Large managed-care companies hold the upper hand in most contract negotiations, but providers are exhibiting new bargaining clout, a development being characterized as "provider push-back."
Analysts say the shift in power soon will alter the business strategies of many health plans.
"There are signs that hospitals and physicians -- which account for about 70% of a typical health plan's medical costs -- are beginning to assert their positions more strongly in certain markets," says Diana Lee, an analyst with Moody's Investors Service in New York. "This developing provider push-back will compel managed-care companies to look beyond the terms of their contracts with providers as a way to improve margins."
No health plan knows that better than Louisville, Ky.-based Humana, whose stock tumbled 25% in one day after a show of force by hospital giant Columbia/HCA Healthcare Corp. of Nashville, Tenn.
Last month, after a four-month standoff, Humana and Columbia agreed on a contract for Columbia's 56 Florida hospitals. Humana agreed to the $350 million deal (which calls for a 15% increase in reimbursements) just hours before its 1.3 million Florida enrollees would have lost access to Columbia hospitals -- and only after the hospital chain threatened to walk away from the deal.
"For whatever reason, Columbia made a decision that they had nothing to lose and they were going to stick with what they were seeking," says Humana spokesman Greg Donaldson. "At the end of the day, we made the decision that it was in the best interest of our health plan members and that we will have to absorb it financially."
One week after the contract was signed, Humana announced that a jump in medical costs ($90 million in additional medical claims largely due to the Columbia contract) would mean lower-than-expected earnings for the first quarter of 1999 -- 20 cents to 24 cents per share instead of the projected 34 cents. That news, coupled with Moody's announcement that it was downgrading Humana's outlook to negative from stable, caused the insurer's stock to drop to $12 from $16 on April 8.
"The Columbia contract reflects the changed dynamics of our industry," says Gregory Wolf, Humana's president and chief executive officer.
Empowered by the Humana victory, Columbia is approaching contract negotiations with a new attitude, says spokesman Jeff Prescott. "We once looked at managed-care contracting with a strategy of 'more is better,'" he says. "What we instead are saying recently -- and Humana is obviously the most public example of this -- is we want to make sure the contracts meet the local needs.
And if they don't, we're willing to walk away."
Columbia is not the only provider pushing back -- or walking away for that matter. In Louisville last month, an 1,800-physician independent practice association terminated its contract with Blue Bell, Pa.-based Aetna U.S. Healthcare after the insurer refused to budge on some key contract provisions.
Across the country, Coast Plaza Doctors Hospital, a 123-bed facility in Norwalk, Calif., in February terminated its $500,000 contract with Blue Cross of California. Last month the hospital filed a lawsuit against the insurer charging unfair trade practices, among other things. Coast Plaza had worked with Blue Cross for more than 40 years, according to hospital Chairman Gerald Garner. But the discrepancy between the cost of care and reimbursements from Blue Cross "resulted in an untenable economic hardship for the hospital," Garner says.
A year ago, Blue Cross' parent company, WellPoint Health Networks, ended a contract standoff over reimbursement rates with several prominent hospital systems, and providers likely will continue to be hard-nosed, Lee says. "Margin improvement will be harder to achieve over time as a result of ongoing provider push-back," she adds.
Gary Frazier, a managed-care analyst with BT Alex. Brown in Washington, says health plans across the country can expect medical costs to increase about 6.5% this year as a result of provider push-back. Frazier says the Columbia-Humana standoff was unusual because the insurer was completely dependent on the hospital chain in that market.
"Nevertheless, I think that situation, as well as the situation with WellPoint in California, suggests that we're in a period of guerrilla warfare in regard to the juncture that exists between HMOs and provider groups," he says (see related story, page 54).
Provider push-back is occurring for several reasons, Frazier says. The first is that providers have spent the past few years consolidating and building market strength. They now have strength in numbers and know that health plans need the best medical groups and IPAs in the community to sell their plans to employers and consumers.
The second, he says, is that the high premium increases by HMOs over the past few years have not gone unnoticed. "The providers are saying to the health plans, 'If you're getting 18% increases, a lot of that has to flow down to us.'"
Humana's Donaldson warns that push-back will lead to even higher premiums, and the Columbia deal in particular may mean higher costs and fewer benefits for some Medicare enrollees. Medicare rates cannot be changed until 2001 because of HCFA regulations, and Donaldson says he is not sure how much the premiums will go up.
Gary Davis, a managed-care attorney with Steel Hector & Davis in Miami, says the threat of increased premiums no longer flies with providers. "Providers are saying, 'We can't afford to subsidize whatever your responsibilities as a payer are,' " he says. "If you need to raise your premiums, you need to raise your premiums. But we can't be the last one on the totem pole and be asked to support all the weight in the system anymore."
Lee predicts many health plans will counter push-back with higher premiums. But, she adds, "while some of the negative effects of push-back may be alleviated by extracting higher premiums from employers and consumers, the sustainability of a strategy of raised premiums may be short-lived," she says.
Instead, Lee says, health plans will seek long-term solutions, such as merging with other plans or reducing medical costs through utilization review and disease management.