Health insurers’ suits show they’re not keeping a lid on costs

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.

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.