June 1, 1995


Executive Summary
What names are used to describe this practice?
How does this practice differ from typical PPO arrangements?
Who is harmed? Providers and patients
What is an example of this practice?
Basic business considerations before contracting
Exhibit A ­­ how to protect your bargain with a PPO
Sample contract provisions
Preferred providerorganization regulation
Diagram "Breaking the Silence"


Health care providers, including doctors, hospitals and health systems, are being victimized by billing schemes that create payment discounts for payors who aren't entitled to them. These payors obtain preferred-provider discounts without providers' consent under practices known as "silent" or "non-directed" PPOs. Depending on the patient volume, providers could be losing tens of thousands of dollars, if not hundreds of thousands of dollars, on inappropriately applied discounts.

In preferred-provider organization (PPO) arrangements, providers offer discounted fees to payors in exchange for "preferred provider" designations that attract more patients. With "silent" PPOs, PPO discounts are applied to indemnity patients not covered by a PPO.

Here's how it works: Suppose a payor receives a $4,000 medical bill, but doesn't want to pay the full amount. The payor contacts a PPO broker who has access to a list of providers and discount levels for several PPOs. The payor learns that the provider is under contract with a PPO for a 25 percent discount. The payor then recalculates the bill, taking 25 percent off the original $4,000 amount. The new bill refers to the PPO's discount as the reason for the lower payment, even though the patient is not covered by that PPO.

Upon receiving the discounted bill, the provider's accounting or billing department verifies that the hospital or physician group has a contract with the PPO. But, unless the specific patient's treatment or admission records are searched to determine coverage, it is impossible to confirm that the patient is not a PPO member. Thus, many providers are granting discounts they're not obligated to give.

  • Efforts to identify and stop these arrangements are essential. At a minimum, providers should:
  • scrutinize their PPO contracts and their dealings with payors;
  • protect themselves by refusing to sign PPO contracts permitting the sale of discount information;
  • And, as a further precaution, conduct audits to determine whether PPO discounts are being applied inappropriately to indemnity patients.


This is the second alert from the AHA and AMA that describes a practice that both associations initially reported on in October 1994. It explains Silent PPOs in more detail and recommends ways for providers to protect themselves from these discounting practices.

The term "Silent PPO" was used in the first alert to describe this practice since that term appeared in marketing materials distributed by at least one entity that promotes these practices. Another, perhaps more accurate, characterization of these practices is "secondary market in contracted rates." The secondary market exists for payors who are able to obtain discounted contract rate information and reprice provider bills that then are submitted to unsuspecting providers.

This secondary market, which operates under an array of names, permits PPOs and network brokers to sell hundreds of millions of dollars in provider discounts to payors, brokers, and other entities. These may well be discounts that the providers never intended to grant and which may not be permitted by the providers' PPO contracts.

Access to contracted rates reportedly is sold to a broad base of payors responsible for; indemnity lives, out­of­network care, workers' compensation, automobile accident medical claims and self­insured employers (either self­administered or contracting for third party administrative services). Many payors routinely use the contracted rate information to calculate discounts reflected on Explanation of Benefits forms sent by payors to providers.


What the AHA and AMA view as a secondary market in contracted rates may be referred to in the field as: silent PPOs, non­directed PPOs, voluntary PPOs, wrap around PPOs, blind PPOs, soft channeling, second tier PPOs, total conversion PPOs, extended managed care network, invisible PPOs, supplemental PPOs, back­end PPOs, discounted indemnity or managed indemnity. Undoubtedly, there are other names to describe this practice.


Most providers are familiar with the operation of preferred provider organizations, or PPOs. In fact, the great majority of providers have signed contracts with one or more PPOs. In these contracts, providers agree to a discounted fee schedule in anticipation of receiving additional patient flow as a result of being designated a preferred provider. But providers may not know about this secondary market for discounted contract rates.

Discounted indemnity plans and silent PPOs are not conventional managed care products. They are merely words used to describe a process through which a payor is able to apply a discount to a provider's bill. This is possible when the PPO makes its roster of preferred providers and contracted rates available to other payors and brokers for a fee. The discounts typically are applied to patients who are covered by an employer or payor that has not contracted with the PPO (i.e. plan participant), therefore, the patients are not subject to meaningful financial incentives or other steerage mechanisms which encourage them to select the preferred providers.


This practice results in providers losing revenue to which they are otherwise entitled. In addition, patients who may think that their health care bills are covered, may be balance billed by providers who discover that a bill has been repriced through a "silent PPO."

This fluid market in contract rate information exacerbates the imbalance between provider charges and DRG payments. If hospitals continue to lower their charges to address the PPO pricing mechanisms, the hospital's Medicare profiles also drop. Likewise, physician reimbursement under RBRVS may be negatively affected by this vast secondary market in contract rates that is readily accessible to payors.

If the business office or patient account manager is trying to keep aged accounts receivable as low as possible, then these repricing practices will be harder to stop. Cash flow may take precedence over careful analyses of explanation of benefit forms to identify whether the appropriate amount was remitted. In short, for many providers the amount of collection may be less important than its timeliness.

"Silent PPO" discounts are usually applied to patients with indemnity coverage. In these situations, the patient is liable for the provider's reasonable charge, and has the right to indemnification for all or a portion of the bill from the insurer. If the insurer fails to pay to the full extent of its obligation by reducing the provider's charge before paying the 80% (for example) it is obligated to pay, the patient will not receive the level of indemnification he or she is entitled to. The patient loses in two ways: the insurer may be charging premiums that the patient believes are based on the insurer's obligation to pay 80% of the charges, and, the patient is exposed to a potentially larger balance bill from the provider.


The attached diagram uses a physician's practice to illustrate how the secondary market for contracted rates works. A typical PPO relationship involves a simple exchange of bargains: providers agree to discount their fees in exchange for their designation as "preferred providers." Through the PPO's use of financial incentives, directories and the like, the preferred providers expect that patients will be steered to them. A typical financial incentive may provide that the PPO plan participant, i.e. employers and payors, will pay 90% of a physician's bill if the enrollee chooses a preferred provider, but only 70% if the enrollee does not. In contrast, a traditional indemnity plan pays 80% of the provider's usual and customary fee. PPO plan participants will save money even by paying the higher percentage of a bill because the preferred provider has agreed to accept a lower than customary fee, often dramatically lower.

Once the network of preferred providers is in place, the PPO markets the network to plan participants. The PPO's contracts with providers contemplate this business activity, and generally require the PPO to notify its preferred providers on a regular basis of the addition of new blocks of business. Moreover, enrollees of the PPO carry identification cards which indicate their enrollment in the PPO. These cards aid providers in verifying coverage at the time service is rendered. However, the variety of identification cards in the market canbewilder both enrollees and providers.

Many individuals are reluctant to choose PPOs, HMOs, and other plans which restrict, even to a limited degree, their choice of providers. Thus, a strong demand exists for "freedom of choice," a hallmark of traditional indemnity plans, particularly in certain geographic areas and among certain employee groups. The payors who offer indemnity plans also seek to offer a competitively priced product and are vitally interested in securing provider discounts for their indemnity business. However, these payors may have difficulty securing discounts for their indemnity products directly from providers because they cannot offer providers steerage mechanisms or other inducements to lower their fees. As a result, these payors seek discounted contract rates from other sources, e.g. (1) PPOs that have negotiated discounted contract rates with providers or (2) contract rate brokers who have purchased "access" to those rates from PPOs.

PPOs meet this demand by selling the information from their roster of preferred providers, including the discounted contract rates for each provider, directly to indemnity payors or to brokers who resell the information to payors. Armed with this information, the payor is able to re­price any claim that it receives from a provider in the PPO's network, simply by referencing the provider's discount level with that PPO and asserting (or implying), as discussed below, that it is entitled to the discount as well. This process enables the payor to avail itself of the PPO's discounted rates even though the beneficiary is not in the PPO.

Suppose that a patient is in a traditional indemnity plan that pays 80% of the usual and customary physician's fee. The patient visits her physician for treatment. At the time service is rendered, the physician telephones the number on the patient's insurance card and verifies her indemnity coverage. The physician provides the needed care and submits a bill to the payor.

At this point, the payor is obligated to pay 80% of the usual and customary physician fee, with no discount. The payor would rather receive a discount, if possible, so it seeks one from a PPO or broker. If the physician has signed a contract with any PPO, the payor will likely gain access to that information. For a fee, the PPO that has a contract with the physician may sell the payor the information on its preferred provider roster. If it does, the payor will be able to reprice the claim from the physician, taking the discount the physician has agreed to with the PPO, and identify the PPO (which the patient does not belong to) on the payor's Explanation of Benefits (EOB) form that accompanies payment of the discounted rate. (Note: Repricing often is done by third party administrators serving the employer/payor.)

Once the physician receives the EOB from the indemnity payor referencing the PPO discount, one of several things may happen. The physician's office staff may not notice the discrepancy, especially if the physician has a contract with the PPO referenced on the EOB. The staff may not compare the EOB with the original verification of coverage, and may simply assume that the payor is entitled to the discount. (Because most payors offer a variety of plans, and the relationship among plans is not obvious and the wide variety of enrollee identification cards, the office staff may believe that the payor and the PPO are related.)

One the other hand, the staff may note the peculiar circumstance of a PPO discount being applied to a patient with indemnity coverage, and may telephone the payor with an inquiry. (This possibility is more likely in the event that the PPO referenced on the EOB is not one with whom the physician has a contract. More on how that can happen below.) In response to this inquiry, the payor is likely to tell the physician that it is "affiliated" with the PPO in question, and that it receives a discount if one of its indemnity insureds happens to visit a provider under contract with the PPO. Given the trust inherent in the health care system, the constantly changing relationships among payors, and physicians' general lack of detailed knowledge of the terms of their PPO contracts, the physician is likely to accept this explanation, extending to the payor a discount to which it may not be entitled. Likewise, hospitals with numerous managed care contracts may have difficulty coordinating and updating their base of participating PPOs and plan participants, as well as devoting appropriate time to scrutinize each contract.

This secondary market in contracted rates is big business. Several brokers operate nationally, and are quite automated. These brokers establish on­going relationships with payors and provide them with computer software containing the provider rosters of one or more PPOs. This software enables the payor to reprice claims from any provider under contract with any of the PPOs automatically, without having to search for access to a PPO discount for each claim. This practice undercuts the business and rationale for legitimate PPOs, which is to create a network of preferred providers and require that financial incentives and other steerage mechanisms are applied to enrollees.

A payor who deals through a broker in this way may reference the broker when identifying the discount on its EOB forms, rather than the specific PPO whose discount it has used. When dealing through a broker, the payor simply may not know which PPO the provider has contracted with, and therefore which PPO's discount it is using. The payor may only be told that the broker is "affiliated" with a PPO or a national discount network. The payor may only receive contract rate information from the broker. By referencing only the broker on its EOB forms, the payor may add to the provider's confusion when the EOB is received, because the provider is unlikely to have a contract with the broker. In effect, the provider will be asked to honor a discount for an indemnity patient on behalf of a PPO with which the provider has not contracted.

There is plenty of money for providers to lose in this scheme. Generally, the broker receives 30% of the amount it "saves" the payor on each claim. Thus, if a payor is able to discount a provider's claim by $1000, then $300 will be sent to the broker or PPO who made the transaction possible. If a broker is involved, it will generally split its fee with the PPO that supplied the contracted rates. If you as a provider are approached by a broker or told by a payor that they are "affiliated" with a national or regional network; ask to see the "affiliation agreement." Chances are it doesn't exist in writing.

Providers who sign PPO contracts may not have contemplated a secondary market in their PPO discounts, but they may have made one possible by signing contracts with loose language. PPOs may also be violating the letter and spirit of their contracts with providers by selling discount information in this way.

  • There are common elements to all of these arrangements, including:
  • Reliance on numerous and complex Explanation of Benefits forms;
  • Reliance on loose contract language that usually favors the silent PPO sponsor and payors;
  • Comunications and information systems problems between hospital/medicaloffice admitting departments and billing/accounts receivable functions.


The current realities of the market may dictate what contact terms providers can negotiate with PPOs and other brokers. In some cases, the provider may have to accept the "steered" with the "non­steered" patients if the PPO or broker will not accept firm contract provisions that require financial incentives and other limits on the use of the provider's contract rates.

Also, providers need to determine whether it is worthwhile signing a contract that may be difficult for the provider to implement. Other considerations include:

Payor's ability to pay claims;

  1. What is the actual number of lives that the PPO might be able to deliver;
  2. The past experience of the PPO in directing lives. It is advisable to check the statistics roughly three months before the end of the contract term and ask the PPO to verify the amount of business "steered" to you.
  3. Whether the proposed agreement will bring in new business or simply permit the PPO and any party it contracts with to expand the payor base by substituting different amounts of payment for the same patients, thus lowering the average payments the provider receives. In other words, if the PPO is able to rapidly expand its list of payors (with no limits) within your service area, you may be treating patients that otherwise would have come to you and are only substituting the amount of payment.
  4. Given your market, is the PPO or plan sponsor likely to bring new business by buying market share (covered lives) from indemnity plans or HMOs. That market strategy is another example of possibly treating the same patients for a different, usually lower, payment.



Provider education and efforts to identify and stop these arrangements are essential. At a minimum, providers should follow the contracting advice presented below. In addition, providers should check all PPO directories in their facility to verify the accuracy of the list of participating providers for each PPO and/or "network affiliate" of a PPO. A phone call to the isted PPO and/or network affiliate to verify your status as a direct contract participant is recommended.

Careful Contracting

Providers signing PPO contracts should ensure:

  • that discounts will be extended only to enrollees of the PPO who have cards identifying them as such;
  • that all PPO members eligible for discounts will be subject to steerage mechanisms; contract language that promises "best efforts" by the PPO to steer enrollees usually is of minimal value under most state law;
  • that the types of entities that can be added to the network are identified in advance, and that providers receive timely notice when payors or employers are added;
  • that all members added to the PPO be subject to the same steerage mechanisms;
  • that any discounts applicable to a PPO enrollee be disclosed at the time coverage is verified;
  • that the sale or other unauthorized use of contract rate information is specifically prohibited.


The AHA and AMA have reviewed numerous PPO contracts in order to understand how this secondary market has gained such a substantial foothold. These contracts are, of course, numerous, but they contain some common provisions. Presented below are sample contract provisions that are especially important to be aware of before executing participating provider agreements:

  1. Certain agreements specify that patients eligible for discounts will be subject to steerage mechanisms:
    PPO will provide each Preferred Provider with a list of all Payors who have entered into agreements with PPO to utilize the services of Preferred Providers. PPO shall require Payors to develop effective channeling mechanisms, including financial incentives, for encouraging Participating Patients to use health care providers participating in the PPO.
  2. They may also specifically identify the patients to whom provider discounts will apply:
    This agreement provides for each Preferred Provider to provide its full complement of health care services at the rates specified on Schedule 1 to eligible beneficiaries of the Participating Groups and to any Payor Groups that are later added pursuant to this agreement. Each Participating Group will have a contract with the PPO that requires the Group to provide financial incentives for its beneficiaries to use Preferred Providers. No additional Payor will be added to this agreement until the Preferred Providers have had the opportunity to review the proposed PPO­ Payor contract.
  3. Some of these terms may be incorporated in the definitions of the contract:
    "covered individual" means any individual, employee, member or group member and any dependent insured under a contract issued by the Payor, where such contract provides financial incentives to use the PPO network of Preferred Providers.
  4. The financial incentives may be explicit:
    Insurers, through their contractual agreements with PPO, agree to promote the utilization of Preferred Providers by offering financial incentives to Insureds, with a minimum differential of 10%.
  5. In some cases, the sponsor of a health benefit plan agrees to contract exclusively with a PPO:
    Sponsor agrees to exclusively offer to the enrollees the "ABC" PPO within the geographical area set forth in Exhibit A. Sponsor also agrees not to enter into any agreements with other providers, medical networks or other entity, directly or indirectly, to provide medical services to its enrollees.
  6. Check to determine whether the Client (i.e. payor) of the PPO has agreed in its contract with the PPO network to impose certain duties on the Client's claim administrator to ensure confidentiality of information:
    Claims Administrator will not disclose information, including but not limited to contract rate information, repriced bills from which contract rate data might be derived, and related data, without the written approval of "ABC" PPO. Such confidential information shall not be used by Claims Administrator in any way not expressly authorized under this Agreement.
  7. Some PPO agreements may not specifically define the group of beneficiaries eligible for discounts:
    Participating Physicians shall accept the PPO Charge as full payment for Covered Services for Eligible Persons.


The 1994 "State Managed Care Legislative Resource" published by the American Managed Care and Review Association (AMCRA) includes a section entitled: "State­by­State Issue Profiles" that describes the status of PPO regulation on a state specific basis. Some states have laws that require PPOs to use incentives to steer patients. In those states where PPO regulation exists, a citation to the applicable law is provided. In addition, this resource includes the phone number for each state's insurance department.

AMCRA's address, phone and fax numbers are:
1200 19th Street, NW PHONE: (202) 728­0506
Suite 200
Washington, D.C. 20036 FAX: (202) 728­0609



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