"Usual and Customary" Rates in the Health Insurance Industry

Most Americans covered by private sector health insurance participate in plans that encourage them to use health care providers within their insurance carrier’s network, but that also allow them to see an “out-of-network” provider if they choose. Consumers pay higher premiums and cost-sharing for this so-called “out-of-network” option.
Over the past few decades, insurance companies have developed the practice of basing their payments for out-of-network claims on what they call the “usual, customary, and reasonable” (UCR) charge for a service, rather than on a doctor’s or other provider’s actual charge for the service. In the late 1990s, a subsidiary of insurance giant UnitedHealth Group ended competition in the market for “usual and customary” data by purchasing the two databases that provided charge information to the insurance industry.
A. The “Out-of-Network” Health Care Option
Approximately 170 million Americans have health insurance coverage through the private insurance market.1 The majority of these consumers are covered through “Preferred Provider Organization” (PPO) or “Point-of-Service” (POS) insurance products. These plans encourage consumers to seek care from “in-network” providers who have contracted with the insurer to provide services at a negotiated price.2 In general, when consumers receive a service from an in-network provider, they are responsible only for applicable deductibles, copayments, or co-insurance payments.
Under most PPO and POS plans, however, consumers can also choose to receive services from an “out-of-network” provider, a doctor or other provider who has not contracted with the insurer. But when they choose to go out of network, consumers are likely to face higher out-of-pocket costs. They are responsible for any balance left after the insurance company has made its payment (or “allowance”), and they are often required to share a higher portion of the costs of an out-of-network service.
As a general rule, consumers pay significantly higher premiums for the choice to see out-of-network health insurance providers. For example, the Blue Cross Blue Shield family coverage currently offered to federal employees charges federal employees who choose to have coverage for out-of-network visits an additional $1,680 per year (see table below).3
1 Kaiser Family Foundation, How Private Health Coverage Works: A Primer. 2008 Update. (April 2008) (Online at http://www.kff.org/insurance/upload/7766.pdf).
2 According to the Kaiser Family Foundation, 70% of the 158 million Americans who have health insurance through their employers have PPO or POS policies. Kaiser Fam ily Foundation and Health Research Educational Trust, Employer Health Benefits 2008 Annual Survey (2008), 1, 64. (Available at: http://ehbs.kff.org/pdf/7790.pdf)
3 Blue Cross and Blue Shield Service Benefit Plan. A Fee-for-Service Plan (Standard and Basic Option) with a Preferred Provider Organization (2009), 134. (Online at: http://www.fepblue.org/benefitplans/2009-sbp/SBP2009Brochure_English.pdf).
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Plan Description 2009 Family Monthly Premium
Blue Cross Blue Shield “Basic” PPO Policy
“Under Basic Option, you must use Preferred providers in order to receive benefits.”
$216.48
Blue Cross Blue Shield “Standard” PPO Policy
“Under Standard Option, when you use a Non-participating provider, you will pay your deductible and coinsurance – plus any difference between our allowance and the charges on the bill.”
$356.59
During the Committee’s March 26 hearing, testimony from a New York consumer named Mary Reinbold Jerome helped explain why millions of American consumers choose to pay higher premiums to have the option of seeing out-of-network health care providers. Ms. Jerome was enrolled in a Point of Service (POS) plan when she was diagnosed with advanced stage ovarian cancer in July 2006. After reviewing her treatment options, Ms. Jerome and her primary care physician decided her best option was the Memorial Sloan Kettering Cancer Center in New York City. As she explained this decision in her testimony:
At the time, that hospital was the only recognized, comprehensive cancer treatment center in the New York City area. Even though the hospital was not in my insurer’s network, I had paid for out-of-network coverage; part of a point-of-service plan. I had always been confident that paying for the out-of-network option provided a peace of mind with respect to the financial burdens associated with catastrophic medical costs.4
What Ms. Jerome discovered instead was that her insurance company’s payments for her cancer treatments were so far below Sloan Kettering’s actual charges that she soon owed the hospital almost $50,000. Ms. Jerome told the Committee that these large unexpected expenses for her cancer treatment made her feel like she was fighting two battles, “one against an illness and another against the insurance company.”5
B. The Development of “Usual and Customary” Reimbursement Rates
Over the past several decades, the health insurance industry has developed the practice of reimbursing consumers such as Ms. Jerome at what it calls “usual, customary, and reasonable” (UCR) rates for out-of-network services. The insurer will not necessarily reimburse the consumer based on the actual charge for the out-of-network service, but based on a calculation of
4 Senate Committee on Commerce, Science, and Transportation, Hearings on Health Insurance Industry Practices – Are Consumers Getting What They Paid For?, 111th Cong. (March 26 and March 31, 2009), Testimony of Dr. Mary Reinbold Jerome (hereinafter “March 2009 Health Care Hearings”).
5 Id.
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the prevailing UCR (or “usual and customary”) market cost of a particular service delivered in a particular area.
According to insurance industry representatives, the UCR system developed as a way to counteract health care providers who charged exorbitant prices for their services. UnitedHealth CEO Stephen Hemsley testified to the Committee that “physician reimbursement based on nothing but the doctor’s bill is simply not economically tenable for consumers nor our health care system.”6 The CEO of a large regional health insurer wrote the Committee:
For patients seeking care within provider networks, the insurer has the ability to negotiate payment on behalf of members, and to see the delivery of the appropriate level of care. This ability is lost when patients use hospitals and doctors who opt out of healthcare networks. Concepts like usual and customary charges were designed to permit payment amounts that would be predictable, change with market-based changes in prevailing payments, and keep insurance costs in check by eliminating excessive charges from the insurance pool.7
In her testimony before the Committee, Dr. Nancy Nielsen, the president of the American Medical Association (AMA), explained why doctors sometimes refuse to contract with insurance companies. Some doctors decide to stay out of a network because they think the fees offered by the payer are too low or because the network will not provide them adequate patient volume. Other doctors, Dr. Nielsen explained, refuse to join certain networks because “the hoops that they have to jump through are not worth it to get the care that their patients need.”8
C. Ingenix: the Only Commercial Source of Medical Claims Data
The industry’s main source of UCR information is the Prevailing Healthcare Charges System (PHCS). The PCHS database was created in 1973 by the Health Insurance Association of America (HIAA), at that time the health insurance industry’s trade association.9
In 1998, HIAA sold the database to Ingenix, the information technology business unit of United HealthCare, one of the nation’s largest insurance companies.10 A year earlier, in 1997, Ingenix had purchased the Medical Data Resource (MDR) database, the largest direct competitor to the PCHS database.11 Since 1998, Ingenix has continued to market PHCS and MDR as
6 Id., Testimony of Stephen Hemsley, President and CEO, UnitedHealth Group.
7 Letter from William J. Marino, President and CEO, Horizon Blue Cross Blue Shield of New Jersey, to Senator John D. Rockefeller IV (Apr. 23, 2009).
8 March 2009 Health Care Hearings, Testimony of Dr. Nancy Nielsen, President, American Medical Association.
9 As will be discussed further below, in 2003, HIAA and the American Association of Health Plans (AAHP) merged to form America’s Health Insurance Plans (AHIP).
10 Health Insurance Association of America, HIAA Sells Prevailing Healthcare Charges System to Ingenix, Inc. (Oct. 19, 1998) (Online at http://hiwire.hiaa.org/news/content.cfm?ContentID=454).
11 United HealthCare Buys HIAA Pricing System, Bestwire (Oct. 22, 1998) (“Both systems [PHCS and
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separate product lines, although the company appears to have consolidated the two databases in 2001.12
Since these acquisitions in the late 1990s, the insurance industry has overwhelmingly relied on the Ingenix PHCS and MDR “data benchmarking” products to estimate reimbursements for out-of-network charges. As one health care executive told the Committee in recent correspondence: “We know of no alternative sources of national health care charge databases