UnitedHealth Probe Reveals History of Pricing Questions

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 Quote) -- 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 Quote) and WellPoint (WLP Quote). 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.