Most of the hospitals that diversified into the health insurance business in the mid-1980s through early 1990s were out of it by 2000, realizing that they were better at providing hospital care than underwriting health benefits. Some, however, have gutted it out, continuing to believe in the integrated delivery system model under which hospital care, physician services and a way to finance each could be performed under one corporate umbrella.
And a few of those hospitals that have stuck it out have gotten very good at the insurance business. So good, in fact, that their business practices have drawn the ire of competitors and state lawmakers. For example, earlier this year Intermountain Health Care in Salt Lake City beat back an attempt by the state Legislature to force the 19-hospital Utah system to sell its 450,000-member HMO. A compromise law there set up a task force to study Intermountain's effect on the state's healthcare market (May 9, p. 16).
Now, attention is on a lawsuit in Ohio, where competition between a third-party administrator and a hospital-owned rival spilled into state court. The antitrust case may determine how far a hospital can penetrate the local health insurance market without crossing legal lines and the extent to which opponents can fight back.
A judge will decide the difference between "good, old-fashioned American competition and predatory conduct, whether charging low prices is just good business or whether someone with significant market power and ability can use its power to drive a competitor out of business," said Scott Becker, a healthcare lawyer with McGuire Woods.
The case also is noteworthy because in addition to the plaintiff's antitrust allegations are charges of undisclosed payments to independent insurance brokers, a subject of interest to at least three state attorneys general. To date, those investigations have concerned large insurance brokers, not hospital-owned or -operated insurance plans.
The plaintiff is a privately owned for-profit company called Professional Claims Management, or PCM. Based in Canton, Ohio, PCM is a third-party administrator of claims for local self-funded employers. The chief defendant in the case is the not-for-profit Aultman Health Foundation, also in Canton. The foundation is the parent of 592-bed Aultman Hospital and AultCare Corp., a not-for-profit insurer. AultCare Corp. operates a number of insurance plans and companies (See box). Also named as a defendant is the Hummel Group, an independent insurance brokerage that used to contract with PCM.
According to PCM, the foundation conspired with Hummel and other local independent insurance brokers to steal claims business from it by offering local employers below-market rates for health insurance provided by Aultman's health plans and delivering its claims-handling business to its AultCare Third Party Administrators. The foundation allegedly did this by paying secret bonuses, which it called "conversion support payments," to the independent brokers to persuade them to switch their self-funded employer clients away from PCM and to AultCare.
Also, according to PCM, the foundation transferred nearly $4 million in tax-exempt monies to its unprofitable reinsurance company, McKinley Life Insurance Co., enabling it to offer benefits to area employers at discounts that couldn't be matched by insurers represented by PCM, effectively hurting the latter's business. PCM alleges that the Aultman Foundation is using AultCare as a loss leader to funnel more patients to its hospital, where it recoups its losses through increased inpatient volume.
PCM sued the foundation and its operating units in December 2003 in Stark County (Ohio) Court of Common Pleas, alleging tortious interference in business practices, restraint of trade, unfair competition, attempted monopolization and predatory pricing. Aultman denies PCM's allegations, saying it has done nothing illegal and is simply besting PCM in the market in fair, albeit tough, competition by offering low prices and pursuing its charitable mission.
"Competition is the lifeblood of trade," said John Cusack, the foundation's antitrust lawyer. "We have competed and intend to continue to compete. If PCM can't keep up, that's just tough."
A Stark County judge heard arguments for summary judgment June 10 and attorneys must submit briefs by June 25.
In court documents, former Aultman Foundation and Aultman Hospital President and Chief Executive Officer Richard Pryce said in written testimony that the foundation entered the health insurance business in 1985 for civic, not financial, reasons. According to Pryce, Aultman formed AultCare Corp. "because the large for-profit insurers were receiving low rates from Aultman Hospital but were not passing on these low rates to the local businesses. AultCare was created as a vehicle to take advantage of these low hospital rates and pass on these savings to the local businesses."
Pryce said the conversion support payments were established in 1997 because "these large for-profit companies are again knocking on our door. We want to make sure the Stark County market does not revert back to the 1980s where the local healthcare market was controlled by the large, for-profit insurers who were not looking out for the local businesses."
PCM-owned by half-brothers David Bratton, its CEO, and Michael Novelli, its president-opened in 1983. It administers medical claims for self-funded employers in the five counties surrounding Canton. Bratton and Novelli said their company, which is seeking $30 million in damages in the case, lost $7.5 million in contracts, losing business from 28 companies covering 3,600 people to Hummel alone.
"We were losing business and couldn't figure out why until we learned of the payments and secret agreements in 2003," Novelli said. "That's when we hired an attorney. We believe we should be able to compete fairly but couldn't unless we did something about the problem."
As a privately held for-profit company, PCM's financials are not publicly available and it declined to divulge them. Aultman calls PCM's allegations absurd. Spokesman Timothy Beauch said, "We believe this legal action is unnecessary and we are prepared to present the facts to support that." Aultman's attorney, Cusack, was less politic. "They can't compete. AultCare and Aultman Hospital offer low prices, sometimes 40% to 50% lower. Our costs are lower, so our prices are lower. Low prices charged are not and cannot be predatory or illegal."
AultCare earned $1.8 million on net revenue of $320 million in 2004, according to Aultman spokesman Beauch. Aultman Hospital also is profitable. It earned $14 million on net revenue of $359 million in 2004. The results hardly represent a windfall in either industry segment. AultCare's 0.6% profit margin compares with the average profit margin of 3.2% for 41 Blues plans in 2003, according to the Blue Cross and Blue Shield Association. The hospital's 3.9% profit margin compares with the 4.8% aggregate profit margin of all hospitals nationally in 2003, according to the latest data from the American Hospital Association.
As for the conversion support payments, Cusack characterized them as a "perfectly proper and straightforward means to compensate brokers for switching from one plan to another."
However, a national underwriters group disagrees. Janet Trautwein, vice president of government affairs for the National Association of Health Underwriters, said such payments are unethical, rarely used in the industry and could be illegal. "This is quite uncommon," she said. "It's the first time I'd ever heard of the practice."
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AultCare Corp.'s insurance portfolio
* A 184,000-enrollee PPO
* A 16,000-enrollee Medicare HMO
* A 13,000-enrollee Medicaid HMO
* A 5,000-enrollee HMO
* A 89,000-enrollee workers' compensation plan
* AultCare Third Party Administrators
* McKinley Life Insurance Co.
Source: Aultman Health Foundation