Private Better Than Govt-Not Necessarily

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By Michael Hiltzik

July 11, 2012

"With federal healthcare reform still facing political head winds despite its validation by the Supreme Court, this probably isn't the best time for health insurers to admit their utter incompetence in handling their most important role under the reform, which is keeping a lid on healthcare costs.

But that admission underlies a couple of lawsuits filed by Aetna and United Healthcare earlier this year, alleging that a Northern California chain of small surgical clinics fraudulently overcharged them tens of millions of dollars by counting on the insurers being asleep at the cost-control switch.

The clinics have joined with 60 individual doctors and the medical associations of California and Los Angeles, Ventura and Santa Clara counties in what is basically a countersuit against Aetna, filed last week in Los Angeles County Superior Court.

They say their main concern is that Aetna is preventing doctors who are themselves members of Aetna's contract network from referring Aetna members to out-of-network clinics, in violation of the patients' rights under their insurance policies. Don't you believe it.

The real issues at the heart of the case are different. One is who gets paid, and how much, for your medical care.

The other, perhaps more important, is whether unnecessary medical utilization increases, driving up costs, when doctors refer patients to clinics they own — such as the clinics at the center of this courthouse battle. Evidence from all over the country suggests that the answer is yes.

"These providers only make money when they do stuff," observes Jean Mitchell, a Georgetown University expert on physician-owned facilities. Some physician-owned clinics have profit margins of more than 25%, she says. "They're cash cows — it's why they've proliferated."

That's especially troubling in California, where physician-owned clinics are subject to such lax regulation that state authorities have almost no idea how their surgical outcomes match up to hospitals and other better-regulated facilities.

That should be a concern to you, and it should be the insurers' job to monitor that usage and stamp it out if it's unnecessary or overpriced, or both. Judging from the Aetna and United lawsuits, those companies have finally gotten around to taking that task seriously, which is good. But it still leaves the question: What took them so long?

The insurers' lawsuits are aimed at a firm named Bay Area Surgical Management. BASM's business model is the sale of shares in its half-dozen Northern California outpatient surgery clinics to doctors, who agree to perform at least a third of their surgeries at the facilities. To the extent that the clinics don't have contracts with major insurers that specify how much they'll get paid for each procedure, they can charge whatever the market will bear.

What bugs Aetna is that some of the physician share owners are members of Aetna's network, which helps the doctors attract patients. The insurer's position is that when the doctors refer those patients for surgeries or tests to out-of-network facilities they themselves own, that defeats the purpose of building a network based on negotiated fees.

How does this affect you, the patient? Many health plans allow patients to get treatment from out-of-network providers, on the understanding that the choice will cost them — they'll pay a coinsurance share of 20% to 50% of the bill, and the insurer will pay only a percentage of the remaining "usual and customary" fee for the service, supposedly an average of the fees charged in the region. The patient bears responsibility for the rest.

The idea is to encourage patients to use network providers who accept negotiated fees, which saves everyone money. The Aetna and United lawsuits say the BASM clinics winked at the patient obligations by waiving the coinsurance charge and promising not to bill patients for any balance not covered by their insurers. They then allegedly filed sky-high claims with the insurers, hoping to be reimbursed for the whole sum.

Among the claims cited in the lawsuits is an outpatient bunion operation for which a BASM clinic claimed $66,100. Aetna says the average payment to its in-network clinics for this operation is $3,677, but it paid BASM $52,880 on the claim anyway. United says BASM submitted a claim for $128,813 for a kidney stone operation in 2010. United blithely paid $97,051, even though its usual in-network payment was $6,851.

BASM disputes these figures, according to Bobby Sarnevesht, a manager of the firm. (He says several of the doctors named as plaintiffs in the case against Aetna, though fewer than half, hold shares in BASM clinics.) He says the lawsuits inflate BASM's claims and low-ball the network payments to make the difference seem more shocking. He characterizes the lawsuits as weapons in negotiations for network contracts — the insurers want the clinics to accept reimbursements so low they can't make money as independent facilities.

"They've been trying to strong-arm us into a contract," Sarnevesht says. In any event, he says, the doctors always disclose their ownership in clinics to which they refer their patients, as is required by state law.

The insurers say that what they're really concerned about is fraud. Aetna and United maintain that BASM never actually planned to charge the patients the amounts they submitted to insurers — the clinics told patients that they would accept in full settlement of their bills whatever the insurers decided to pay. In filing the higher claims, Aetna and United say, the clinics were crossing their fingers that the insurers wouldn't examine them too carefully before paying.

Indeed, United says that's what happened. Its processing volume of 1 million claims a day is so burdensome that it's "not in a position to specifically investigate the veracity of each claim." BASM exploited that loophole, United argues.

This is the part of the insurers' lawsuits that should make you go, "Say what?" The whole point of our private commercial health insurance system is that the industry supposedly has the expertise to identify and eliminate unnecessary healthcare and excessive billing. Their rationale for consolidating into a handful of mega-insurers, despite antitrust concerns, has been that this makes them more efficient at cost control.

The same rationale has been used to justify how the healthcare reform act preserves their role as gatekeepers of healthcare delivery. It's also how they defend the premiums they collect ($27 billion for Aetna last year, $92 billion for United) and the pay packages of their top dogs ($10.5 million for Aetna Chairman and Chief Executive Mark Bertolini, $13.4 million for United CEO Stephen Hemsley).

Yet they say they got snookered to the tune of $60 million by BASM's surgery centers. The insurers don't have a good explanation for why they didn't catch this alleged fraud and put a stop to it long ago — or why they paid what they now say were manifestly inflated claims.

There's no good explanation for dereliction on this scale. If Aetna and United are such cheapskates that they can't be bothered to install data programs or employ enough staff to monitor claims effectively, they need to go into another line of business or, more properly, out of business.

BASM and its physician partners aren't angels in this affair. The trend toward physicians owning shares in surgical clinics has raised the hackles of state and federal regulators for more than a decade. Numerous studies have shown that doctors with a direct financial interest in surgical or diagnostic facilities tend to overutilize those facilities by prescribing unnecessary surgeries or tests — if you've invested in a CT scanner, after all, your incentive is to cover your nut by scheduling lots of CT scans.

Studies also suggest that physician-owned clinics cherry-pick patients, angling for those with good private insurance (say from Aetna or United), while referring those on low-paying Medicaid plans to their local public hospitals. In other words, clinic-owning doctors stick public institutions with the costliest patients while reserving the most lucrative for themselves. This two-class system undermines the finances of the hospitals that may be linchpins of healthcare in their communities, while putting upward pressure on premiums.

The unfortunate thing is that this is an aspect of rising healthcare costs that's least affected by the new reform act, which doesn't impose any direct control on private provider charges. That's going to be in the hands of the insurers. Judging from this affair, that's not reason for optimism.

If the insurers continue to perform this badly, who will pay the price? As taxpayers and policyholders, you will."

Wonder why your premiums keep going up? Righties always say that private business is more efficient than govt. Keep in mind you don't find out about the policies and frauds going on in private business unless there is a lawsuit or charges brought. With government, there is more access to information so govt malfeasance is more visible.

Jun. 29, 2012 9:24 am



The belief that private industry always is better than the government – a belief that leads to the single-minded focus on reducing the size of government – is wrong-headed and destructive. Government exists because in some areas it provides superior service to the people.

In America, the left hand is the public sector and the right hand is the private sector. Our country was built by two hands, working together. Cutting off the left hand is no way to build a nation.

Now, if only someone could please inform the Tea Party “Patriots,” before they completely ruin America." from Mitchell's blog

pshakkottai's picture
Jul. 11, 2011 10:27 am

Doctors, and small businessmen committing fraud?! Never, they are the job cremators!

Phaedrus76's picture
Sep. 14, 2010 7:21 pm

I think the better expression is that "government services exist because in some areas the services must be delivered without interruption," i.e. sewers and trash collection.

Jul. 31, 2007 3:01 pm

The problem we have is that the 2 hands are not working together. The corporate Wall Street hand is around the throat of the govt hand.

Jun. 29, 2012 9:24 am

The idea that we always need a "public/private" partnership is wrong. The mixed economy is a separate matter, and there is a natural symbiosis between public and private when the latter is not justifying "profits" as the same as added value. Both sectors can be judged by value added and the return on investment, but the public sector or Commons is not "for profit."

Few are arguing that doctors and nurses should be state employees or that hospitals should all be organized by the feds into another VA. That argument is not without some virtues, but we are looking at nationalized health insurance in Single Payer, not "government run healthcare." The premise is that the universal risk pool is the best and most efficient way to share the costs of healthcare. As with car insurance, you win if you don't need to use it. Those who pay in and who do not collect win the bigger lottery.

What does healthcare cost? How much should doctors, nurses, interns and clerks be paid? How about the hospital CEO or civil manager? How much does the laborer deserve for fairness for workers? I far prefer the civil model of compensation than the for profit incentives for the efficient and effective delivery of healthcare to people who need it. It keeps the mission of healthcare first and makes 'making money" depend upon real value added.

The other obvious zone for public rather than the partnership is power. We need to own and manage our public power companies. Private only decreases our ability to innovate and conserve. We don't want toll roads either, unless they are paying off public bonds. User fees tend to regressive.

What is also clear is that Commerce must depend upon the State for the legal and regulatory conditions of a market. It is not "interference" in the free market at all. State policies can be smart or stupid, but they are to be judged by their results in the common good and general welfare, not by how convenient they are for predators. The State is the Game Manager of the Economy. Commerce only uses the economy, and the State is where concern about the health of the economy is vested. "Health" from that perspective, in a democracy, has to do with how broadly the prosperity is being shared and how well the citizenry is participating in power, including economic power.

If you lived in a monarchy or plutocracy, the "health" of the economy could be measured in billionaires while the poor died in the streets. Your problem would be social instability, not "the economy." This is why the question must always go to democracy and away from economics per se. The problem of our economy is its distortion and our misguided focus on money instead of what real wealth is about.

Apr. 26, 2012 11:15 am

A very good thread,"the big lie"(private/individual system is best) vs the "truth" (cooperative system) Time to show the earth is "round"! If one need nothing for survival,that`s normal,we all must break from our mother. But when we need help for survival,the mother or whatever is next in line to supply the help,we would be insane to be in denial. Cooperation is no contest vs the individual,time for the "big truth"! Individual control of capital is a structual flaw of capitalism.

tayl44's picture
Jul. 31, 2007 3:01 pm

Where is Donald Trump's Worldview Leading Us?

I want to step back a little from the constant strum of the latest Trump scandal to the most recent outrage, the Trump constantly popping into the news literally every day. I don't remember this during the Obama administration or any other presidency frankly of my lifetime.

Every day they look for some way to get in the news even if it's negative.

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