Firing a shot across the bows of Pittsburgh's growing hospital networks, Highmark Blue Cross Blue Shield said last week it will enter contracts only with individual hospitals-not systems.
The move may be the first example of a dominant insurance company attempting to squelch the development of provider networks that could evolve into direct competitors by offering insurance products.
Highmark, formed last December through the merger of Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield, has 2.5 million enrollees in western Pennsylvania, equally divided between managed-care and indemnity products. The plan had $6.6 billion in pro forma revenues in 1996 and posted a loss of $50 million.
It has contracts with virtually every hospital in the region and more than 7,000 physicians. All its current contracts are with individual hospitals.
The plan made the "no-systems" announcement as it starts to assemble a roster of providers for lower cost managed-care products expected to be introduced in 1998. These budget plans will carry reduced premiums made possible by contracting with a narrower network of providers.
But Highmark emphasized that the no-systems policy will apply to all contracts.
Highmark can hold down costs better with individual negotiations, explained Keneth R. Melani, executive vice president of the insurer's health services unit.
"There is little evidence that hospital-led provider networks have served their members in a more cost-effective . . . way," he said.
By repudiating systemwide contracting, the powerful insurer, which covers more than 60% of Pittsburgh-area residents, could chill healthcare systems' growth in the area. At the least, Highmark appears to be trying to bolster its bargaining position in the face of increasingly powerful hospital networks.
Officials of Allegheny Health, Education and Research Foundation and University of Pittsburgh Medical Center System declined requests for comment on Highmark's announcement.
But a knowledgeable observer of the Pittsburgh market said the policy represents a major turning point.
"I view this as a pre-emptive strike to blunt the growth of the tertiary-care networks," said William Hanna, president of Pilot Group, a Pittsburgh-based consulting firm. Highmark is "not going to be put in a position of being leveraged by these large networks," he added.
Highmark asserts it can do a better job assembling a virtual network a la carte than buying prepackaged services through a hospital network.
Although Pittsburgh is "a hotbed of consolidation," Melani said, "we don't see any of the networks having formed as being highly desirable in the marketplace."
An explanatory letter sent to providers in the area last week went further in questioning the value of the hospital-based networks.
"The networks were formed by tertiary hospitals to meet their needs," the letter said, citing a "lack of proof that integrated delivery systems (like AHERF's and UPMCS') have been successful in reducing costs or improving quality." In fact, the letter said ominously, "In other parts of the country, some providers who have built integrated delivery systems like (AHERF's) Pyramid and (UPMCS') Tri-State, are now taking them apart."
