Health Insurance

Want to cut costs by up to 24 percent? Audit workers' hospital bills.

By Jayne Pearl

Last year health insurance premiums for business rose 20.4 percent. To hold the line, more and more companies, large and small, are auditing their health care bills. It can be done by outsiders or with selfauditing programs that offer incentives to employees who catch hospital billing errors. Savings can reach 24 percent of a typical hospital bill.

Government and private studies show that most hospital bills contain errors: charges for procedures never provided or medicine not dispensed. That's why most large corporations and insurance companies have big hospital bills audited. Three years ago Equifax, an Atlanta auditing firm, checked 40,000 suspicious-looking hospital bills that exceeded $10,000. It found that 97 percent of the bills, with an average total of $39,283, contained errors of $1,300 to $1,500, or about 3.5 percent. The hospitals were three times more likely to overcharge than undercharge.

Companies with fewer than 50 employees, whose health insurance rates are generally based on the pooled claims experiences of several small firms, may not see an automatic drop in premiums if they lower employees' medical bills. But for family businesses that have many relatives on staff, finding billing errors can lower copayments.

It may not make sense to hire an auditor to screen every hospital stay. But when an employee submits a whopping bill, most auditors will do a free "prescreening," advising you whether an audit is likely to turn up significant savings. The auditor looks at the history of the facility and whether the bill includes a high volume of errorprone areas (such as pharmacy charges, central supply, and lab services).

A Snellville, Georgia, construction company, E.R. Snell Contractor Inc., employs 260 people (including 25 second- and thirdgeneration family members). The company, which began selfinsuring last year, had a few large claims this year, which its thirdparty administrator, a contractor that processes claims, submitted to an auditing firm. "One lady was confined to a hospital for 30 days with a digestive tract disorder. If they had given her all the drugs they 'listed on the hospital bill, they probably would have killed her on the first day, " says Eldred Floyd, president of TPA of Georgia, Snell's claims administrator. "When we got into the audit, we found that those drugs were never given to the individual, and we deducted 60 percent of the pharmacy charges. In dollars, that came to about a $14,000 savings, or 9 percent of the total bill."

Many auditors only scrutinize bills larger than $10,000; that's where errors are most likely to add up and justify the expense I of the audit. Fees can be based on hourly rates (generally $55 to $75 an hour, depending on regional wages), a percentage of the bill being audited (usually 1.5 to 2.9 percent), or a percentage of the savings generated (25 to 35 percent). If you chose an hourly rate, the auditors may spend a specified number of hours on a bill, after which they can call to report their findings so far, and let you decide whether or not to go further. 'We cap hourly charges to not exceed 2 percent of the hospital bill in question," says Dave Mooney of Equifax. Most auditors prefer not to charge by a percent of savings, because it makes hospitals less cooperative if they suspect auditors have an incentive to be less diligent in sniffing out undercharges.

Ethically, auditors are obligated to report any undercharges they uncover. "Most of our customers make up the difference of an undercharge," says Douglas Leland, vice-president of product management and development at Intracorp.

Assuming hospital billing errors are not deliberate, there should be a similar frequency of overcharges and under-charges. There is, explains Paul Miller, Intracorp's manager for hospital bill reviews. "However, the magnitude falls on the side of overbilling, for a number of reasons. For instance, a doctor may tell the nurse, 'If Mr. Smith should be in pain tonight, here's a prescription for Darvon.' Mr. Smith sleeps through the evening, but they went out to the pharmacy to fill that prescription. That doesn't mean Mr. Smith used the pills and should be billed for them," says Miller.

Auditors refer to medical documentation when contesting such items. 'There's a lot of negotiation. If it's not in the medical record, generally we argue it didn't happen," says Miller.

Surprisingly, most auditing companies don't bother to check whether the price of a hospital service or product is correct or "reasonable," however. So don't expect an audit to catch errors such as a few extra zeroes for hospital gowns. "We have no basis for comparison in a lot of cases," says Miller. "We don't know what it costs a hospital in Agawam, Massachusetts, to provide a tonsilectomy, compared with one in New York City. Hospital charge masters are proprietary."

Many employers are providing incentives for employees to audit their own bills, and report discrepancies. "The patients were there," points out Dave Garratt, managing consultant with A. Foster Higgins in Washington, D.C. 'They know how many times they got x-rayed and had blood taken." About 20 or 25 percent of his company's clients (mostly those that self-insure) have installed an incentive program. Some split the savings, usually up to a limit such as $500 or $1,000. Others offer a flat amount. To set up a program, just decide the type and size of financial incentive you want to offer, and announce the new program, perhaps with some fanfare.

Dave Mooney of Equifax points out, "Most insurance companies set reasonable charges for supplies and procedures. Consumers can get a list of those charges from their insurance company." The Health Insurance Association of America, based in Washington , D.C., also publishes cost guidelines that the large insurers use. And the government publishes Diagnostic Related Groups, a list of what Medicare will pay for various medical procedures.

The best way to spot overcharges is for the employee to ask the doctor for the cost of a procedure before hospitalization. In non-emergencies, patients can even ask the doctor to Est all lab work, x-rays, and medicines that he expects to prescribe. The patient can then ask the hospital what each procedure will cost, and later compare that with the itemized bill. "We always a a estimate when we get our car repaired," insists Mooney. "But we rarely ask for an estimate when we get our body repaired."


Jayne Pearl is a senior editor at Family Business.


Berwyn, PA

Managed Care Services Group
Westport, CT

Axiom Review Inc.
Millburn, NJ

HealthCare Compare Inc.
Downers Grove, IL

The Sunderbruch Corp.
West Des Moines, IA

Source: Business Insurance magazine.