Contract standoff continues between competing UPMC and Highmark systems

A bitter contract dispute between the dominant hospital system in Pittsburgh and the region's largest insurer may foreshadow similar fights across the country, as health systems and insurers increasingly move into each other's territory.

The contract between UPMC, a not-for-profit health system that runs 22 hospitals and has a large insurance arm, and Highmark, a Blue Cross and Blue Shield insurer serving 4.2 million members in Pennsylvania, expires at the end of 2014. UPMC says it will not renew the agreement because Highmark purchased a regional health system in 2013 and is now a competitor. If the contract ends, Highmark members are expected to face high out-of-network costs for seeing UPMC doctors.

The deadlock shows no signs of easing. “The fiduciary duty of UPMC's board is not to allow management to enter into a contract that would diminish all the great things that UPMC does for this community,” said Paul Wood, a UPMC spokesman. “As long as Highmark has a vested interested in shifting patients from where they would prefer to go—UPMC—and into their own hospital system, there cannot be a contract.”

But last week, Allegheny County announced it would continue its contract with Highmark through 2015 for its 6,700 employees, regardless of what happens in the contract dispute. County Executive Rich Fitzgerald said in a written statement that he hopes this “makes it clear to UPMC that we want to see a contractual relationship between these two organizations.”

Similar decisions by other major employers could increase pressure on UPMC to reach an agreement. According to Highmark spokesman Aaron Billger, “there are numerous large, fairly prominent accounts in the marketplace that will be doing the same. They're not public yet.” Highmark must also contend with the ongoing turnaround of its provider network, Allegheny Health Network.

West Penn Allegheny Health System ended its fiscal 2013 with an operating loss of $386 million on revenue of

$1.5 million, though losses were inflated by an accounting charge of $214 million, said Elizabeth Allen, interim chief financial officer for Allegheny Health Network, which includes West Penn Allegheny.

Highmark and UPMC have long been the dominant insurer and provider, respectively, in the Pittsburgh area. Now they're both integrated-delivery systems, with their own insurance arms and provider networks. UPMC started offering insurance through the UPMC Health Plan in 1998 and currently has 2.3 million members. Last year, Highmark acquired the struggling West Penn Allegheny for $1 billion. Both Highmark and UPMC are offering plans on Pennsylvania's federally run health-insurance exchange.

Highmark and UPMC each have made substantial inroads into the other's business. Today, UPMC receives roughly 20% of its patient-service revenue from Highmark patients. But the system's CFO, Robert DeMichiei, estimated in February that UPMC would lose $500 million in revenue annually if it maintained its contract with Highmark as patients shifted to Highmark's eight-hospital system.

Liz Kennon, a Pittsburgh insurance broker who works with small businesses, said employers are eager for a resolution. “Now that we're starting our July renewals for our small groups, it's becoming a big issue, because we don't know what's going to happen,” she said. While Highmark's premiums tend to be cheaper than UPMC's, many customers want access to UPMC doctors.

The Pittsburgh Business Group on Health reported last month that 81% of the 36 Pittsburgh-area businesses it surveyed would either drop Highmark insurance or offer both Highmark and another health plan that contracts with UPMC to give their workers the option of staying with UPMC providers if the split takes place.

Doctors are also caught in the middle. “Many of them are uncomfortable that employers or individuals will have to make choices among insurance companies and the affiliated hospital systems that will limit (patients) to those networks,” said John Krah, executive director of the Allegheny County Medical Society.

Antitrust litigation between Highmark and UPMC dragged on for more than four years until a judge ordered them to drop it in December. The insults traded by the two organizations through advertisements became so nasty that Gov. Tom Corbett created a task force last August to monitor them. In March, bipartisan legislation was introduced in the state Senate that would require integrated-delivery networks like UPMC to contract with “any willing insurer.”

Last week, Highmark and UPMC announced that they would continue offering small-employer plans that don't meet the requirements of the Affordable Care Act for at least another year, allowing them to offer less-costly plans.

Such conflicts between former partners that now have competing integrated-delivery systems could well become more common across the country as providers and health plans move from fee-for-service to models that reward managing the health of enrolled populations, said Josh Seidman, vice president of payment and delivery reform at research firm Avalere Health.

-- With Melanie Evans

Catherine Hollander is a San Francisco-based freelance writer.