A series of bitter contract disputes this spring and summer involving large hospital systems in California threatened to send hundreds of thousands of Blue Cross of California enrollees scurrying to find new doctors and hospitals.
The hospital systems, including Sutter Health, Catholic Healthcare West and Columbia/HCA Healthcare Corp., threatened to cancel their contracts with Blue Cross, one of the state's top-five managed-care plans, over what they considered lowball payment rates.
In the end, the brinkmanship paid off. The three systems, after considerable turmoil, reached negotiated agreements with Woodland Hills, Calif.-based Blue Cross. But the pressure was intense, the stakes were high and the results were seen as a sea change by many industry observers in the Golden State.
"This was the first year those guys (the hospital systems) successfully stared down Blue Cross," says Wanda Jones, a San Francisco-based hospital consultant.
The contract settlements were "the best result for hospitals in seven years," according to Jones, who says hospital systems in California finally have developed the negotiating clout -- and the internal discipline -- to negotiate on equal terms with large managed-care companies such as Blue Cross of California, a unit of Woodland Hills-based WellPoint Health Network.
Officials at the California Healthcare Association in Sacramento, which represents more than 630 hospitals, health systems and physician groups, also say the recent contract showdowns with Blue Cross are proof that times have changed.
"We have not had insurers -- or health systems -- of this size before, and they're learning to work with each other," says Mary Wallace, a spokeswoman for the association. "We've moved into a new type of contract negotiation."
Sacramento-based Sutter Health negotiated a three-year deal with Blue Cross in early June that covers 23 facilities. Catholic Healthcare West worked out a similar, multiyear deal a month later for 30 of its hospitals in California. Several of its hospitals either negotiated separately or were not included in the systemwide deals.
A similar agreement with Columbia's three-hospital, San Jose-based South Bay unit was announced July 1.
In all three cases, the hospital system threatened to let its Blue Cross contracts lapse unless the health plan made concessions in negotiations. "We've started the process for termination, and we're prepared for it," Helen Robbins, a Columbia vice president, told the San Jose Business Journal in mid-June.
A fourth major player, the University of California, Davis Health System, near Sacramento, is still in negotiations with Blue Cross. It hasn't publicly threatened to bolt but has talked tough.
Things got rolling in January, when Sutter threatened to cancel contracts worth about $60 million for Blue Cross' Prudent Buyer PPO and CaliforniaCare HMO when the contracts came up for renewal. Sources say Sutter was asking for steep increases, possibly as high as 25%, but no one will say what the actual proposals were.
Sutter's hardball maneuver brought Blue Cross to the table, but negotiations soon broke down. Talks restarted two months later but fell apart again. By the middle of May both sides were warning Blue Cross enrollees in Sacramento, the San Francisco Bay Area and the Central Valley to sign up with other, non-Sutter providers.
No one involved will talk about the details, but a Blue Cross official at the time characterized Sutter's proposed rate increases as "just huge."
Blue Cross officials say the health plan was just doing its job: trying to keep healthcare costs down by negotiating aggressively with providers. "The hospitals want more money, but consumers want lower costs," a spokeswoman says.
Sutter officials countered that Blue Cross' payments didn't cover the cost of inpatient care at many of their facilities.
About 180,000 enrollees would have been affected by the termination, along with some of the region's best-known medical centers: California Pacific Medical Center in San Francisco, Alta Bates Medical Center in Berkeley, Marin General Hospital in Marin County, and Sutter General and Sutter Memorial hospitals in Sacramento.
But the threats appear to have worked, in large part because hospital systems are more integrated and organized than ever before and because they drew a line in the sand after many years of giving in to discount pressure from HMOs and other managed-care plans.
"There's a growing amount of parity," says hospital consultant Jones. "We're in a new game where we'll have true negotiations instead of unilateral pricing."
Blue Cross has long had a reputation for parsimonious reimbursement to providers. It's also battling a class-action suit by about 13,000 California doctors alleging that the plan failed to live up to payment provisions in its contracts.
The hospital-system standoffs began to gain public attention in late spring. Sutter, one of the state's largest hospital systems, threatened to terminate its expiring Blue Cross contracts by May 15 if the health plan didn't sweeten its offer.
Sutter ended up terminating the expiring Blue Cross contracts -- at least temporarily -- but there was no interruption in service to Sutter's Blue Cross patients. Both sides agreed to extend coverage "so enrollees could make new arrangements," says Sutter spokesman Bill Gleeson.
Two weeks later, the warring parties agreed to a compromise that provided Blue Cross enrollees with continued coverage on terms acceptable to both the system and the health plan.
San Francisco-based Catholic Healthcare West, which operates 36 hospitals in California, followed suit about a month later, potentially jeopardizing about 4% of its annual hospital revenues by setting a July 7 deadline to reach a resolution.
Columbia's three-hospital South Bay system in San Jose also joined the brinkmanship game, threatening in June to pull its Blue Cross business.
Neither Blue Cross nor the systems involved in the contract talks were willing to disclose the terms of the agreements.
"We are bound by the contract agreements themselves not to disclose the details," says Rhonda Seaton, a Blue Cross spokeswoman.
But industry sources say the increases for Sutter were likely in the low double-digits, after Sutter and CHW initially demanded increases reportedly as high as 20% to 25%. California health plans, in contrast, typically have been getting 1999 premium increases of 4% to 8%.
Blue Cross officials stress they now have multiyear contracts with six of the state's largest systems: Sutter; CHW; Columbia; Roseville, Calif.-based Adventist Health; Tenet Healthcare Corp. of Santa Barbara; and Burbank-based UniHealth. That suggests the heat will be turned down for a while. The new contracts are also staggered, so a repeat of this year's showdown isn't likely in the near future.