A congressional subcommittee held a hearing Thursday to examine the health insurance co-op loan program established by the Affordable Care Act. The program provided $2.4 billion in taxpayer-backed loans as seed money for the co-ops, which are private companies that were originally intended to bring competition, choice, and innovation to the health insurance market. In spite of this seed money, co-ops are off to a rough start. Since their inception just over two years ago, 12 of the original 23 co-ops have closed due to financial concerns. Taxpayers aren’t the only ones at risk of getting left with the tab for the co-ops.
A co-op left doctors and hospitals in Iowa and Nebraska holding over $80 million in unpaid claims when it closed. Worse still, consider that unpaid claims left behind by failed insurance companies are often allocated by state guaranty funds to the surviving insurance companies, who ultimately pass them on to consumers. One way or another, you’re likely to pay for any obligations the co-ops can’t meet. The co-ops’ leaders don’t offer much comfort, either. One co-op CEO recently offered this assessment of the co-ops’ prospects for re-paying their loans: “Will there be a little money left? Yeah, maybe.” Fortunately, the surviving co-ops have an often-overlooked asset they can tap to stay in business and meet their obligations: the recovery rights to their overpayments.
The term “overpayments” refers to healthcare reimbursement claims that were, for whatever reason, paid at an amount higher than that owed by the health plan to the recipient (recipients are typically care providers, rather than patients).
There are many different causes of overpayments, such as accidental duplicate bills, bills that should have been paid by a different program or insurance company, and fraudulent bills, just to name a few. Many overpayments are impossible or prohibitively difficult to avoid; even the best-run plans commit them. In fact, overpayments are a relatively predictable phenomenon…and a costly one.
A 2014 report estimated the global average cost of overpaid health claims to be about 7% of all claims, but the rate can be much higher. The 2014 report of Medicare improper payments, for example, puts the figure at 13.2%. Health plans that outsource the claim payment function (as do many co-ops) are believed by some to be at particular risk, and the transition to a greatly-expanded set of coding rules last October could push overpayment rates even higher.
Health plans’ contracts with providers typically include an explicit right to recover overpayments. Of course, some overpayments are difficult and costly to detect. And detecting an overpayment is not the same as recovering it. Out-of-network providers, for example, may have little obligation or incentive to refund an overpayment. And a fraudster who has been put in jail – or fled the country – can be nearly impossible to collect from. And of course, recoveries take time – several months to several years after the date the original claim was paid, depending on the situation. Nonetheless, a mature health plan with a typical level of overpayments and a robust audit and recovery program will manage to pull in substantial recoveries each year.
Health plans traditionally employ an “audit and recovery” team, comprised of internal staff, vendors, or a combination, to detect and recover overpayments. Recoveries are deposited as they are received over time, typically at least six months after the overpayment occurred. For example, a claim that gets overpaid tomorrow might be discovered four months from now, and recovered three months later still – a total of seven months after the claim was (over)paid.
The traditional model of hiring an audit and recovery team and waiting months or years to recover overpaid claims might work for some health plans, but most co-ops are short on money and shorter on time. By selling the recovery rights to multiple years’ worth of claims – past and future – to buyers who can afford to exercise the recovery rights over time and keep the recoveries, the co-ops can unlock the value of their recovery rights now, when they desperately need capital.
The dozens of vendors – many of them sophisticated and well-financed firms– that perform audit and recovery services today top the list of potential buyers. They already have the resources and expertise to do the work, and they are already accustomed to their income being at risk based on their performance. The firms that are contracted under Medicare’s “Recovery Audit Program,” for example, get to keep a percentage of the recoveries they bring about, as compensation for their work.
A firm that has made an up-front investment in return for all the overpayments it can recover will have a strong incentive to audit and recover aggressively. That’s a good thing in the sense that it encourages the mitigation of wasted health care dollars, but it can also lead to unintended negative consequences for providers and patients, if care isn’t taken in advance. For example, Medicare’s Recovery Audit Program is being improved to protect providers against erroneous refund requests and excessive requests for additional documentation to support their billings. Similarly, precautions should be taken to ensure that overpayment recoveries don’t end up costing patients through a practice known as “balance billing,” whereby patients can sometimes be responsible for any portion of a medical bill not covered by insurance.
Consider the South Carolina co-op, Consumers’ Choice Health Insurance Company (CCHIC), which announced last October that it would no longer insure anyone after the end of 2015. CCHIC reported total claim costs of $173 million in 2014, and a net loss of $3.8M. If CCHIC experienced a 10% overpayment rate that year, its overpayments would have totaled about $17 million. Understanding the considerable collection and various other risks involved, how much might a savvy bidder have paid for those recovery rights? $3.8M would have been enough to turn a money-losing year into a break-even year. If it could have sold the recovery rights to two or even three years’ worth of overpayments, the proceeds might even have been enough to keep CCHIC in business and meeting its financial obligations.
By selling the recovery rights to their overpaid claims, the surviving co-ops can generate funds that will help them stay in business and meet their financial obligations. With careful planning, they can do it without negative impact to patients, and without subjecting doctors and hospitals to overzealous audit campaigns. After all, won’t taxpayers, consumers, doctors and hospitals rightly be irate if they’re left holding the bag for the health co-ops? In the words of the co-op CEO: “Yeah, maybe.”
William Snyder is founder of Black Hills Group consultancy and a former guaranty fund board member.