Exchange exclusion suit

Executives at Seattle Children's Hospital said they were stunned to learn they had been excluded from two health plans on Washington's new insurance exchange—but the same scenario may be playing out behind closed doors in higher-cost hospitals across the country.

Last week, Seattle Children's sued its state insurance commissioner in federal court, arguing that the office incorrectly certified two health plans for sale on the exchange that shouldn't be there because they don't include Seattle Children's and therefore don't cover an adequate range of services. The hospital is seeking to have the plans kicked off the exchange unless they can settle the controversy out of court.

“The notion that a major insurer would exclude us as from a major insurance product like this is unprecedented,” said Dr. Sandy Melzer, senior vice president and chief strategy officer with Seattle Children's. “It is a wake-up call to families.”

Experts say conflicts are heating up nationally between insurers vying to sell affordable plans in the exchanges and healthcare providers with high overhead costs, including children's hospitals, academic medical centers and safety-net facilities with large Medicaid and Medicare populations. Several observers declined to identify other markets where behind-the-scenes negotiating may be breaking down.

Mark Wietecha, president and CEO of the Children's Hospital Association, said Seattle Children's was probably the “first out of the box” with their litigation.

“I think we're going to see more of it, and I don't think it will be unique to pediatrics,” Wietecha said. “In some of the other states, it is still early days. Each state is different. This is something that we have a lot of buzz around on the pediatric side and the adult academic side.”

The conflict exposes a tension embedded in the structure of the insurance exchanges mandated under the Patient Protection and Affordable Care Act, pitting the goal of providing meaningful coverage against the need to keep the premiums low enough that millions of people will be able and willing to pay them.

HHS mandated that insurance plans sold through the exchanges provide “adequate” networks for care, including providers that treat large shares of under-served populations. The federal list of 17,000 “essential community providers” includes more than a dozen children's hospitals, including Seattle Children's.

But the rule only requires plans on the exchanges to include 10% of the nearby essential community providers.

Experts will be watching the outcome of the Seattle Children's litigation closely, because it could become the first lawsuit to interpret the related federal requirement that networks in exchange plans have a sufficient number and variety of providers to ensure that services are “accessible without unreasonable delay” and enrollees have adequate choice within each type of provider.

“If you're trying to sell a product on an exchange, and the product is supposedly providing the necessary services, you'd need to contract with a high-end children's hospital,” said Lisa Martin, a senior vice president with Moody's Investors Service who penned a major report on children's hospitals last year. “I think it's going to be very difficult to exclude children's hospitals from the networks.”

Washington is one of the 15 states plus the District of Columbia running its own insurance exchange, the Washington Healthplanfinder, where more than 165,000 people have browsed for health plans and more than 9,400 have enrolled in coverage as of last week. The exchanges are intended to force insurers to compete on plan pricing, creating incentives to offer smaller networks than many consumers might be used to.

Molina Healthcare of Washington, for example, is selling a health plan that includes two other children's healthcare facilities, one operated by MultiCare Health System in Tacoma and another run by Providence Health & Services in Everett, Wash.

“We currently include Seattle Children's Hospital in our Medicaid network and, if we can agree to reasonable terms, we would like to include Seattle Children's Hospital in our network for Washington Healthplanfinder as well,” said Dr. Mario Molina, president and CEO of Molina Healthcare, in an e-mailed statement.

In narrower low-cost networks, hospitals agree to accept lower rates from insurers but gain a better chance of attracting more patients because beneficiaries have few other options that are covered in-network.

That kind of arrangement may end up shutting out providers who have long counted on profitable commercial insurance rates to subsidize Medicare and Medicaid patients, whose public insurance typically pays 90% or less of what it costs to provide the care. High-end children's hospitals in particular tend to have large Medicaid populations, requiring a high degree of cost-shifting to stay afloat.

“I think it's a real problem,” said Timothy Jost, a healthcare law professor at Washington and Lee University School of Law in Lexington, Va. “These are expensive providers, and for insurers who are trying to get the lowest premiums, one way to do it is to exclude them.”

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