made use of "silent PPOs." Consequently, to search for the use of silent
PPOs in the FEHBP, we focused our attention on the vendors who subcontract with FEHBP
carriers to provide non-directed PPO services. As a result, we identified five FEHBP carriers
who contracted with four (as a result of an acquisition, to become three) vendors to provide non­
directed PPO services (See Exhibit 2). [Note: These same vendors may also provide directed'
PPO services to other clients] We sampled and reviewed 600 claim lines representing 120 claim
lines for each earner that were repriced by these vendors. The purpose of our sample was to
determine whether the discount taken on each claim was pursuant to the medical providers
memhership in the non-directed PPO and was otherwise consistent with their contract. We
found that in each instance, a series of contractual agreements were in place. These agreements
were between the carrier and the vendor, the vendor and provider network or the provider, and
the provider network and providers. Consequently, we found no evidence that the FEHBP
carriers through their vendors used "silent PPOs" to access discounts.

C. With Minor ExcjQ2tion, Discounts Were Accessed in Accordance with Contract Terms.

ln addition to ensuring that there was a contractual relationship between all the parties who
participated in arranging for the discounts from non-directed PPOs, we also verified that
discounts taken were consistent with the contract terms. While the great majority of the claim
lines tested were processed in accordance with contract terms, we observed in a few instances,
that the FEHBP carrier was not entitled to the discounts taken. We found that the vendors
accessed provider discounts in 8 of the 600 claim lines (or 1.3%) that were inconsistent with

                                                5
 contract terms. These improperly taken discounts totaled $675.27 representing 1.24 percent of
 the $54,370 of discounts taken in our August 1997 sample of 600 claim lines. If our findings for
 the month of August 1997, were representative of the six-month period ending June 30, 1997,
 then out of carrier reported non-directed PPO savings of $25.4 million, about $315 thousand was
 Improper!y taken. In each case, to access the discount, the contract between either the vendor
 and provider network or between the provider network and the provider required the steerage of
 the patient to the provider through some form of financial incentive. In each case, the patient
 was not steered to the provider in accordance with the contract terms. Our review at each vendor
 is further discussed below:

National Preferred Providers Network (NPPN). Inc.

The NPPN is located in Middletown, New York and offers provider networks to its clients. Its
network consists oD,OOO hospitals, 18,000 ancillary facilities, and 280,000 physicians. The
NPPN contracts with the National Association of Leiter Carriers Health Benefit Plan (NALC) to
provide a non-directed PPO network. Their agreement provides that NALC is under no
obligation to notify participants of the availability ofNPPN's network providers.

Dunng our review of the NPPN claim line sample (60 claim lines out of a universe of 33,848),
we determined that there were contractual agreements in place that made the medical providers
members of NPPN's network. However, we found that NPPN extended some discounts to
NALC that we determined were improper. NPPN's contract with one provider network required
steerage in order for the discounts to be given to the insurance carrier. This contract covered
three claim lines or 5 percent of the claim lines reviewed in our NPPN sample (See Exhibit 4).
For the three claim lines, $55.77 in discounts were taken.

Multiplan

. Multiplan is located in New York, New York. It is a facility-based preferred provider
 organization with a network of over 30,000 hospitals and other facilities located throughout the
  United States. Multiplan contracts with the NALC to provide a non-directed PPO network.
  Multiplan also provides directed PPO services to other clients. (See appendix for Multiplan
 comments.)

During our review of the Multiplan claim line sample (30 claim lines out of 6,081), we
determined that there were contractual agreements in place that made the medical providers
members of Multiplan's network. Generally, we also found that Multiplan agreements with
provider networks did not require the steerage of patients, but instead required Multiplan to use
its best efforts to encourage appropriate incentives to the Providers. However, we found that
Multiplan extended an immaterial discount to NALC from one provider network that we
determined was improper (See Exhibit 4). Multiplan's contract with one network required
steerage in order for the discounts to be given to the insurance carrier. The contract covered one
claim line or 3.33 percent of the lines reviewed. The discount totaled $1.87.

                                                 6
United Pavers & United Providers (UP & UP)

The UP & UP is located in Rockville, Maryland. UP & UP provides non-directed PPO services
to the following five FEHBP carriers: Foreign Service, APWU, NALC, Rural Carriers, and
SMv1BA. In September 1997, UP & UP acquired America's Health Plan, Inc.. AHP previously
provided non-directed PPO services to FEHBP carriers. (See appendix for UP & UP comments.)

During our review of the UP & UP claim line sample (510 claim lines out of 40, 704), we
determined that there were contractual agreements in place that made the medical providers
members of UP & UP's network. We observed that UP & UP periodically provides its provider
networks with a list of client payers. They also provide their hospitals with a cash prepayment.
We also noted that UP & UP agreements state that it will use its best efforts to require each payer
client to create financial incentives for covered persons to utilize their providers.

Our review disclosed that UP & UP accessed discounts for four APWU claims that we
determined were improper (See Exhibit 4). For the four APWU claim lines, one contract
between a provider network and its providers required steerage of subscribers through financial
incentives in order for the discounts to be given to the Insurance carrier. ln all four cases, the
carrier did not provide the financial incentives required by the contract. In three of the four
cases, the APWU paid 100 percent of the claim. Had co-insurance been applicable to these
specific claims, the cost sharing provision of UP & UP's contract with its providers would have
been operative thereby authorizing the discounts taken. These four claim lines represent less
than one percent of the claim lines reviewed. in our sample. The discounts taken total $617.63.

Conclusion

While we found no evidence that silent PPO's were a problem in the FEHBP, we noted that In
eight instances, FEHBP earners were given access to discounts by their vendors to which they
were not entitled. In these instances, the contracts with either the provider networks or the
providers required a financial incentive to steer patients to the provider's facilities and the
subscribers were not so steered. We believe it is the obligation of the vendor to ensure that It
does not give FEHBP earners access to discounts to which they are not entitled. To the extent
that these circumstances exist, providers would have cause for concern. However, the number of
instances in our sample were not material.

While the evidence of our review suggests little cause for concern, this conclusion is inconsistent
with the level of concern expressed by the medical community. While we found that in the great
majority of the cases, discounts taken were consistent with the contract terms, the complex
environment and sometimes vague contract terms under which PPOs operate leave expectations
on the part of providers that perhaps are not being fulfilled. First, we observed that many of the
vendor contracts with provider networks and providers state that the vendor will make a
reasonable or best effort to encourage payers to provide incentives to its subscribers to use the
vendor's providers. Best efforts do not always translate into actual steerage. Second, the

                                                 7
 contractual relationship between the vendor and the provider sometimes also involves an
 intermediary, a regional provider network. These regional network agreements insulate the
 provider from the true nature of the agreement that exist between the regional networks and the
 vendor. Third, some payer clients use the vendors for directed PPO services and thus share the
 same providers with other payer clients who use the vendor's non-directed PPO services. Since
 the vendor may have only a single contractual agreement with the provider, some of the patients
 are steered and others are not. Thus, we can visualize how these three factors can combine to
 cause perhaps false expectations and confusion on the part of providers who may be expecting
 steerage but in fact entered into an agreement that does not require steerage. We would suggest
 that the best solution to these factors is education within the industry. We have observed that
 both the American Medical Association and the American Hospital Association have already
 begun such an effort.

 D. Use of Non-directed PPOs Encouraged by Appropriation Committees.

 Our review determined that language in OPM's annual carrier call letters, which encouraged

 carriers to seek discounts on providers' bills, was a result of discussions between House

 Appropriation Committee's staff and OPM's former Associate Director for Retirement and

 Insurance.


  Each spring, OPM issues its annual carrier call leiter to health benefits carriers. The call letter is
  a solicitation to current FEHBP carriers for proposed rate and benefit changes for the upcoming
  contract year which begins January I. The letter generally provides overall direction and sets the
  parameters for acceptable rate and benefit changes. Recognizing that in the market place, pnce
  concessions were available from non-network providers (meaning providers who do not belong
  to directed PPO networks), the March 1993 call letter for the 1994 contract year included a new
  provision which encouraged carriers to obtain price.. concessions from providers including non­
  PPO providers (again meaning providers who do not belong to directed PPO networks). The
. provision read as follows:

         "Carriers are to actively establish or promote the expansion of existing PPO
         arrangements in terms of availability to enrollees as well as coverage provided, In
         addition, OPM is aware that price concessions are available from non-network
         providers. e.g. hospitals, so carriers are expected to obtain the lowest price
         available for all goods and services. including non-PPO providers." (Underline
         added)

  A similar provision was included in the March 1994 call leiter for contract year 1995. lt read as
 follows:

          "We continue to encourage expansion ofPPO arrangements, in terms of
         availability ofPPO providers to enrollees and coverage provided. In addition,
         carriers are expected to obtain the lowest price available for all goods and

                                                    8
       services, includIng those of non-PPO providers. All carriers must put in place
       procedures to capture discounts from all bills presented andior contract with
       vendors to do this." (Underline added)

The call letters for contract years 1996, 1997, and 1998 continued to encourage carriers to
expand and strengthen their existing PPO arrangements and the services provided under such
arrangements. In addition, they each contained the following pertinent provision:

       "We also expect carriers to put in place procedures to capture discounts from bills
       presented, where cost effective to do so."

The committee was concerned that the call letter language may have encouraged, perhaps
inadvertently, the use of improper payment discounts. By "improper," they meant any system of
payment discounts for payers who are not entitled to such discounts, They believed that the
result of any such improper discount would be to cause an FEHBP provider to grant a discount to
a payer that it is not contractually obligated to give. The committee was also concerned that the
call letter seems to have had the effect-Intended or not-of spawning efforts on the part of some
network managers andior brokers to require the use of non-directed PPOs by statute. As a
consequence, the committee asked us to determine what prompted the language in the OPM call
letter.

The former Associate Director for Retirement and Insurance recollected that in 1993 the House
Appropriation Committee was considering either report or statutory language which would
require FEHBP carriers to take advantage of provider discounts available in the market place.
The former Associate Director indicated that he opposed any language which would regulate the
market place. Consequently, as a compromise he agreed to include language in OPM's call.letter
which would encourage FEHBP carriers to take advantage of whatever discount arrangements
were available in the market place. In 1993 (for the FY 1994 appropriation) and again in 1')94
(for the FY 1995 appropriation), both the House and Senate Appropriation Committee reports on
OPM's appropriation bill applauded OPM's action. The House report for the FY 1994
appropriation stated:

               "The Committee feels that, in addition to the cost savings obtained by
       HMO's and PPO's, all FEHBP carriers should endeavor to obtain the lowest price
       available for the goods and services they provide. The Committee has learned
       that while price concessions are available from most providers, not all FEHBP
       carriers are receiving such discounts. Many carriers in the FEHBP merely pay the
       billed charges or the usual and customary rate.

              The Committee is aware, however, that some carriers are utilizing large
       discount networks that have negotiated more favorable rates with providers. The
       Committee feels there could be significant savings realized through a more
       concerted effort by carriers to pay the lowest price available for billed medical

                                                9
       charges, and applauds the Office of Personnel Management's reference to such
       potential efforts in its Letter to Carriers dated March 31, 1993. The Committee
       believes these efforts should in no way disrupt benefits or attempt to direct
       patients if they choose not to be directed to specific providers."

Based on our interview with the former Associate Director for Retirement and Insurance and our
review of the Appropriation Committees' Report for the Treasury, Postal Service, and General
Government Appropriation bills for 1994 through 1995, we conclude that the call letter language
was prompted by the House Appropriation Committee'.

IV. OBJECTIVES, SCOPE, AND METHODOLOGY

The objective of our review was to determine whether FEHBP carriers were taking advantage of
health care providers by using payment schemes that create payment discounts for payers who
are not entitled to them. In performing our review, the committee staff requested that we also:

       I.	    Identify organizations that contract with FEHBP carriers to reprice provider bills
              to obtain a discount where the FEHBP carrier does not have a directed PPO with
              the provider or the patient has not been given a financial incentive to use the
              provider from whom the discount was obtained.

       2.	    Determine whether any discounts were taken by FEHBP carriers to which they
              were not contractually entitled.

       3.	    Identify providers that have a contract with vendors based solely on the possibility
              of becoming a part of that vendors network.

       4.	    Identify providers that have a contract with a vendor based solely on the concern
              that they need to do this to remain cornpetitive.

       5.	    Determine what prompted the language in the OPM call letter to encourage the
              use of non-directed PPOs by FEHBP carriers.

Our review was performed in accordance with generally accepted government auditing standards
for performance audits. The review was performed at the Government Employees Hospital
Association, Kansas City, Missouri; United Payers and United Providers, Rockville, Maryland;
Multiplan, New York, New York; and National Preferred Providers Network, Middletown, New
York during the period June 1997 through December 1997. Additional work was performed in
our offices in Washington DC. Our review entailed the following review procedures:

•	     We conducted an initial review at the FEHEP's Government Employees Hospital
       Association (GEHA) plan to gain an understanding of the subject. We interviewed
       carrier officials and traced 34 claims, which were repriced by non-directed PPO vendors,

                                               10
     to contractual agreements between the GEHA, vendors, and providers. We found no
     evidence of questionable conduct or contract inconsistencies; that is, in each case, we
     found that contracts were in place and that discounts were taken pursuant to the contract
     terms.

•	   We surveyed 9 of 14 FEHBP fee-for-service carriers to identify which carriers used
     directed and non-directed PPOs and to identify the non-directed PPO vendors used by the
     carriers. We did not survey: Blue Cross Blue Shield (has its own PPO networks), GEHA
     (covered in survey work), Association Benefit Plan (requires extraordinary security
     procedures), Panama Canal Area Benefit Plan (out of country), and Secret Service
     (underwritten by BCSS who has its own PPO networks),

•	   Of the nine carriers surveyed, we found that five carriers used non-directed PPO
     arrangements. They were:

     1. Amencan Foreign Service Protective Association (Foreign Service),
     2. American Postal Workers Union Health Plan (APWU),
     3. National Association of Letter Carriers Health Benefit Plan (NALC),

     4, Rural Carriers Benefit Plan (Rural Carriers), and

     5, Special Agents Mutual Benefit Association (SAMBA).


•	   We identified four vendors that provided non-directed PPO services to the five carriers
     (See Exhibit 2), They were:

     I.	      United Payors and United Providers (Up & Up), Rockville, Maryland,
     2.	      America's Health Plan (AHP), Rockville, Maryland (Acquired by UP & UP'!.
     3.	      Multiplan, New York, New York, and
     4.	      National Preferred Provider Network (NPPN), Middletown, New York.

•	   From each carrier, we acquired a computer tape of all benefit payments during August
     1997. From these tapes, we extracted 80,633 claim lines representing $2.7 million in
     discounts paid by the five carriers and repriced by one of the four non-directed PPO
     vendors.

•	   From the extracted claim lines, we sampled 600 claim lines (120 per carrier) representing
     $54 thousand in discounts.

•	   For each of the 600 claim lines, we reviewed the carrier's Explanation of Benefits, when
     available, traced claims to carrier contracts with vendors and further traced claims to
     vendor contracts with provider networks and/or providers.

•	   We reviewed the carrier and provider network contracts at the vendors' offices to
     determine whether contracts were in place and to determine whether the contracts

                                             11
       required steerage in order to access the discounts. When present in the vendors file. we
       also examined the provider network's contracts with providers to determine whether
       steerage was required.

•	     We recalculated a sample of discounts to verify that discounts were calculated consistent
       with contract terms.

•	     We met with representatives from the American Medical Association and the Federation
       of American Health Systems.

       We did a literature search and reviewed the articles identified.

•	     We surveyed 30 hospitals that complained to OPM about its call letter provision
       regarding the capture of discounts.

•	     With regard to the call letter issue, we reviewed OPM's call letter files for the period
       1991 through 1997 and interviewed both the former Deputy and Associate Directors for
       Retirement and Insurance Services to determine who or what influenced OPM to include
       in Its annual call letter a statement which would encourage carriers to capture discounts
       from non-PPO medical providers. We also reviewed the House and Senate Appropriation
       Committee Reports for the Treasury, Postal Service, and General Government
       Appropriation bills for 1993 through 1995.

Due to time constraints, we were not able to perform sufficient procedures to identify health care
providers that entered into a non-directed PPO contract arrangement with a vendor based solely
on the possibility of becoming a part of that vendor's directed PPO network or to remain
cornpetinve. While we did make some limited inquires, those inquires were insufficient to either
confirm or deny whether these were substantive reasons for entering into a non-directed PPO
arrangement.




                                                 12
                                                           EXHIBIT 1





             FLOW OF DISCOUNT ARRANGEMENTS





                                 I       CARRIERS     I




                                     I   VENDORS      I

                 I
                                             I
             NETWORKS                    PHYSICIANS        HOSPITALS


                 I

                           I

HOSPITALS
              PHYSICIANS
                                                                                                                                                        EXHIBlT 2


                       PREFERRED PROVIDER ORGANIZATIONS

                         <.::~:"""   '.
                                              ~;'-':':':~'~
                                                                 .: .      :."   ":.'.:::           },~'.\<-~
                                                                                                           .-"
                                                                                                                 -~~   "


                                                                                                                           ..:.                'j)~itefJ., Payors &
                                                              .i\.,.,.
                                                                                                                       ~~i~~:r

                                                                                              .;:




                                                                                                                                               ,·tJtti~,rrovlders
                                          ",
                                                ".',.                            "-'C",
                                                                                                    ;,',
                                                                                                                                        ....
                                          <
                                                                                   "      "
                                                                                               .:.::"                               "




 Emp.layee Orga:nmttfull,··.:· r                                                                                       Ih7tlir~rretf:             a:.ndArru~rica'8
  ,-,.,,"   -'   ...
                 ~
                                                                         ,",'
                                                                               Inc .
                                                                    MultlltbD,.',                          Pf(lvid~,lN~bvQtk·                      RealthPlan
                                                                                                                                                            .• ....,          ~.,,'


                                                                                                                                                                                   ;

 American Foreign Service                                                                                                                               V
 Protective Association
                                                                                                                                                                                   ;
 American Postal Workers                                                                                                                                V
 Union Health Plan
 National Association of                                                   V                                                 V                          V
 Letter Carriers Health                                                                                                                                                            :
 Benefit Plan

 Rural Carrier Benefit Plan                                                                                                                             t/                         ;
                                                                                                                                                                                   :

                                                                                                                                                                                   ,
                                                                                                                                                                                   ;



 Special Agents Mutual                                                                                                                                  V
 Benefit Association ..                                                                                                                                        , .....   .   ...


Yendors:

'Multiplan, Inc.
 115 Fifth Avenue
 New York, NY 10003
 Phone: (212) 780-2000

National Preferred Providers Network, Inc,
407 East Main Street
Middleton, NY 10940
Phone: (914) 343-1600

United Payor and United Providers/America's Health Plan
2275 Research Boulevard, Sixth Floor
 Rockville, MD 20850
 Phone: (30 l) 548-1000
                                                                                                                                                                                                                                        EXHIBIT 3


                             PREFERRED PROVIDER ORGANIZATIONS REVIEW

                                                       PREMIUM PAYMENTS

                                                 FOR PERIOED ENDING JUNE 30 t 1997

                                                           (UNAUDITED)



                                                                                                 DIRECT PPOs

                                                                         PREMIUM

                             CARRIER                                    PAYMENTS                                                   SAVINGS                                         RATIO


                           APWU                                           203.027,700                                      29,825.317                                                          14.69%
                           GEHA                                           477,451,392                                     106,799,463                                                          22.37%
                           MHBP                                           903.996,936                                     179,148,767                                                          19.82°/0
                           NALC                                           323,256.494                                      58.873.579                                                          18.21 %
                           POSTMASTER                                      29,373,621                                       5.007,328                                                          17.05%
                           SAMBA                                           41,255,807
                                                                           •••       . , _ . ~ _     ••   __   ~ ' o
                                                                                                                       .... 19-,.~~~!Q~7                                                       26.27%

                           Gross                                    1,978,361,950                                         390,493,501
                           Fees                                                                                           .. 19,854,24~.

                                           Net                    . 1,978,361,950                                       "360,63$,256                                  • __••   ~   _~TX
                                                                                                                                                                                               18.23%
                                                                                                                                                                                                   .00".                     -"~




                                                                                                          • _ _ _ _ •                   ,,,_,,,,.   A'   •
                                                 ___ ••   _ . "h.'«-"                     _~_~_                         ~,~   T~   _~




                                                                         PREMIUM
                             CARRIER                                    PAYMENTS                                                   SAVINGS                                         RATIO

                           AFSPA                                            18,858,169                                                392,495                                                           2.08%
                           APWU                                            203,027.,700                                              2970380                                                            1.46%
                           GEHA                                            477,451,392                                               7573843                                                            1.59%
                           NALC                                            323,256,494                                             12.573.249                                                           3.89%
                           RURAL                                            85.536,527                                              1.630,669                                                           1.91 o
                           SAMBA                                            41,255,807                                                311,073                __
                                                                                                                                                                                                        0.75%                     ___
                                                                                                                                                                  ~
                                                                                                                                                                       O
                                                                                                                                                                           O
                                                                                                                                                                                   ~
                                                                                                                                                                                       ~
                                                                                                                                                                                               _
                                                                                                                                                                                                    "
                                                                                                                                                                                                        '
                                                                                                                                                                                                            T
                                                                                                                                                                                                                T
                                                                                                                                                                                                                    T
                                                                                                                                                                                                                        T
                                                                                                                                                                                                                              T
                           Gross                                        1,149,386,089                                          25,451,709                                                               2.21%
                           Fees                                                                                               _ 4,345.,.:!.50

                                           Net                          1,149,386,089                                     .}1,106!259 --C"f,,~~:....J:.~4.r~


~ Amounts saved may be further reduced as a result of financial incentives
   (liven to subscribers.
   ~   ••   •   _ _ + ••   _~~   •••••••                         .. _ " . , ••• ~"~oo• • • • • • •         ~ ~_                    _   ~'~'~_.                M' __        ~ __            •                    ••• _       .. ",.
                                                                                                                                                                                                              EXHrBIT 4




                                                                       Results


                                                                                                                                        .-,-                     - "   .: ':'

                          ;iAtr:~ge"etlt,J
                                                                                   ·····~~~lfll~1• .i;
                                                                                                                                               :'~ ,   -


                                                                                                                                                                                          ...
                                                                                                                                                                                                        '"


                                                                                                                                        ~;:>::Totid8                                                ,
                                                                                                                          •, . . '~"c
                                                                       "

                                                                                                                                                                                                             Total
     VeIUi:Q.r!<      :   ....   ·b~"'~.);',\
                                                                                                                               ,~.'
                                                                                                                             .'c',C

                                                                                                                             .'c;­
                                                                                                                                        i:~,.~~~r;~f                                                     Am.oun.t of
                          :VenqQfJN¢hiiJ~i\, NetW~WPtQMid~j·.
                                                 .­ . .                                   -       - '.­
                                                                                                                                           Etton'                                   n.,
                                                                                                                                                                                                             Sample
                                                                                              ~

                                                                                                                                               :
                                        ...:           ......
                                                                                                                                         ~,>:          ,',-'


                                               .....            ....                                                                                                                                         Errors
                                                                                                              ..
                                                                                                                                            >. ..
                                                                            . '.
                                                                                                                                                                                                "
                                 -.".                                  ..            ..                              ..
                                                                                                                   ,',                                     ,.~
                                                                                                                                                                                "




National Pre ferred
Pro vider Network                         3                                                                                                                            3                                      s55 77
Mu ltip Ian                                1                                                                                                                           1                                       $ 1 87

United Payo rs &
United Pro viders                                                                                         4                                                        4                                         S617 63
      Total Errors                        4                                                               4                                                            8                                     $67 5 27

Number of c laim
1mes reviewed                                                                                                                                                    600                                         $ 54   I
                                                                                                                                                                                                                        .. 70
                                                                                                                                                                                                                        .)

                                                                  ..


         Error Rate                                                                                                                                              13%                                          1 24%
                                                                              APPENDlX


                SIGNIFICANT RESPONSES FROM AFFECTED PARTIES

I.    William E. Flynn, III, Associate Director for Retirement and Insurance, Office of
              Personnel Management
1     Richard G. Miles, President, Government Employees Hospital Association, Inc.
3.	   Carroll Midgett, Chief Operating Manager, Health Plan Department, American Postal
              Workers Union, AFL-CIO
4.	   Calvin Engel, Assistant Administrator, National Association of Letter Carriers Health
              Benefit Plan
5.    S. Joseph Bruno, Chief Financial Officer, United Payors & United Providers
6.    Sidney L. Meyer, Executive Vice President, Multil'Ian
                            Office of
                Personnel Management                            Washington. DC. 20415

                                                              In Reply Refer To:




\1EMORANDUM FOR PATRlCK E. MCFARLAND
                                                                   W.
FROM
                INSPECTOR GENERAL

                         WnUAM E FLYNN.
                         ASSOClATE DIRECTOW
                                                  [1l~   j\;;[
                           FOR RETIRE"MENT AND            1     URANCE

Subject                  Silent PPOs. Report Number 99-00-97-054

Thank you for sharing your "Report on the Use of Silent PPOs in the Federal Employees Health
Benefits Program" with us. We were impressed with the rigor and thoroughness of the report and
are gratified that it confirmed our belief that the carriers which contract with us engage in lawful
and ethical practices in obtaining discounts from health care providers

We were pleased that the small number. only I 3 percent, of discounts that occurred in a manner
inconsistent with agreed upon contract terms were inadvertent errors which were neither material
nor indicanve of any systemic problem in need of correction While much concern has been
expressed about "silent PPOs" which take inappropriate discounts from health care providers.
vour report definitively shows that if "silent PPOs" exist at all, they clearly do not exist in the
Federal Employees Health Benefits Program. What do exist are legitimate non-directed PPOs
which produce material savings for the carriers that employ them. While these savings do not
approach those obtained by the same carriers from their directed PPO networks. they still
constitute savings which would not otherwise have been achieved

We hope that your report will put to rest the need that some parties have expressed for action on
our part to address a "silent PPO" problem that does not exist
                                             (;1;1.1,4_

                                   The Health Plan fir Federal Employees .

                                              February 16, 1998


         Office of the Inspector General

         Office of Personnel Management

         Attention: Sanders Gerson

         Room 6400

         1900 E Sf. N.W.,

         Washington, D.C. 20415



         Subject: Draft Copy of Report on Silent PPOs

         Dear Me Gerson:

         I have reviewed the report and was relieved to see that the conclusions
         supported our position ou this matter. As a mailer of editorial comment only
         I have a couple of observations from reading the report.

         The report discusses the concept of an "ideal" PPO. I believe that the leon
         "ideal" used in this context is too subjective and creates the impression that
         one type of network IS better than another. In reality, what may be desired
         by a provider may not be ideal from a payor standpoint or from that of
         another provider

         Although many PPOs do provide services related to controlling utilization
         this is not universal and the savings derived from utilization controls is
         minor in comparison to the savings from contractual agreements with
         providers. In my opinion, whether or not a PPO provides utilization controls
         IS not relevant to the subject matter. I might also suggest that you substitute
         "traditional" for "ideal" to describe directed networks in the second
         paragraph on page 2.

         I thought the report language could be strengthened to note that although a
         small number of errors were detected there did not appear to be a svstemaric
         practice of deception nor were any of the errors made or a matenal nature.



                                 Government Employees Hospital .4."o<:iAtion, Ine.
                  PO.   8o~   1096 • Independenee. MO 64051-0596 • Telephone (800) 821-0136
                                                  """",.geh.eom

J   -1                  8SttLSZ918       ~N Xy~
                                                                                              , t.
Overall, I was very pleased with the conclusions reached and am hopeful
that this report will put the issue to rest so we call all devote our efforts to
more substantive topics. Thank you for giving me the opportunity to review
the draft report and to provide comment.


Sincerely,

~~,             fYJJ...v
Richard G. Miles
President




              mHSZ918      'ON X'H                          VHj9   Wd SZ:Z Non 86-91-9jj

                                                                    Health Plan Department
                                                    American Postal Workers Union, AFL-CIO
                                                                                               P.O.   acx 420.   BurtonsVIlle. MO 20866



                                                                                            February 17, 1998
  ChK'1 OpetoHlAq ~~9¢1"
  ::0311011 C. Mi(l9l1!t(.;,

  LJOlj l)2:1·5!Os~
                        Mr. Sanders P. Gerson
                                            Deputy Assistant Inspector General fur Audits
                                            Office of Personnel Managemem
  Hl'!.tIrhPWtl
                            1900 E. Street NW - Room 6400
  eQ..rd of Oink'rou

 ~CfiUl!~

                                            Washington. D.C. 20415
 3l'res~(



 WJ1",m ElurrUi
 ~c!;;U:::lVl= "''''~ Prdl~t

 .Jo;,;gl.1n C. HoIl:lnxl«

 }lKmafY~ Tl'NIM'lV

                                            Dear Mr. Gerson;
 " tr- '1lk-<1
 'r:GwtNi K~...t/o(U DlrE'C10f

 WI~alTl J. !C.KlQf.          it.
          We appreciate the opportunity to comment on the Office of Inspector General's
 ;;'llr1;rt,-W;   ~"j:Tl    ;-!-"In

                                            report on "Silent PPQs" before its release to the House Committee on Government
 eeeerr.... ::11"'..\ (,)£

 ;)lrt'(1or (ieri', {)tItfslo!'>
           Reform and Oversight.
,dReS w U1"I9bef9
    ~l'J'. 'ol""t'lI/rl"l.:mC'1: Di\,urDn
                                            Based on a reviewof the dI1Ift report dated February 6, 1998 and discussions with the
       ~C ~t::r-;)ro
    1K'rQ(        /i..fVS ONtilr;.n         OlG audit stafI:; it is our ~anding that the four APWU claim lines in question
Oeorge N M(1(e!rtJet'l                      (out of 120 claims reviewed) involved agreements between the oospitals and a
DU"'Q.x, ~OM            OtvwOfl
                                            network which required steerage of subscribers through financial incentives in order
                                            for the discounts to be given. While the contract between APWUHP and UP & UP
                                            did not require steerage and the contract between Up & Up and the network did not
n~ilJtUf CQ<Udin,u","
LC'O   j: :;~jJ~                            require steerage, the contract between the network and the providers apparently
<,Omll       It~k)o
                                            required steerage.
jim Al.u't.c
r,H.l«n R.:gl<:m

!it~ 'til· ?<:rwcll
                                            Currently, the APWUHP is working with UP & UP to determine whar alternatives
·\iortf'ieast 1f~lQfI
                                            are available to el.iminate the conflicting Iangusge in the provider- network contracts,
It'f'r1$i,''(l~fI
SwtMert1          x~jOfY

!l.t,oO"'ll It .~e
                                            Additionally, the 4 claims lines out of 120 claims reviewed represents a 97%
\lies(¢l"t'>~~
                                            processing accuracy rate which is well above the 95% processing accuracy standard
                                            set by the Officeof Personnel Management.
                                                                         February 11, 19'98




[f you have any questions regarding the enclosed information, you can reach me at
(301) 622-5554

Cordially.




CarrollMidgett
Chief Operating Manager




.~2




                                                                              TOTAL P.12l3
                    HEALTH BENEFIT 'PLAN

                        :il~"· \\,I'.,:rI;   C   'hfL\,lli:'l.lfn. \ ;r~!IlU ~n1 J\:.      -,:      ~:.

                          \in,'~nl   R. ""l11nr"tt"_ IJ:'·-h.k'1i • Th.unus H.   ''''In~   ..lr .. ; ,"   .', ..'

                                                              E?0 ..




                                                 Delivered via Facsimile. and.Ll.Si.Mail

February 17, 1998



Office of the t nspector General
U,S. Office of Personnel Management
Room 6400
1900 E Sneer. N. W.
Washington, DC ::0415

Attention: Sanders Gerson, Deputy Assistant Inspector General for Audits

Dear Mr. Gerson:

Thank you for the opportunity to review the Office of the Inspector General's (GIG)
preliminary report on silent andlor non-directed PPO type programs. As this report Indicates.
PPO arrangemenrs are defined and applied by FEHBP carriers with differing methodologies.
Because of this. it is difficult to draw a parallel between the FEHBP carrier's PPO type
appl ications.

Reviewing this OIG draft suggests that DIG is only releasing aggregate.tees (i.e. the amounts
paid to PPO contractors for savings on discounted services) for the FEHBP program. The
NALC Health Benefit Plan believes that OIG's final release should not disclose individual
negotiated fees with any given vendor - being that they are competitively derived. Releasing
these fees will violate the Plan's disclosure terms of PPO agreements and may jeopardize our
capability to obtain future competitive bidding with PPO and discounted provider groups.

Again, thank you for giving the NALC Health Benefit Plan an opportunity to review and
comment on this report before its final release.

Sincerely,

  (~I
Calvin Enge
Assistant Administrator
UN!TE.DEAYORS & UNITED PROVIDJ;_R~_._. __




February 17, 1998


Sanders P, Gerson
Deputy Assistant Inspector General for Audits
U,S, Office of Personnel Management
Office of Inspector General
1900 E Street, NW., Room 6400
Washington, DC 20415

Dear Mr. Gerson:

Thank you for the opportunity to meet with you and Mr. Gibbons on Friday afternoon
regarding the results of the Office of the Inspector General's Review ("OIG Review") of the
use of Preferred Provider Organizations ("PPOs") in the Federal Employees Health Benefit
Program ("FEHBP"). We, the management team at United Payors & United Providers, Inc.
("UP&UP"), want to reiterate to the OIG that:

       (1)	   The review was performed in a professional and efficient manner with
              knowledgeable staff.

       (2)	   The DIG's extension of their FEHBP Review to include PPO provider
              contracts was an important element of examining the benefits derived
              by the FEHBP. The Review validated the importance of the PPO
              networks in obtaining savings for not only the FEHBP but also for the
              individual plan members.

       (3)	   The OIG's Review was an important step in determining that there
              was "no evidence found to confirm the use of payment schemes that
              victimize health care providers in the FEHBP", Further, we
              appreciated your comments at our meeting which indicated that a
              reader of your Review report should determine that (a) there was no
              evidence of "Silent PPO" activity, (b) the FEHBP derived significant
              benefits from PPOs, and (c) there is no need for further audit work by
              the DIG or any other oversight body regarding the use of PPOs.

We believe that if the FEHBP were to be subjected to a further review, it would be
imperative for the OIG, or other agency of the Federal Government to audit all vendors
(so-called Directed and non-Directed PPOs) that provide financial intermediary services
between FEHBP payors and health care providers. These intermediaries (PPOs) offer
identical products that are utilized by the commercial payor community (Le., major
insurance companies). From our perspective. it is important to note that discounts enjoyed
by the FEHBP through so-called Directed PPO products are also supported by a similar
Mr. Gerson
February 17, 1998
Page Two


commercial contracts. In fact, if such Directed PPO arrangements were not supported by
a valid contract, there would be evidence of a "Silent PPO" and an abusive provider
relationship. Specifically, we believe that all other so-called Directed PPOs should be
subjected to the same contractual scrutiny that other FEHBP financial intermediaries have
experienced. To drive this point home, if there is a need to expand your Review, we
believe it should be expanded to the other PPOs serving the FEHBP.

AudiVReview Conclusions Should Be Clearly Stated

We are pleased with the results of your Review and we recommend that your report consist
of an opinion paragraph (presented on page 1 of your report) that indicates the scope of
your Review and the results obtained as noted in your headline comments A and B on
page 6 of your draft report. The substantial background information section of your report
inadvertently allows the reader to believe that unverified industry data and processes
represent the results of your Review. Specifically, we believe that there is no support for
the following health care terminology used in your Report:

         •	   Financial incentives
         •	   Ideal PPO
         •	   Steerage
         •	   Directed PPO
         •	   Non-Directed PPO

If the reader of your Review report requires backgr,ound information, we suggest an
appropriate Appendix which describes how the $1 trillion health care industry operates
including the Blue Cross and other so-called Directed PPOs. This write-up should also
include common health care terminology and not "hearsay" comments which you describe
as anecdotal information from the Committee staff and other special interest groups.

UP&UP is a public company required to make disclosures to the Securities and Exchange
Commission, therefore, we are confident that our business would be characterized using
the following informational points:

  v	   UP&UP's clients include all major insurance carriers - Aetna, Cigna, John
       Hancock, United HealthCare, Prudential, Mutual of Omaha, etc. These clients use
       the same national health care network as the FEHBP.

  v	   UP&UP is a financial services company that supports the health care industry.
       Insurance companies and other major payors design health plans for a full range
       of large and small group employers, unions and other Government employees that
       utilize the UP&UP network.

  v	   UP&UP regularly communicates with its provider clients by describing how the
       beneficiaries of our payor clients use the provider network.
Me Gerson
February 17, 1998
Page Three


  V'	 UP&UP's contracts with its providers offer tangible benefits such as a prepayment
      of one month (1/12) of medical claims represented by all of UP&UP's payor clients.
      As of December 31, 1997. UP&UP has prepaid approximately $17 million in medical
      claims.

  V'	 UP&UP has contracted with hospitals, ancillary facilities and physicians that
      represent "high utilization" providers of the beneficiaries that are covered by the
      health plans of UP&UP's payor clients.

  V'	 UP&UP's national network product is based on certain principles:

         •	   UP&UP does not assume underwriting risk
         •	   UP&UP prepayments to providers do not require the provider to assume
              business risk (capitated payments do shift risk to the provider)
         •	   UP&UP facilitates the continued use of the health care provider by the
              beneficiary through positive communication (directories, 800 numbers, 10
              cards). "Steerage" to hospitals is done by physicians and UP&UP believes
              that it is inappropriate to interfere with the doctor-patient relationship.

  V'	 The UP&UP network savings are always shared with the beneficiary. UP&UP
      believes that the waiver of a "co-payment" is a financial technique that is negative,
      for the following reasons:                                                           .

         •	   Interference with the patient's relationship with their physician.
         •	   Increase in health care costs, l.e.:
                                                                           Co-Payment
                                                     UP&UP                    Waiver
                                                   Relationship         Financial Technique
              Hospital Bill                          $1,000                    $1.000
              Contractual Allowance                     (200)                    (200)
              Net Billing                                800                      800
              Co-Payment Waiver (20%)                    N/A                      160
              Total Health Care Cost
                to Payor (80/20 plans)                   640                      800

              Increase Health Care Cost Shifting	                               20%

Further. as noted above. we believe that when a co-payment waiver is required to "so­
called direct" a patient to a specific hospital. the FEHBP actually incurs a significant cost
in addition to the PPO network access fee in order to achieve "steerage" (if one actually
believes that anyone or any1hing steers a patient other than a physician).
Mr. Gerson
February 17, 1998
Page Four


Full Djsclosure of Background Information is Needed to Make the OIG Report Complete

There are references to Chairman Mica, House Subcommittee on Civil Service, in your
report. We believe that it would be important background information for Congressman
Mica's comments on October 22, 1997 to be included in your report. An excerpt of his
comments are:

              "The second major revision In the amendment deals with the most controversial
      matter in the bill: the question of 'silent PPOs' Everyone acknowleoges that Preferred
      Provider OrganiZations (PPOs) play an important role In today's health care market.
      Frequently, these PPOs negotiate discounted rate schedules with health care providers in
      exchange for certain incentives. The incentives may include an agreement to steer patients
      to the provider, in the case of so-called "directed PPOs'. or they may include financial
      incentives such as prepayment or prompt payment In the case of so-called 'non-directed
      PPOs'. Both directed and non-directed PPOs provide legitimate and valuable benefits to
      health care providers, carriers, and patients.

               However, many believed that the original language placed non-directed PPOs at
      a competitive disadvantage. That was not Chairman Burton's Intent. and It is certainly not
      the Intent of this subcommittee.

                'Silent PPOS', however, are another matter. These orqanizatlons take advantage
      at health care providers by arranging for a carrier to obtain access to discounted rates it is
      not entitled to. The first victims ot this practice are the Doctors and Hospitals. But In the
      end, all of us will pay the price as the losses incurred by these providers are shifted to other
      consumers of medical services."

Also, an October 16, 1997 letter to John Mica from Constance A. Morella, M.C., Thomas
M. Davis, M.C., Elijah E, Cummings, M.C, and Harold E Ford, Jr., M.C. indicated that:

              "we are writing to express our collective concerns about Section 5 of H.R. 1836.
      Currently. tee-for-service plans In the Federal Employees Health Benefits Program
      (FEHBP) are saving the government millions of dollars a year through their utilization of
      various savings initiatives, inclUding non-direcled efforts. Section 5 ot H.R. 1836 would cost
      the FEHBP these savings and create an administrative burden that would increase
      administrative costs.

               We are concerned about these increased costs to FEHBP, which would be borne
      jointly by the federal government and federal employees. Already, next year's premiums
      are rising, on average, by 8.5%. Increased costs caused by this legislation would almost
      certainly need to be addressed in both authorizing and appropriating legislation if Section
      5 is enacted. The Office of Personnel Management (OPM) and carriers within (he program
      have expressed concern over these additional costs. tn the Congressional Budget Office's
      (CBO) first approximation, FEHB costs could increase by between $10 and $50 million a
      year after 1998 it Section 5 of H.R. 1836 were enecled. The govemmenfs share would be
      approximately 70 percent of that.amount, split roughly equally between additional agency
      costs and government payments for annuitants.

              Section 5 would legislate a mandate on the FEHBP, instead of leaving these Issues
      to the marketplace to sort out. Our job Is to protect the federal treasury and federal
      employees - not to become involved In private sector disputes."
Mr. Gerson
February 17, 1998
Page Five


Finally, you indicated during a telephone conversation with UP&UP that Congresswoman
Morella had asked the OIG a series of questions concerning your Review and the scope
of your work. We believe that the entire OIG response to Congresswoman Morella would
represent important background data as an Appendix to your report

Hearsay. Anecdotal Comments and Unsubstantiated Data Do Not Constitute a "Review
Opinion"

We previously noted that your background data could easily be confused by a reader of
your report to be the results of your Review. We reinforce our comments on the efficiency
and effectiveness of your Review and we believe that your "Review Opinion" included in
the second paragraph of page 7 of your report should be on page 1, paragraph 1 of your
report. Your opinion includes these important factual statements:

                "Our purpose was to determine whether the discount taken on each claim was
       pursuant to the medical providers membership In a non-directed PPO and was otherwise
       consistent with their contract. We found that in each instance, a series of contractual
       agreements was in place. These agreements were between the carrier and the vendor, the
       vendor and provider network or the provider, and the prOVider network and providers.
       Consequently, we found no evidence that the FEHBP carriers through its vendors used
       silent pPOs to access discounts."

The conclusion section of your report includes many industry statements that may not be
universally accepted, terms without an appropriate definition and a conclusion sentence
that is inconsistent with your Review opinion on page 7, paragraph 2. Specifically, your
conclusion in the first paragraph on page 10 states:

               'Thus, these three factors combine to cause perhaps false expectations and
       confusion on the part of providers who may be expecting steerage but in fact entered into
       an agreement that does not require steerage."

The word "confusion" has a negative connotation. Of course a $1 trillion industry has
"complex" elements. The providers in question are organizations with billions of dollars in
revenue, sophisticated financial staffs and legal counsel representation. It is difficult to
believe that they do not understand contractual relationships entered into.

Specific Comments Concerning UP&UP's Review Items

With respect to the four UP&UP "errors" as presented in Exhibit 4, we believe that three
of the four items noted are (lQJ; errors. Our support is as follows:

Monongalia General Hospital

This contract states on page 4, section 3.4, the following regarding incentives:
 Mr. Gerson
 February 17, 1998
 Page Six


                "HPO will offer most favorable terms to payers that provide the greatest financial
        savings for Covered Subscribers to utilize the HPO network. All HPO Network pavers
        provide financial incentives for covered subscribers that utilize the network. Financial
        incentives range from shared saving arrangements, to reduced or waived co­
        insuranceldeductibles, to benefit differentials and planned design."

 This section addresses two items:

        (a)	    Most favorable terms to payers, and
        (b)	    Financial incentives for covered subscribers.

Item (a) refers to offering the payor client a lower fee if they provide greatest incentives to
their covered subscribers; while item (b) refers to financial incentives for covered
beneficiaries. The contract specifically defines the range of financial incentives from
"shared savings to benefit differentials". Our Payor clients utilize "shared savings" to meet
the financial incentive contract requirement, therefore, this does not constitute an
 "error".

 Baptist Hospital of East Tennessee (page 4, section 3.4)

 East Jefferson General Hospital (page 4, section 3.2)


These contracts state the following regarding incentives:

                "HPO will offer most favorable terms to Payers that provide the greatest financial
        savings for Covered Subscribers to utilize the HPO network."

 The respective sections address "most favorable terms to Payors" and refers to offering
.fhe Payor client a lower fee if the Payor provides greatest incentives to their covered
 subscribers. There are no contractual requirements regarding financial incentives for
 covered subscribers, therefore this does not constitute an "error". Notwithstanding this,
 all our Payor clients utilize the "shared savings" financial incentive program for their
 covered subscribers. If the Payor client implements additional methods of financial
 incentives such as waived co-insurance and deductibles, benefit differentials, etc., then the
 fee paid by the payor client to access the network would be reduced.

 Specific Comments Regarding Exhibit 3

As currently presented, Exhibit 3 does accomplish the objective stated at our meeting to
"demonstrate that utilization of both Directed and non-Directed PPOs benefit the FEHBP
program". However, the method in which the information is presented. and certain
elements of the information, are unclear, inaccurate and misleading. The unclear,
inaccurate and misleading elements are as follows:

        (a)	    Net Direct PPO savings do not retlect the "actual" additional cost to
                the FEHBP of the financial incentives (reduction or waiver of co­
                payments/deductibles, etc.); and
Mr. Gerson
February 17, 1998
Page Seven


       (b)	   Non-Directed PPOs' savings ratio calculations are misleading.
              Specifically, the amount of premium payment is significantly
              overstated due to the fact that the premium payment must be reduced
              by the actual amount applicable to Directed PPOs to avoid double
              counting.

We have revised Exhibit 3 to reflect a clearer presentation of the data and it is included as
an attachment to this letter for your consideration. We believe the revised Exhibit 3 reflects
your stated objective "to demonstrate that utilization of both Directed and Non-Directed
PPOs benefit the FEHBP program".


                                          ******


In closing, we apologize it the tone of our comments indicate any displeasure with the
Review process by the OIG. In fact, we are pleased that the matter seems to be resolved
since your Review indicated that there was no evidence of any "Silent PPO~ activity. As
a public company, we are sensitive about comments made concerning our business. We
operate with strong business principles and our national health care network is used to
process approximately $3 billion of medical claims for all major insurance carriers. As a
public company, we know we are subject to public scrutiny and we are satisfied with the
results of your Review. We do not believe, however, that government oversight should
extend into a matter that is clearly governed by contractual relationships.

Thank you again for allowing us to comment on your draft Review report. Of course, we
would be pleased if our response (or portions of our response) is included as an Appendix
to your final report as background information on the health care industry.

Very truly yours,




 . oseph Bruno
  iet Financial Officer


SJB/aiw
Attachment
           PRELIMINARY REPORT: FOR DfSCUSSION PURPOSES ONLY
                        NOT FOR PUBLIC RELEASE
                                                                                          EXHIBIT 3
                                                                                            (revised)

              PREFERRED PROVIDER ORGAt"iIZATIONS REVIEW

                              PREMIUM PAYMENTS
                         FOR PERIOD ENDING JUNE 30, 1997




                                         Premium                   Net
           Carrier                       Payments                Savings               Ratio

APWU                                 $     203,207,700
GEtIA                                      477,451,392
MHBP                                       903,996,936
POSTMASTER                                  29,373,621
SAMBA                                       41,255,807
AFSPA                                       18,858,169
NALC                                       323,256,494
RURAL                                       85,536,527
   Total                             s   2,082,936,646


Net direct PPO savings (I)                                    s 360,639,256                  17%
Net non-direct PPO savings                                       21,106,259                   1%
   Total                                                      s 381,745,515                  18%




(I) Directed PPO's by definition must utilize a direction mechanism in the form of financial
incentives (reductionor waiver of co-payments and/ordeductibles for the federal employee), These
financial incentives are not included in this analysis as they were not available from the FEHBP Carriers,
The impact of these financial incentives would be to reduce net savim:s since the FEHBP paid
a larger portion of the premium payments (i.e., the reduction or waiverof the co-payments or
deductible for the federal employee is borne by the FEHBP Carriers),




                                                                                                             .   ,

Sidney L M<ryer

EXI!l:ulirf! Vice Pre:stdl:ni

                                                                               February 19, 1998
                                                                          Via Fax: 202-418-0630
United Stated Office of Personnel Management
Office of the Inspector General
1900 E Street, N.W., Room 6400
Washington, DC 20415
Attention: Sanders P. Gerson
           Deputy Assistant Inspector General for Audits

Re:        Silent PPO Review

Dear Mr. Gerson:

I am writing on behalf of MultiPlan, Inc., in response to the draft, preliminary Report (the "Draft
Report") that you prepared on completion of your review of the use of "silent" and "non­
-lirected" preferred provider organizations ("PPOs") within the Federal Employees Health
. enefits Program ("FEHBP"). We appreciate the OIG's hard work on this complex and
sensitive issue and the opportunity to comment on the Draft Report.

As an initial matter, we concur with your view that giving health payers access to provider
discounts through subterfuge or misrepresentation would constitute, at the very least, an
unethical practice in the FEHBP. MultiPlan, Inc. strongly opposes these so-called "silent"
PPOs. We also are pleased, but not surprised, that OIG's review has confirmed that Multif'lan is
not a silent PPO and does not engage in such practices. Indeed, OIG's review, which was
performed in accordance with generally accepted government auditing standards for
performance audits, demonstrates that MultiPlan had written contracts in place in every case
reviewed and that all but one of the MultiPlan claims reviewed were processed in accordance
with MultiPlan's provider contracts. In the case of that one claim, MultiPlan inadvertently
extended a discount to the FEHBP plan of $1.87 -- a trivial error. As this example illustrates,
MultiPlan's claim payment accuracy far exceeds the FEHBP's own standard for accuracy of
payment. See Office of Personnel Management, Financial Statements Fiscal Year 1996 at 56­
57.




 r J5 Fifth ,1"'IIU<:

YetI;   Yom Nl'1001J3-1OO4

 Te': 1212i 71$0-20,'"
 Fax: f2l2J '8{U)41O
J·1fI~muJli'Plan.Cf1m
                                                      United Stated Officeof Personnel Management
                                                                                 February 19, 1998
                                                                                            Page 2




We therefore ask that you expressly state in the final Report that MultiPlan is not a "silent" PPO
and does not engage in "silent" PPO practices, and that all of MultiPlan's claims reviewed were
processed under written contract administered in a manner that exceeds FEHBP standards for
accuracy of payment.

The OlG has conducted a careful and professional review of this matter The Draft Report,
however, includes some language that is inconsistent with the OlG's data and conclusions as
presented in the Draft Report. It also uses some terms in a manner that is misleading and
inaccurate. We ask that you correct these points, which are described below, in your final
Report.

First, on pages 6-7, the Draft Report states that "anecdotal evidence" may justify concern on the
part of the Committee on Government Reform and Oversight that medical providers are perhaps
being victimized. This "anecdotal evidence," however, is not disclosed. And, in any event, the
OIG's factual investigation refutes this "evidence" and dispels any basis for concern. We urge
that this passage be deleted, less it be quoted out of context in support of a conclusion directly
contrary to that reached in the OlG's review. For the same reason, the discussion of claims
payment should be deleted from section S, on pages 6-7. Rare instances of inaccurate payment
under written contracts is a separate topic from "vitalization" of providers under "silent" PPOs,
and is fully addressed in section C.

Second, the Draft Report inaccurately implies that surveyed vendor's contracts with network
providers are "vague" and create expectations on the part of providers that are not being
fulfilled. This unsupported conclusion is in stark: contrast to the conclusion regarding contract
compliance, which is supported by a detailed claims audit. The report does not cite a single
instance in which the OIG concluded that a provider had reason to be confused regarding the
terms of its contract with Multil'lan or one of the other vendors or in which a specific provider's
reasonable contractual expectations were not met. For these reasons, the Draft Report's
discussion regarding allegedly vague contract terms and nnmet provider expectations should be
deleted.

Third, the Draft Report's use of the terms "directed PPO" and "non-directed PPO" is inaccurate.
MultiPlan is classified as "non-directed", but MultiPlan does provide varying degrees of
direction in its work with FEHBA plans.



                                                                                       SM:Ir.I'«Jl,,:r.bbp
                                                                                                Enclosure
                                                                                                 cc file     -<i&.
JA
"MultiPlan
I
                                                       United Stated Office of Personnel Management
                                                                                    February 19, 1998
                                                                                              Page 3



MultiPlan requires, for example, that its clients share with subscribers the savings realized from
its provider discounts by calculating the subscriber's coinsurance payment on the basis of the
discounted rate. This results in a direct reduction in out-of-pocket expenses or FEHBP
subscribers who use MultiPlan network providers. If, as some suggest, financial incentives are
essential to a directed PPO arrangement, then MultiPlan meets this definition.

But financial incentive are not the only effective way to steer subscribers to network providers.
For example, Multif'lan maintains a web site referral service on the Internet that is so extensive
and accessible that it won an award from !lS.A. Today. We encourage you to review the site,
which is at http://www.multiplan.com. Similarly, MultiPlan operates a 24-hour-a-day toll-free
referral line staffed by nurses, and the FEHBA plans have been notified of this referral line.
MultiPlan also offers a transfer assistance program that arranges for patients that are in a non­
network hospital to be safely transferred to a network hospital.

Finally, steerage is not the only reason providers agree to extend discounts to MultiPlan. or
example, MultiPlan's arrangements result in much better cash flow for network providers.
l\1ultiPlan requires its clients to make timely payment to providers and offer pre-audit payments ­
 .nd prepayment programs as a deposit or guarantee for bed days or for specific procedures. j
These programs provide concrete, financial benefits to MultiPlan's network providers.'
MultiPlan also provides quality support for network providers through its rural health care
support, credentialing and certification. discount purchasing programs for medical services and
supplies, and an extensive library of critical pathways that are shared with all of our network
providers. These programs directly benefit our network providers. Equally important, however,
they encourage high quality of care for FEHBP subscribers.

For these reasons, we urge you to revise the Draft Report to note that benefit differentials are not
the only appropriate form of steerage, and that PPOs such as MultiPlan do direct subscribers to
providers in their networks. In addition. we ask that the fmal Report state that steerage is not the
only benefit that FEHBP providers can gain from membership in a PPO network.

Fourth. the Draft Report does not scrutinize the practices of entities that operate PPOs that the
Draft Report labels "directed." Many of these entities, for example, contract with hospitals for
an EPO rate, and/or HMO rates and/or for a PPO rate. The OIG review did not examine whether
the directed PPOs accessed the correct rate in accordance with the contract term. to provide a
more balanced assessment of whether health care providers are being "victimized" by FEHBP
?ayers -- the stated purpose of the Draft Report -- the OIG's review should be expanded to

                                                                                        SM:lr:I.'b,r"lCbbp
                                                                                                 e..  Icsu.­
                                                                                                   ce:   f..,   ~,
                                                       United Stated Qffice of Personnel Management
                                                                                    February 19. 1998
                                                                                              Page 4



include the practices of so-called "directed" PPOs. If this is not practical at this time. the report
should note a minimum that there is also the potential for abuse by the PPO's that the Draft
Report labels "directed," and that the OIG has not reviewed their practices.

Fifth, the Draft Report should note that OPM's 1993 call letter encouraging FEHBP carries to
obtain the lowest price available for all goods and services is entirely consistent with existing
legal requirements. Se~ 48 C.F.R. § § 1600 et seq. OPM obviously did not intend for the
carriers to do this through unethical or illegal means.

In summary, Provider discount arrangement with PPO's exist today for a variety of reasons.
These reasons include direction of patients, collection and cash flow advocacy and quality
support. The depth of discount vary as does the reason for providing them. TIlls is all part ofthe
process that helps keep health care in America self regulated as to price and the world leader       as
to quality.

Again, we appreciate the opportunity to comment on the Draft Report.

Please call Harvey Sigelbaum or me if you have any questions, or if we can be helpful to you in
anyway.




 'fuley L.   eyer
Executive Vice President         .
ChiefLegal and Legislative Affairs Officer




                                                                                        SM:Ir.feacn:kbbp
                                                                                               EndOSUll:
                                                                                                 c.c: File