CommonSpirit Health's CHI St. Luke's is threatening to end its contracts with two major health insurers if they don't agree to higher prices.
Houston-based CHI St. Luke's, which operates 16 hospitals in Texas, says it will go out-of-network with Blue Cross and Blue Shield of Texas and Molina if the organizations can't reach agreement by Dec. 16 and Nov. 25, respectively. The termination warnings from CHI St. Luke's follow months of unsuccessful negotiations with both insurers.
CHI St. Luke's took the unusual step of asking for prices increases in the middle of the contracts; the BCBSTX contract lapses at the end of 2021. Disputes like this don't typically crop up until contracts are nearing renewal.
"It's a bold maneuver," said Dr. Mike Schatzlein, a former health system executive and principal of the consultancy Schatzlein Solutions Group.
It's not happening because of the COVID-19 pandemic, which has devastated the finances of many healthcare providers. Rather, Doug Lawson, CEO of CHI St. Luke's, said his team asked for the increases following a sweeping analysis of its finances in late calendar 2019 that turned up issues with its payment rates from BCBSTX and Molina. Both contracts allow for termination with adequate notice.
Lawson declined to say how much of a rate increase his system is seeking, but said it's not a step the system takes lightly. He said the increase is necessary so the system can pay its staff fairly, invest in technology and provide the services patients expect.
"It's certainly not the norm," he said, "but the reality is we're significantly underpaid relative to other similar hospital systems across the Houston market. The significance of the variance led us to reopen the negotiations with Blue Cross Blue Shield and Molina."
Shara McClure, divisional senior vice president of healthcare delivery for BCBSTX, called the proposed price increase "egregious." She declined to say how much of an increase the health system is seeking, but said it's in the double digits and is multiples of the organizations' common negotiations.
BCBSTX, which has 65,000 members who use CHI St. Luke's, has warned its members that CHI St. Luke's could go out of network. McClure said the rate increases would hurt employers the most, as 60% of its members are self-insured.
"It comes directly out of their expenses since they're paying the healthcare costs," she said.
CHI St. Luke's is struggling financially, having lost $204 million on operations on $2.3 billion in operating revenue in fiscal 2020, which ended June 30, a -9% operating margin. Its parent system, the massive, 137-hospital CommonSpirit, lost $550 million on operations in its fiscal 2020, which ended June 30.
BCBSTX members represented about 10,500 hospitalizations at CHI St. Luke's and 158,000 outpatient visits. Molina members represented about 1,000 hospitalizations and 10,700 outpatient visits.
Chicago-based CommonSpirit has struggled to make money since its early 2019 merger, and its Houston market has been a drag on its performance since CMS cut off Medicare funding for heart transplants at Baylor St. Luke's Medical Center in 2018. CMS recently restored that funding.
The COVID-19 pandemic has been a dramatically different situation for providers and insurers. The shutdowns effectively cut off a crucial source of provider revenue for a time: elective procedures. That area continues to suffer. The sluggish return has been coupled with higher expenses from pulling in contract workers during spikes and inflated supply costs.
For insurers, it's been a very different picture, with several reporting higher profits as claims expenses decline and premium revenue continues to roll in.
The parent company of BCBSTX, Health Care Service Corp., raked in $2.6 billion in net income in the first half of the year, up 14.5% over the same period in 2019, a recent Modern Healthcare analysis found.
Molina, which did not return a request for comment, posted $454 million in net income in the first half of 2020, compared with $394 million in the prior-year period, a 15% increase.
It's common for providers and insurers to get into a "game of chicken" during contract negotiations, and it almost always gets resolved at the last minute so that patients aren't harmed, Schatzlein said. Publicly threatening termination, however, is an extreme maneuver that's not often taken, he said.
McClure, of BCBSTX, said she's heard CHI St. Luke's argument that CommonSpirit is having financial problems during the pandemic.
"Well you know what? All of our customers are having a financial problem during this global pandemic as well," she said. "It's not a good time to be asking for significant increases at the expense of our customers or our members and frankly, I don't see the market bearing this for them."