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UnitedHealth Probe Reveals History of Pricing Questions

Melissa Davis

OKLAHOMA CITY -- A routine chiropractic bill involving less than $400 could wind up costing the health insurance sector plenty.

Three years ago, Dr. Michael Davekos set out to prove that he had been underpaid for treatment he provided to a car-wreck victim near Boston. Davekos felt that he charged fair prices for his services and even compared notes with other local chiropractors just to make sure.

Nevertheless, Liberty Mutual maintained that his rates exceeded the charges that are "usual, customary and reasonable" -- or UCR -- for treatment in his area. After Davekos sued, Liberty finally paid most of the bill. But the insurer balked at paying the $394.77 that remained.

Like many insurance companies, Liberty relies on data supplied by Ingenix -- a division of UnitedHealth Group UNH -- to establish rates for health care provided outside of its own network. Recently, Liberty suffered a troubling courtroom setback as a result.

"There is nothing in the record to establish the accuracy or reliability of Ingenix's raw data and, thus, its statistical extrapolations," a Massachusetts judge ruled when reviewing the Davekos case earlier this year. "Indeed, Ingenix itself prints the following disclaimer on its products: 'The database is provided for informational purposes only, and Ingenix disclaims any endorsement, approval or recommendation of data in the database.'"

Still, many giant health insurers rely on that database when paying out-of-network bills every day. In fact, they help build the pricing system. They supply Ingenix with prices for services in their area and then pay for access to the resulting database.

Physicians have long complained about the arrangement, accusing insurers of conspiring to lower rates for out-of-network services. The American Medical Association even filed a class-action lawsuit against UnitedHealth for allegedly orchestrating the scheme. With UnitedHealth fighting back, however, that case has languished in court for eight long years.

But last month, New York Attorney General Andrew Cuomo burst onto the scene, announcing a sweeping industry-wide investigation specifically focused on out-of-network pricing. Cuomo plans to subpoena more than a dozen health insurers, including heavyweights like Aetna AET and WellPoint WLP. Meanwhile, he has threatened to sue both Ingenix and its parent.

"The lack of accuracy, transparency and independence surrounding United's process for setting a 'reasonable and customary rate' is astounding," Cuomo declared. "United's ownership of Ingenix, coupled with the inherent problems with the data it is using, clearly demonstrates a broken reimbursement system."

Quite simply, Cuomo feels that health insurers have been abusing the system to provide less coverage than they should. Insurers sell premium policies that promise to cover up to 80% of out-of-network bills.

However, Cuomo claims, Ingenix subscribers have been paying 80% of manipulated UCR rates that can be far lower than actual prices, leaving consumers to cover the bulk of those bills instead.

UnitedHealth responded by strongly defending the Ingenix database while, at the same time, promising to "cooperate fully" with Cuomo's probe. The investigation has hurt the entire sector in the meantime, erasing billions of dollars from the market value of UnitedHealth alone.

'Bucket of Water in the Face'

Investors, however, might have missed the bigger story: the Davekos ruling.

"In many ways, I think that this case is more significant" than the investigation itself, says Joseph Paduda, owner of Connecticut-based consulting firm Health Strategy Associates. "The court made it abundantly clear that there is no valid, statistical basis for anyone to claim that the rates that Ingenix comes up with are either usual or customary, let alone reasonable ... Insurance companies should take this as a bucket of water in the face."

Ingenix declined to comment on its court cases for this story.

Ultimately, the court found Ingenix data inadmissible and sent the case back to a lower court for fresh consideration. Meanwhile, it listed multiple problems with the Ingenix evidence.

For starters, the court noted, Ingenix collects pricing information only from those health insurers that are willing to volunteer it as clients of the company. Furthermore, it observed, Ingenix requests valid data but lacks the power to enforce any real demands. Finally, it added, Ingenix does not audit the data on a regular basis and has never tested its UCR prices for real-world accuracy at all.

"These are legitimate issues for a court to examine," says Jack Janov, an attorney at Locke Lord Bissell & Liddell, a law firm that has represented UnitedHealth in the past.

"But UCR is a good tool," Janov said. "In fact, for out-of-network pricing, it's one of the best things that we have."

History Lesson

UnitedHealth recognized the value of UCR pricing data a long time ago.

When the company set out to build an information empire in the late 1990s, it started by purchasing the two most popular UCR databases around. The Health Insurance Association of America, an industry trade group, controlled one of those before that.

"Some health insurers use one or the other system, some use both, and some have developed their own price benchmarking systems," Bestwire wrote after Ingenix bought the second system in October of 1998. "Combined, the two products have more than 50% of the market."

Doctors saw a conflict of interest and sensed an abuse of power. Less than 18 months after Ingenix acquired its second UCR database, the AMA filed its class-action lawsuit.

In a nutshell, the AMA accused Ingenix of selling manipulated UCR data with prices so low that it could promise subscribers a 16:1 return on their investment. The AMA claimed that Ingenix users had unfairly pocketed "hundreds of millions of dollars" as a result.

Since then, Ingenix subscribers have come under attack. One of them, Health Net , paid an especially high price. Last fall, the company shelled out nearly $300 million -- more than half of its full-year profits -- to settle complaints about its low reimbursement rates.

Now, with Cuomo sniffing for fraud, health insurers could face regulatory penalties as well.

"To the extent that a plan uses unadjusted data out of the database and sets it equal to the UCR for their out-of-network claims, then that plan might well be understating its medical costs and might have exposure to this investigation," writes Sheryl Skolnick, senior vice president of CRT Capital Group. "That might cause the plan to cancel its contract with Ingenix or at least to more closely scrutinize its exposure to the database and its use of it."

Several health insurers, including Liberty, Aetna and Cigna CI, face class-action lawsuits over their out-of-network prices already.

ProClaim, a New Hampshire firm that collects bills for physicians, welcomes such battles.

The firm says that it "always" fights denials that were based on Ingenix's UCR rates. It likes to tout a big win against Liberty, in particular. In that case, Liberty wound up paying more than $30,000 in claims that it previously tried to reject.

"Ingenix had a problem," says ProClaim President Jon Feins. "They get all of their data from the Liberty Mutuals of the world. But how do they know if that data is correct?

"They were asked about that," Feins continues. "They didn't have a good answer. They didn't have an answer at all."

Mixed Views

For his part, Janov sees a system worth salvaging. Outside the health care arena, he notes, payment disputes often erupt when no contracts exist. To settle those cases, he says, courts rely on the going rates for the services involved.

For medical care, he concludes, UCR prices simply establish those benchmarks in advance.

"Many physicians would accept 80% of UCR on a regular basis," Janov says. "They just want valid UCR rates. From my perspective, from what I've seen, the UCR data is usually fair."

But the data can be mixed at best. CRT Capital's Skolnick, for one, has seen some extremes.

In California, she says, state officials thoroughly tested UCR prices and ultimately found them to be fair. But in other areas, she says, doctors have reported UCR rates that fall below even the cheap prices paid by Medicare.

"Medicare is the biggest buyer of health care services in the country" and enjoys huge volume discounts as a result, she stresses. "So how can this be?"

Clearly, Cuomo wants some answers. Courtroom judges are starting to ask for more evidence as well.

Meanwhile, UnitedHealth claims that Ingenix supplies valuable data that benefits the entire health care system. But now, it has to prove its word.

In the Davekos case, "the Ingenix representative basically couldn't stand behind the data," Paduda says. "Even though this [decision] was specific to one state, other states -- and potentially the feds -- could look at it as, if not a precedent, then at least an acknowledgment by the courts of the limitations of the data.

"Ingenix has got some work to do to validate their data sources," he continues. Meanwhile, "if insurance companies are paying based on UCR, they better make sure that the prices are 'usual and customary'" as pledged.