Illinois Blues delivers blow to small hospitals

A recent decision by Blue Cross and Blue Shield of Illinois could make it more difficult for small hospitals to preserve their independence by affiliating—rather than merging—with larger healthcare systems.

The move came in reaction to a deal struck earlier this year between south suburban Silver Cross Hospital and Advocate Health Care, the largest hospital network in the state.

As part of their affiliation, the systems planned to jointly negotiate reimbursement rates with Chicago-based Blue Cross, the state's dominant insurer. Silver Cross, an independent single hospital based in New Lenox, Ill., would be buoyed by the heft of Advocate, which has 12 hospitals and plans to get even bigger by merging with north suburban powerhouse NorthShore University HealthSystem.

But Blue Cross won't negotiate reimbursement rates with affiliations created by separate health systems that clinically integrate rather than those under common ownership, Dr. Lee Sacks, chief medical officer of Downers Grove-based Advocate, said during a meeting yesterday with the Crain's Chicago Business editorial board.

“If the Blues aren't going to recognize (the affiliations), that's really going to have a chilling effect on everybody's non-merger kind of relationship,” Advocate CEO Jim Skogsbergh said.

The issue illustrates a dilemma for small health systems and independent hospitals looking for ways to command higher reimbursement rates from insurers in the competitive Chicago-area healthcare market. Large hospital systems and physicians groups are establishing care coordination groups that have financial incentives for improving health while reducing costs, and financial penalties if those benchmarks aren't met. It's high-risk but potentially high-reward. It also requires large groups of patients in order to get economies of scale, a difficult hurdle for small systems such as Silver Cross.

The Blue Cross decision also could impact a joint operating agreement announced in June by Adventist Midwest Health, a four-hospital system based in west suburban Hinsdale, and Alexian Brothers Health System, a five-hospital network based in northwest suburban Arlington Heights.

Representatives from Alexian and Adventist did not provide comment.

In a statement, Blue Cross spokesman Mike Deering said the insurer has advised other Illinois-based hospital systems that it will negotiate rates only with groups under a single ownership.

“While we support clinical integration arrangements to better coordinate patient care, optimize the sharing of clinical information, and working toward the industry's triple aim—improving patient satisfaction, increasing quality and lowering costs—we do not believe joint fee negotiation by hospitals is necessary to achieve these results,” Mr. Deering said in the statement.

Experts say clinical integrations at smaller systems can improve the quality of patient care. But there can be a financial downside for insurers.

“If at the same time you're taking community hospitals that are often lower-cost and bringing them to these large health systems rates . . . you've also increased cost,” said Steve Riedl, Chicago-based senior consulting actuary at Towers Watson, a consultancy and employee benefits firm. “It's not necessarily a great outcome for the people that ultimately foot the bill.”

Skogsbergh and Sacks could not say how much money Advocate could lose or how much costs could go up by not jointly negotiating Blue Cross rates with Silver Cross. The health systems' affiliation likely won't end, Sacks added.

Ruth Colby, chief strategy officer and senior vice president at Silver Cross, declined to comment.

In February, Silver Cross and Advocate announced an affiliation that falls just short of a merger. The deal adds Silver Cross and about 300 members of its medical staff to Advocate Physician Partners' clinical integration program, the collaboration between Advocate's hospitals and its 4,400 affiliated doctors to manage costs through better coordinating patient care. The agreement could be advantageous for Silver Cross since it wouldn't have been able to launch such a program itself due to hefty startup costs.

Advocate has about 600,000 patients in some type of care coordination contract, not including Medicaid. Of those, about 400,000 are Blue Cross patients in an accountable care organization formed by the insurer and Advocate that has already demonstrated improved patient care.

"Blue Cross delivers blow to small hospitals" originally appeared in Crain's Chicago Business.