When Payers Fail

Last summer, Faith Dajao, MD, president of a large primary-care practice in Portsmouth, Va., felt caught between a rock and hard place. One of the practice's payers said it could not pay her claims in full and would settle outstanding balances below the usual payment levels.

The good news was that the payer did not represent a significant percentage of the practice's revenue. The bad news? The payer was not state-regulated and Dajao's only alternatives to accepting the deal were to sue the payer or bill those patients for the unpaid balances. She took the settlement.

Dajao learned the hard way that government regulation of the companies that pay healthcare claims can be confusing and, at times, absent. The organization that owed money to Dajao and her colleagues was not an insurance company but rather a third-party administrator (TPA) that processed and paid claims for several large employers in the region. Since it was only a middleman -- not an insurance company -- the TPA was regulated by federal law, not the state of Virginia.

Understand TPAs

Figuring out why some of your payers are state-regulated and others are not requires a bit of knowledge about the Employee Retirement Income Security Act (ERISA). Congress passed ERISA in 1974 to better regulate employer-provided benefits. The act established rules for retirement funds and allowed certain employers to provide private health coverage to their employees.

Under ERISA, large corporations could, essentially, establish their own insurance for health claims and pay the benefits as bills were received. This option eliminated the administrative costs of using an insurance company. Employers gained some flexibility in designing employees' health coverage, plus got the benefit of additional cash flow from not paying insurance premiums before medical claims were received.

Since many companies do not have the expertise to administer health plans, they contract with TPAs to receive and process the medical claims for their employees' healthcare.

TPAs receive claims from hospitals, physicians, and other providers; verify employee coverage; check claims for accuracy; and collect the money from the employer to pay the claim. Like insurance companies, they issue identification cards to covered employees. However, unlike insurance companies, TPAs are not regulated by states. They don't have to meet the financial reserve requirements that state regulators place on insurance companies, nor are they covered by state-run funds designed to protect citizens from insurance company bankruptcies.

The impact of the ERISA exemption from state regulation can be significant. If a TPA receives administrative fees for its services but operating costs turn out to be higher than budgeted, it will end up spending more than it received from the employer that contracted it to pay claims. In the long run, the TPA will be unable to pay all of the filed health claims, leaving providers like Dajao with unpaid claims.

The ERISA exemptions also can include exemption from a state's prompt payment laws or similar regulations.

States monitor most payers

It is likely that most of your payers are state regulated. Although rules and regulations differ by state, most states require insurance companies that want to sell policies to residents to demonstrate financial soundness and maintain sufficient reserves to pay unexpected claims.

State oversight gives physicians an indirect means to monitor their payers' financial health. Typically, licensed insurance companies must file annual reports with the insurance departments of the states in which they operate, and those agencies issue public notices if a payer fails to meet the financial requirements.

Although many states treat HMOs differently than insurance companies -- either setting lower reserve requirements or allowing them to demonstrate financial viability through reinsurance arrangements with other carriers -- most states require HMOs to file annual reports and meet certain financial standards.

State licensing of health insurance companies isn't the only way that medical practices can monitor payers. Because most health insurers are publicly traded companies, they must file financial reports with the federal Securities and Exchange Commission. Accounting scandals at HealthSouth, Enron, and elsewhere have heightened the monitoring of regulated companies' financial health. When large companies get into trouble you'll read about it.

Since health insurance is such an important protection, most states are very vigilant in the oversight of companies that do business within their borders. Insurance commissioners also share information between states so problems are quickly communicated before a crisis occurs. In addition, a growing number of states have prompt payment rules that require insurance companies to pay physicians' claims within a certain number of days of receipt. If payment times lag, complaints to the insurance department will result in an investigation.

Protect your practice

Even when dealing with a TPA that is not state regulated, there are steps you can take to protect yourself.

Before Dajao received formal notification of the TPA's failure, the group's administrator heard that other medical groups were having problems receiving payments. He contacted the TPA and insisted that the practice's claims be brought up to date or it would stop accepting TPA members for care. The TPA wanted to avoid bad publicity and made special payment arrangements so, ultimately, Dajao's loss was minimal.

While you may have contracts with dozens or hundreds of payers, a majority of your revenue probably comes from just a handful of them. If you are concerned about your exposure to cash flow problems at your largest payers, register their stock symbols (if they are publicly traded) on your Web browser or personal financial software to get alerts if financial problems arise. Check to see if your state medical society monitors the top five or 10 health insurance carriers in the state and will notify society members if problems occur. Finally, get copies of the annual reports your major payers file with your state insurance department so you can monitor their health directly.

Monitor internally

Annual reports are only snapshots in time. That's why it's important to keep continuous tabs on the financial health of all of your payers.
Assign staff to review, each month, aged accounts receivable reports that are broken down by payer. If one payer's outstanding balances are growing, it might indicate problems. Typically, any insurance claim that is unpaid after 60 days represents a problem and should receive attention from your billing staff.

Continually monitor your income and receivables. If revenue drops or receivables increase -- and it is not traced to an internal problem -- your staff should quickly determine the reason. Delayed payments may not be the result of financial problems at the payer but rather billing issues in your office or communications problems with your billing software. Today, very few practices have sufficient cash reserved to allow such problems to continue without creating cash flow issues.

Don't let your practice management software get in the way of accurate monitoring. Make sure your system separates your key carriers from those that are minor sources of your revenue. Many practices lump all managed care plans into one account so it is not possible to assess the performance of any one plan. If you're unsure how your files are set up, review the structure with your billing manager, billing company, or software vendor.

Go on offense

If the payment delays are the payer's doing, call the provider relations representative at the company who handles your practice. If that doesn't resolve the problem, you may need to go on the offensive to protect yourself.

Some medical practices send letters advising patients that they will be responsible for unpaid insurance balances. Often, the human resources department at the local employer offering the problem insurance to employees can help resolve payment delays.

If the payer is state-regulated -- as most of your payers probably are -- complain to your state insurance department about slow payments. Most states have an established complaint process, often on a state Web site. Get your state and county medical societies involved, too.

TPAs pose risks

Since most states offer protection against the failure of insurance companies, the worst-case scenario when a payer collapses is usually that your payments are delayed. Eventually, you get paid.
Assessing your risks from a TPA's failure is more difficult. While the TPA may be financially sound, there is always the possibility that the company behind the self-insurance program may experience financial problems. The cash contributions that the company provides to the TPA to cover its employees' outstanding claims may be delayed, which could either slow down your reimbursements, weaken the TPA, or both.

If the company contracting with the TPA goes bankrupt, there may be no money available to reimburse you for treating its employees. If that happens, you'll be forced to weigh the desire to collect your earned fees against the political and public relations risks of dunning patients who may have just lost their jobs because their employer went bankrupt.

As premiums for health coverage soar, a growing number of cost-conscious employers are self-insuring and many are outsourcing their claims management to TPAs. Since you may be at higher financial risk when dealing with these companies, carefully review your list of payers. If you see payers that seem unfamiliar, these may be self-funded products that are regulated under ERISA rather than your state department of insurance.

In the long run, the best way to manage your risk of exposure to unpaid claims is to keep tabs on your practice's accounts receivable trends by payer, monitor internal processes to maintain peak efficiency in your part of the billing process, stay in close contact with payers, and pay special attention to payers whose claims reimbursements begin to slow down.

Gregory J. Mertz, FACMPE, is president and CEO of The Horizon Group Ltd. of Virginia Beach, Va., which offers consulting and management services for physicians. He is a Fellow of the American College of Medical Practice Executives and has more than 30 years of healthcare services management and consulting experience in varied settings such as public health, hospital feasibility and development, consulting, and private practice management for groups with three to 300 physicians. He can be reached at gjm@medgroupstrategy.com or via editor@physicianspractice.com.

This article originally appeared in the April 2004 issue of Physicians Practice.