Let's get ready to rummbbbbble! Having amassed greater muscle through consolidation, the nation's hospitals are now more prepared than ever to go to the mat during contract talks with health plans. Insurance heavyweights, though, are countering blow for blow, unwilling to forfeit more of their thinning profit margins.
The result has been a growing number of very public showdowns, with both parties sparring as much in the media as at the negotiating table. Some such contract disputes have produced winners, though often not before months of knock-down, drag-out wrangling. Others have ended in stalemate, ultimately disrupting care and leaving consumers feeling sucker punched.
Take Lehigh Valley Hospital in Allentown, Pa. On March 1, the 540-bed hospital walked away from a four-year relationship with Aetna rather than swallow what it called "extremely inadequate" reimbursement rates. The facility is part of three-campus Lehigh Valley Hospital and Health Network, one of the area's largest systems with a total of more than 800 beds. The bust-up left Lehigh off limits to the more than 100,000 Aetna members in the region, forcing many of them to find new physicians, travel farther for treatment or switch health plans.
The two healthcare organizations had been at loggerheads since early 2000, when Lehigh pushed for both a 45% rate increase and retroactive payments to compensate for mounting losses from its contract with the nation's largest health insurer.
According to Elliot Sussman, M.D., Lehigh's president and chief executive officer, the decision to forfeit Aetna's business, which accounted for 13% of admissions but only 8% of revenue in 1999, was a financial necessity. The hospital had been losing 35% of revenue annually on the pact, first signed in March 1996, Sussman says. He estimates that in 1999 alone the Hartford, Conn.-based insurer received $10 million worth of services for which it never paid.
"Aetna was getting a Jaguar for Yugo prices," Sussman says. "We realized that, as a not-for-profit organization, we could no longer afford to subsidize a for-profit insurance company." He added that most of the Aetna members who used Lehigh have switched health plans to remain with the hospital.
For its part, Aetna argued that a 45% rate increase was "way out of range for the market" and would have made Lehigh the highest-paid hospital in all of central Pennsylvania, including even top academic medical centers.
"They presented us with a clear ultimatum," says Jennifer King, spokeswoman for Aetna's mid-Atlantic region. "It was `take it or leave it.' We were forced to leave it."
Aetna, of course, isn't the only health plan to hit a contracting impasse, permanent or otherwise, with hospitals and healthcare systems in recent months.
The UCI Medical Center-University of California, Irvine, nixed a seven-year deal with PacifiCare Health Systems last June, citing multimillion-dollar losses. Fourteen HCA-The Healthcare Co. hospitals severed ties with Cigna HealthCare of Florida last October, only to rejoin the insurer's network two months later when better rates came across the negotiating table. And it took verbal jousting via full-page newspaper ads before Independent Health and Catholic Health System agreed in November 2000 to ink an amended contract covering western New York.
Several other insurers, including Blue Cross and Blue Shield of North Carolina, Harvard Pilgrim Health Care, Humana and UnitedHealthcare, also have run up against resistance from providers flexing their newfound muscle. Many hospitals have enhanced their leverage during the past decade by banding together to form healthcare systems that serve large areas and large numbers of patients, making them indispensable to insurers' provider networks.
In fact, according to a study by the Center for Studying Health System Change, Washington, managed care is losing its sting and hospitals' leveraging power is on the rise because of consolidation (March 12, p. 8). In 1998, 57% of the nation's community hospitals were part of a multihospital system, up from 32% in 1980, according to the American Hospital Association. However, some systems recently have come apart, including high-profile breakups such as Unity Health, St. Louis, and Penn State Geisinger Health System, Harrisburg, Pa.
Though most standoffs ultimately are resolved, an increasing number aren't settled until the eleventh hour. Today, a typical contract takes six to nine months to hammer out, experts say.
That's a far cry from a few years back, when hospitals scrambled over one another to get any managed-care business they could, at whatever price was offered by the insurers. When low-priced HMOs gained market control in the early 1990s, providers were desperate not to be left out of the loop.
But those days are gone. Now, consultants are telling hospitals to decide what rate increase they want and to begin contract negotiations from there, rather than using the rate an insurer is already paying them as the starting point.
"The lesson here is, you are not going to end up with 10% if you ask for 6%," says Dave Foshage, a consultant at the Indianapolis-based consulting firm Health Evolutions. The company bought the managed-care consulting business of Partners First on March 1 from Ascension Health, St. Louis. As part of the deal, Health Evolutions now will provide managed-care consulting to a consortium of nine Roman Catholic healthcare systems, including many of the industry heavyweights.
Analysts say Blue Cross of California would have lost much of its clout in Northern California if the 2 million-member insurer had not re-newed its contract with Sutter Health System, which operates 26 of the region's hospitals.
The two parties managed to hammer out a renewed contract last month, ending the latest skirmish in a years-long battle over reimbursement rates. But the agreement came only after the healthcare giants parted ways, sending tens of thousands of patients scrambling for new doctors and hospitals.
When not-for-profit Sutter demanded a 30% to 35% rate increase last year, Blue Cross balked, arguing that an increase of that size would drive up premiums so dramatically that consumers would be priced right out of the market.
Unable to settle their differences, the companies let their contract lapse on Dec. 31. And it was only after much arm-twisting by state legislators and regulators that the two parties agreed to return to the negotiating table in February to piece together a new two-year arrangement.
The companies would not disclose the financial terms of the contract, but Sutter spokesman Bill Gleeson made it clear that the San Francisco-based hospital system had emerged the victor.
A matter of survival
Much of the change in attitude by hospitals and healthcare systems stems from necessity.
For many, renegotiating managed-care contracts is the one surefire way they can boost their revenue in the wake of reimbursement pressures from the Balanced Budget Act of 1997 and rising costs, driven largely by pricey new drug therapies and higher salaries for hard-to-find staff members.
"As long as Medicare was paying at above cost, hospitals were (comfortable) with granting discounts to certain health plans. But since 1997, Medicare rates have been falling," says Kenneth Thorpe, chairman of the Emory University Department of Health Policy and Management in Atlanta. "As a result, hospitals are having to stand up to insurers. It's become a matter of survival."
Healthcare systems especially are renegotiating many of their contracts. Many systems performed poorly under early contracts because they were willing to accept lower prices in exchange for volume, says Joseph Davis, president and CEO of Medimetrix Consulting in Cleveland. In cases where those contracts included assuming risk, systems really suffered when utilization spiked.
Consequently, hospitals and systems have moved away from the accept-anything approach to contracting. Regardless of the volume they might lose, many now are increasingly willing to scrap a contract if it's a money-loser, Foshage says.
But before a provider walks away from a contract, it needs a plan to replace the lost business or be willing to downsize to shoulder the blow, Davis says.
Catholic Healthcare West managed to avert such a situation by opting to hash out its reimbursement grievances in court rather than at the negotiating table.
Last June, San Francisco-based CHW nearly severed ties with Blue Cross of California, alleging the insurer routinely boosted profitability by declining to pay for patient services. But rather than disrupt medical care for thousands of patients, the 47-hospital system filed a lawsuit.
The two companies reached a contract agreement in August 2000, though it took until mid-February to completely settle the $50 million suit for undisclosed terms.
"We did not wish to make complex contract negotiations even more complex," says George Bo-Linn, M.D., CHW's chief medical officer. "We thought that if there was any way we could settle the (repayment) issue without disrupting coverage for thousands of our patients, then we would try it."
For their part, insurers are feeling increased pressure to succumb to health systems' demands.
In a tight labor market, employers have been pushing health plans to offer inclusive provider networks, which in some markets means contracting with every hospital in town, observers say.
But as the economy slows, things may change, Davis warns. He says talk of restricting provider networks already is cropping up as the employment market shifts into a lower gear and employers again start looking to control their benefit costs.
Another source of pressure, which is unlikely to abate anytime soon, is the growing consumer backlash against managed care. Facing scrutiny from all sides, many big-name insurers are feeling compelled to make difficult contracting concessions rather than risk stoking the anti-HMO fire.
Take Aetna, which has been making amends at the negotiating table as part of its recent effort to overhaul its reputation with providers and patients. The insurer, long known for its hard-nosed approach to contracting, has been relaxing its payment schemes and eliminating controversial policies to lure back hospitals and physician groups that have been fleeing its network in droves.
Aetna, for instance, conceded to a revised contract with the Mayo Clinic in January, just six weeks after the prestigious medical facility terminated its relationship with the insurer for allegedly failing to pay claims accurately or punctually.
After learning of the falling-out, Aetna CEO John Rowe, M.D., phoned the head of Mayo to express his regret, and then he dispatched two senior managers to Rochester, Minn., to draw an entirely new contract. As part of the terms, Aetna agreed to reimburse Mayo for all unpaid and disputed claims.
"Aetna did what they had to do to win Mayo back," says one healthcare analyst who asked to remain anonymous. Although the clinic treats only 2,000 of the insurer's 20 million members, "it's simply bad business for a company that's trying to foster a more provider-friendly image to be at odds with one of the most renowned medical facilities in the country."
Other health plans have been doing away with some of their more onerous contract provisions, too.
Minneapolis-based UnitedHealthcare pulled its preapproval requirement in late 1999, giving providers more leeway when writing referrals to specialists and ordering tests, X-rays and other medical procedures. And, under mounting pressure from providers, PacifiCare has been slowly shifting away from its capitated contracts to ones in which it shares the financial risk of treating patients.
To resolve contracting disputes, "everybody's going to have to give a little bit," says PacifiCare President and CEO Howard Phanstiel. "The payers have to recognize that you can only drive so much savings out of reductions in unit-cost reimbursement to both hospitals and doctors. There's only so much money that you can squeeze out of the system that way."
Holding their own
Still, many health plans are standing their ground.
Like hospitals, health insurers have been consolidating during the past decade. Since 1997, the number of HMOs operating nationwide has dropped 13% to 568. And most of those left standing are large national or regional players with thousands of members and prodigious power to pressure providers to accept lower reimbursements.
Take PacifiCare, which refused to budge last year during negotiations with St. Joseph Health System, the largest provider network in Orange County, Calif. The Santa Ana, Calif.-based insurer chose to walk away from the companies' 14-year relationship rather than sign a revised contract that would have required it to take on more of the financial risk for treating patients, says Darrin Montalvo, St. Joseph's vice president in charge of contracting.
"We negotiated every week from July through October (last year), once a week until that infamous Thursday," Montalvo says, referring to the Oct. 12 meeting that marked the end of talks between the two parties. "We came in that day thinking that we were finally going to sign a revised contract, but at the last minute, PacifiCare snatched the offer off the table. From there, there was no going forward."
Such contract tussles illustrate a growing contentiousness between hospitals and for-profit health plans, which critics say are under increasing pressure from shareholders to do whatever it takes to maximize profits. Montalvo points out that PacifiCare's unexpected about-face came the day after its stock plunged 48% on news of an earnings shortfall.
Yet insurers of all stripes have been raising premiums at twice the rate of inflation, while remaining reluctant to share the extra revenue with providers. The reason: Health plans are only now recovering from a financially disastrous few years and must keep payment rates in check if they hope to ensure future stability, analysts say.
The nation's HMOs saw their bottom lines improve an average of 4% in 1999, largely on the heels of hefty premium increases, according to InterStudy Publications, a Minneapolis-based managed-care research group. Even so, only 39% of them were profitable, down from 41% in 1998 and almost 90% in 1994.
"Insurers have been hurt financially not only by legislative actions, but also by fierce competition within the managed-care industry," says Gary Frazier, a healthcare analyst at Deutsche Banc Alex. Brown in New York. "Most of the rate increases we're seeing on the payer side are to help them recover lost revenues, not with the anticipation of paying providers a lot more."
Meanwhile, consumers and employers have grown tired of getting caught in the middle and are looking for ways to protect themselves when contract talks collapse.
Leading the charge is the California Public Employees Retirement System, the second-largest purchaser of health insurance after the federal government. The pension fund, which has 40,000 members using Blue Cross of California's provider network, was hit hard by the insurer's temporary bust-up with Sutter.
CalPERS now is looking to lay down new ground rules for contract negotiations that would minimize disruption to patients. It would like to see one letter go out to its members, signed by both plan and provider, setting uniform guidelines for transition coverage and clearly outlining all costs to patients.
Open disclosure of when contracts expire and what is covered when they do would go a long way toward helping patients become better prepared, says Allen Freezor, CalPERS' health benefits administrator.
"Somebody outside the process," he says, "has to step in and put the consumer back in the equation."