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Preferred Provider Contracting: Beware Of Rental Networks And Third Party Guarantors

By Martha Swartz, M.S.S., J.D.

What is a PPO? As a health care institution or individual provider, it is difficult to provide services in Pennsylvania and New Jersey without participating in at least one preferred provider network (PPO).  PPOs are a form of managed care in which: an intermediary (PPO) forms a network of health care providers and connects the health care providers to third party payers such as insurance companies, employers, and third party administrators (Payers). The providers offer their services to the PPO at a discounted rate because they expect Payers to steer patients to them as a result and thus, to increase their patient volume. The health care providers that are on the PPO’s panel of providers are “in-network” and, because of the negotiated discounts, patients who go to them for services pay less than they pay for similar services offered by health care providers who are not on the PPO panel, or are “out of network”. A PPO can be a “win-win” for patients and health care providers in that individual patients who seek services from in-network providers save money and in-network providers potentially receive increased revenues as the result of increased patient volume which results from the PPO’s marketing of their services as being “in-network” and thus less expensive.

What is a Rental Network? The above arrangement falls apart if the PPO fails to market the health care provider’s services as “in network” or if the PPO makes the discounts available to Payers that are not part of the health care provider’s marketing plan, that is, if the PPO “rents out” the provider’s discount without the provider’s knowledge or consent.  When this happens, health care providers find themselves providing services to individuals for which they expect to receive a certain reimbursement amount, only to find out at time of payment that the individual’s Payer has accessed a discount to which it is not entitled. The PPO may even have made your discount available or “rented out” your discounts to Payers with which you already have a negotiated an agreement at a higher rate. Providers thereby end up with the “short end” of the bargain, that is, they give discounts, but don’t receive a higher volume of patients in return.

Back in 2005, a number of commentators began to warn physicians of “silent PPOs”, that is, arrangements in which a PPO with which a physician contracts to be on a PPO panel makes the discounts the physician negotiated with that PPO available to other Payers, without the Physician’s consent. However, many times a physician unwittingly agrees to make her negotiated discounts available to other Payers in a PPO’s “rental network” because the physician fails to read the fine print in the contract proposed by the PPO.

Are Rental Networks “legal”? In 2008, to avoid the regulation and possible banning of “silent PPO”s, the American Medical Association and the American Association of Preferred Provider Organizations lobbied the National Conference of Insurance Legislators (NCOIL) to adopt a Model Act to Regulate the Secondary Market in Physician Discounts. Under the model law, an intermediary contracting with a physician who wishes to make the terms of its contract available to other Payers must state in its contract with the physician that the intermediary contracting entity:

  • is permitted to enter into an agreement with a Payer allowing the Payer to access the physician’s discounted rates;
  • will contractually obligate the Payer renting access to a provider network to abide by the terms of the original contract between the intermediary and the physician; .
  • will provide the Payer with the relevant terms of the original contract with the physician with which the Payer is obligated to comply;
  • will provide the physician with a continually updated list of entities that have access to the physician’s discounts, including all additions and deletions;
  • will obligate all Payers to note on their Explanation of Benefit forms the source of their contractual discounts.

A number of state legislatures have adopted forms of the NCOIL Model Act, including Connecticut, Colorado, Florida, Indiana and Ohio. Other states including Arkansas, California, Kentucky, Louisiana, Maryland, Minnesota, North Carolina, Oklahoma, South Carolina, Texas and Virginia, have enacted laws that limit or prohibit silent PPOs. So far, there is no similar legislation in either Pennsylvania or New Jersey.

In addition to legislature-passed laws, several state and federal courts have issued decisions rejecting a Payer’s right to make discounted payments to a health care provider when the discount was “sold” to the Payer without the health care provider’s knowledge. Although none of these cases arose in either New Jersey or Pennsylvania, they provide insights as to how a local court might view this issue. In at least two of the cases, HCA Health Services of Georgia v. Employers Health Insurance Company, 240 F. 3d 982 (11th Cir 2001) and Mitzan v. Medview Services, Inc., 1999 WL 33105613 (Mass. Super, June 16, 1999), the courts based their analyses on whether the insurer that had accessed the provider’s discounts had been in the position to steer patients to the provider, thus providing the physicians with the “benefits of their bargain”.

What can physicians do to gain the benefits but avoid the risks caused by rental networks? Review your PPO agreements carefully, preferably with the assistance of an attorney, to ascertain if the PPO intends to “rent” your negotiated discounts to Payers. If it is determined that the agreement does permit the “renting” of your discounts, make sure that your agreement with the PPO:

  • makes it clear that the discount you’re offering the PPO is in exchange for the PPO requiring the Payers with which it contracts to steer patients to you as an “in network” participating provider
  • obligates the PPO to require all Payers to identify you in all of their written material as an “in network” provider
  • makes it clear that the payment terms that you agree to in the PPO agreement are confidential and may not be disclosed without your express written consent, except to a list of Payers that you have approved
  • obligates the PPO to provide you with a list of all Payers, updated throughout the term of the contract
  • obligates the PPO to refrain from contracting with any entities with which you have an existing agreement that provides higher payment rates
  • requires the PPO to contractually obligate all of its Payers to comply with the terms of the PPO’s agreement with you, including payment procedures, UR procedures, underpayment recoupment, etc.
  • obligates Payers to note on their EOBs the source of their discounts
  • clarifies which UR procedures applies to your contract, i.e. those of the intermediary or those of the Payer
  • obligates the PPO to conduct financial due diligence regarding the Payers to which it makes your discounts available to you to reduce the chances that a Payer will fail to make timely and accurate payments
  • obligates the PPO to advocate on your behalf if a Payer fails to make timely and accurate payments
  • requires Payers to pay your full charges if they fail to pay you within the agreed upon time limit
  • permits you to discontinue discounts to, and to terminate your relationship with, any Payer or any Payer’s product if the Payer fails to make timely and accurate payments

Third party Guarantors of Copayments. Another type of arrangement that recently has been introduced locally can also be a “win-win” for patients and health care providers. At least one local PPO is now offering a program in which a patient’s copayment is paid by the Payer, thus relieving the provider of the expense and inconvenience of collecting the copayment from the patient itself.  Because their costs will be reduced, some providers may be willing to accept lower reimbursement rates as a result of this arrangement.  Since physicians don’t refer patients to insurers, the promise of such a potential benefit to physicians doesn’t implicate state or federal anti-kickback statutes.

However, practical problems can arise if it is unclear to the provider or the patient that an entity other than the provider will be seeking the copayment from the patient.  Thus, the provider’s agreement with the PPO should require the PPO to obligate its Payers to: 1) inform the patients in writing to expect a bill for the copayment from the Payer; and 2) specify on the patient’s ID card the Payer that is responsible for paying the patient’s copayment, so that the provider is aware that it is not responsible for collecting the patient’s copayment.

Also, since the provider has no direct contract with the Payer that is paying the patient’s copayment, the provider must rely on the PPO to obligate the Payer contractually to pay the patient’s copayment to the provider in a timely fashion. Furthermore, the PPO’s agreement with the provider should confirm that the provider is no longer obligated to collect these copayments.

Negotiating your PPO Agreement. Many physicians fail to read their PPO (and other types of third party payer) contracts carefully because they assume they have no ability to negotiate with large insurance companies and other payers. Remember, however, if a Payer needs the type of specialty or subspecialty services that you provide in the geographic area in which you provide services, you may have more leverage than you think.


The Law Office of Martha Swartz ( concentrates on the regulatory and business aspects on health care.


One comment

  1. Dana R. Bellefountaine Jr.

    What an excellent article! At the end of the day you must know who your payers are and the contracted allowables.

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