Fasten your seat belts, because it's likely to be a bumpy ride.
That sums up the outlook for upcoming contract negotiations between managed-care plans and providers for next year, according to a number of industry observers.
Some expect to see examples reminiscent of the bruising contract talks in mid-1998 between Woodland Hills, Calif.-based WellPoint Health Networks and several major hospital systems in California, including Sacramento, Calif.-based Sutter Health and Catholic Healthcare West of San Francisco.
Those bitter contract disputes over how premiums were to be split threatened at various points to send hundreds of thousands of WellPoint's Blue Cross of California enrollees scurrying to find new doctors and hospitals (Aug. 10, 1998, p. 62).
In the end, the brinkmanship paid off for the hospital systems, which reportedly got some of the largest rate increases in seven years. Now observers say that other providers, especially big hospital systems with significant leverage, are likely to use a similar strategy, and not just in California.
"Negotiations are going to be ugly, brutal, horrendous," predicts Steven Valentine, president of the Camden Group, an El Segundo, Calif.-based consulting firm. Many providers are likely to cancel managed-care contracts-or threaten to do so-as part of these contracting battles, he says.
"Organizations have to be prepared to walk away, and not as an idle threat," says Van Johnson, chief executive officer of the 26-hospital Sutter Health system. "And sometimes you have to say, `We're going to terminate you,' just to get negotiations going."
In New York, one of the highest-priced markets in the country, Empire Blue Cross and Blue Shield will aggressively try to negotiate rate cuts with some hospitals.
In most cases, though, Empire "is looking to contain and maintain (1998) rates," says Connie Poirier, Empire's vice president of contracting and network development. She says it doesn't make sense to look at percentage increases without comparing rates with other markets. New York's rates "are still too high compared with the rest of the country," she says.
On average, this year's managed-care premiums are 7% to 9% higher than 1998 rates, according to numerous surveys and estimates. A recent Towers Perrin study shows that HMO premiums for large corporate customers jumped by an average 8% this year (Jan. 11, p. 22).
Health plans and hospitals are certain to battle vigorously over who gets the lion's share of those increases.
Managed-care plans are demanding-and getting-higher rates from employers to counteract higher medical costs, soaring pharmaceutical expenses and plunging bottom lines. Hospitals, which contend they face more pressures from government payers, believe commercial managed-care contracts represent the only area where they may be able to bargain for a better deal.
The question is, who will blink first?
In Washington state, for example, managed-care plans have been racking up large losses recently, says John Holtermann, vice president of provider network management for Seattle-based Regence Blue Shield.
Regence posted an underwriting loss of $50 million in 1998, its fifth straight year of operational red ink, and it expects to see a $20 million underwriting loss this year, Holtermann says. Health plans in Washington state lost $250 million in 1997, the last year for which aggregate financial results are available.
"We're raising premiums," Holtermann adds, "but there's not a lot to pass back to the providers."
Regence isn't alone. Many health plans, swamped with large losses in recent years, have "described themselves as behind the curve on premium increases," says Richard Wade, senior vice president for communications at the American Hospital Association. "And their willingness to share those premium increases with providers is going to be extremely limited."
Hospitals, meanwhile, say they are getting squeezed by federal Medicare cuts required by the 1997 balanced-budget law, attempts by numerous states to slash Medicaid costs, growing numbers of uninsured patients and increased pressures from commercial managed-care plans, Wade says.
Those competing currents will complicate contract talks.
"Hospitals are going to be resolute," Wade says. "In some markets, you're going to see some very tense and very tough negotiations."
Critical mass will be the key to providers' success.
"Provider systems are going to be asking for more, and they're going to be getting more," says hospital consultant Wanda Jones, president of the New Century Healthcare Institute in San Francisco. In most cases, that should translate into rate hikes of 5% to 7%, she predicts. For the biggest players, such as the dominant, integrated systems in Northern and Southern California, increases "may go as high as 10%," Jones says.
Valentine, meanwhile, says contract design also will play a big part in determining winners and losers in the battle for a bigger piece of the premium pie.
Hospitals and medical groups that have negotiated "percentage of premium" contracts with health plans will share directly in estimated 7%-to-9% premium increases, he says. Valentine says a majority of hospitals have some of these contracts in place. But others, notably stand-alone hospitals without the contracting clout to negotiate such deals, may see increases of as little as 2%.