Out-of-Network: What is FMV Compensation?


The persistent presence of out-of-network benefits in employers’ health plans has resulted in continued disputes between insurers and providers over pricing.  Ultimately, when insurers and providers end up in court, everyone wants to know the Fair Market Value of payment for services.

Out-of-network health insurance benefits have traditionally been structured as percentage-based coverages. So you may have a $1,000 deductible and 80% insurance coverage for in-network services, as well as a separate out-of-network benefit with a separate $1,000 deductible and 60% insurance coverage rate.

The main issue lies in the percentage-based coverage.  With in-network benefits, insurance may pay 80% of the negotiated fee schedule rate in the contract between the insurer and provider while the patient pays the other 20% of the negotiated rate.

With out-of-network benefits, there is no contract or fee schedule between the insurer and provider.  So the 60% insurance coverage has traditionally been applied to the providers’ gross charges–which are set at the discretion of the provider.  So under percentage-based out-of-network coverage, a provider would directly benefit from increased payments by increasing billed charges.

When there is no contract between healthcare providers and insurers, it is difficult to establish the limit of the payment obligations of the insurer.  Surely, at some level the gross charges of an out-of-network ambulatory surgery center would be deemed excessive.  If the industry rule of thumb is to set gross fee schedule charges at 3.5 times Medicare rates, would we draw the line of reasonableness at 10 times Medicare or 20 times Medicare?  There is no authoritative guidance.

Some insurers have experimented with out-of-network benefit coverages that instead pay out-of-network providers as a markup on Medicare rates (i.e. 150% of Medicare).  However, when medically necessary treatments for autism, psychiatry, and hand surgery are refused under these payment terms, it does not take long for an employer to quickly direct an insurer to revert to the traditional out-of-network payment model.

There is a growing body of data and research on market payment rates for healthcare services.

 1) FairHealth.org and FairHealthConsumer.org

FAIR Health’s database includes over 19 billion medical and dental claims for services provided to over 150 million individuals. FAIR Health was formed to create an independent data source for out-of-network fees in October 2009 as part of a settlement of an investigation by New York State into certain health insurance industry reimbursement practices.

2) HSC Research Briefs No. 16 and No. 27

The two best research studies of market pricing power for inpatient, outpatient, and physician services were published by the Center for Studying Health System Change.  These two studies describe variations in reimbursement in over a half dozen U.S. cities and compare the results as a percentage of Medicare rates.  These two studies are good references for setting the outer bounds of what is realistic.  Analysts can calculate normalized revenues by imposing these percentage of Medicare rates on the services being analyzed.

Brief No. 16 used claims data from Aetna, Anthem Blue Cross Blue Shield, CIGNA and UnitedHealth Group for eight major metropolitan markets.  Here is a sample table from Brief No. 16 analyzing hospital prices as a percentage of Medicare.


Brief No. 27 examines the same hospital and physician services with a slightly newer 2011 claims data for commercial insurance enrollees in 13 markets. Here is a sample chart from Brief No. 27 focusing on primary care physician services.


 3) State All Payor Claims Databases

About a dozen states have created all-payor claims databases, but only a handful have provided the public with detailed data for price comparison purposes.  These databases can be referenced to identify the prices commercial insurers and providers negotiate.  New Hampshire’s NH HealthCost and Maine’s HealthCost online tools provide their constituents with the best commercial pricing data.  Here is a snapshot of New Hampshire’s output for Cigna reimbursement for colonoscopies at various facilities.

New Hampshire’s NH HealthCost: Selected Cigna, $2,000 deductible New Bitmap Image ++++++++++++++++  

HCTadvisor provides healthcare business data for research and analysis purposes. Contact HCTadvisor today at (303) 800-6444.