Hospital-insurer disputes: Are things about to get ugly?

Several high-profile disputes between health systems and insurers made headlines in recent months, with some of those disagreements leading to contracts expiring without a new one in place.

The failed negotiations between UnitedHealthcare and Charlotte, N.C.-based Carolinas HealthCare made headlines in February. That same month, it was announced that a 20-year relationship between Humana and the University of Chicago Medicine would come to an end April 1, affecting approximately 1,750 patients. Rush University Medical Center was also involved in heated insurer negotiations, as Blue Cross & Blue Shield of Illinois notified 65 medical groups they would receive reduced reimbursement if they referred BCBS HMO patients to Rush.

One of the most controversial provider-payer disagreements involved Pittsburgh-based UPMC and health insurer Highmark. The contract dispute between the two grew to such proportions that the government considered intervening. Pennsylvania lawmakers drafted legislation that would force UPMC and Highmark to work together. In June 2014, the organizations executed a consent decree and put a five-year transition plan into place. However, even with the consent decree governing their post-contract relationship, UPMC and Highmark have continued to battle over the interpretation of certain language contained in the document.

There have also been some last-minute agreements reached. For instance, in January, after weeks of negotiations, Blue Shield of California and Sacramento, Calif.-based Sutter Health reached a deal and entered into a new two-year contract.

Sometimes new agreements are reached by relationships ending and the organizations subsequently coming back together. In November 2014, Atlanta-based Grady Health System left the Blue Cross Blue Shield of Georgia network. At that time, Grady Health System executives claimed the health insurer paid it 70 percent less than other hospitals in the state. However, Blue Cross Blue Shield of Georgia claimed the system was seeking reimbursement higher than inflation. The parties continued to negotiate even after Grady Health System left the network, and the organizations agreed on a new contract in late March.

Contract negotiations between providers and payers are a normal part of doing business, but there are many new factors influencing these talks, including price transparency and the increasing role consumers are playing in healthcare. Even with the transition to more value-based care, it is likely these disputes will continue to occur.

Why an increase in these disputes is no surprise
There are several factors causing more disagreements between providers and payers. For instance, the economic marketplace is extremely difficult, and cost pressure in the industry is contributing to more contentious negotiations between providers and payers.

"It comes down to employers, the government and consumers wanting more value," says Ben Isgur, director of PwC's Health Research Institute. To provide that value, payers and providers are trying to rein costs in, and as contracts are negotiated, both sides try to justify cost increases.

The greater importance of cost for all parties has resulted in more transparency in the healthcare industry, and by allowing for comparison, transparency is also playing a significant role in these disagreements.

"Consumers want more transparency," says Mr. Isgur. PwC's consumer surveys show about 43 percent of consumers want an online pricing experience, and many providers are responding to that demand. When that information is available to the public, there is increased pressure on systems to put together more competitive pricing.

However, increased transparency can also have a positive influence on payer-provider relationships, as it can lead to more productive negotiations. "One of the things we believe might happen, is it will allow insurers and systems to enter into more value-added relationships, such as [accountable care organizations]," says Julie Coffman, partner with Bain & Company's healthcare practice.

The tremendous amount of consolidation happening in the industry may also be causing an uptick in the number of provider-payer disputes. "One of the benefits of consolidation is growth, and with growth comes purchasing power around pricing," says Rick Judy, principle of PwC's Health Industries Advisory practice.

These pressures don't affect all organizations in the same ways
One reality of increased cost pressure on all parties is the increased difficulty hospitals, especially standalone facilities, face in negotiations. Payers are looking for networks of care that can provide the total quality experience and take care of patients in a variety of settings, and standalone facilities are feeling the squeeze.

"Forming more clinically integrated networks over time is going to be necessary for standalone organizations to have the right negotiating stance," says Ms. Coffman.

The pressures are also taking a toll on many community-based hospitals, especially those in dense urban markets.

In February, Horizon Blue Shield of New Jersey announced Christ Hospital in Jersey City had terminated its contract with the insurer. In its announcement, the insurer said the contract was cancelled because it "could not agree to the demands for rate increases made by Christ Hospital."

Christ Hospital is part of CarePoint Health, which operates three of the six hospitals in densely populated Hudson County. Ten percent of Hudson County's population was uninsured in 2014, according to data from Enroll America. That number is slightly below the national average calculated by Gallup in the fourth quarter of 2014. A large percentage of the county's population is also on Medicaid or in need of charity care.

CarePoint CEO Dennis Kelly says, "Payers look at the marketplace and there aren't a lot of reasons for them to get a favorable contract, because there aren't a lot of people with private insurance to serve." He sees this as a significant problem.

"The urban community providers are at risk. We've got to be able to negotiate contracts," Mr. Kelly says. "Unless the insurance companies recognize that the insurance rates need to be adjusted to the individual markets that systems operate in, safety-nets aren't going to be able to stay open."

Will more value-based contracting end these disagreements?
Rate increases are the center of heated negotiations between payers and providers in a fee-for-service world, and those types of disagreements might occur less often when dealing with value-based contracts.

However, even if the subject matter of the disagreements changes when negotiating a value-based contract, there is still plenty for providers and payers to argue about. For instance, they have to agree on which quality metrics to use to determine bonuses or penalties and work out the details of shared savings agreements.

Providers have a lot on the line when negotiating these contracts, with nearly 33 percent of healthcare providers expecting value-based contracting to negatively impact their organizations' bottom lines, according to a 2014 KPMG survey.

It's important for providers to use data in making their case to payers when negotiating value-based contracts. They can use data, such as hospital reimbursement data and cost data, to perform a financial analysis when negotiating. Using the financial analysis, providers can determine where they "can afford to give a little, to get the contract elements more important" to them, according to The Advisory Board Company.

Providers also have to prove they can meet the challenges presented in value-based contracts to make payers want to negotiate, according to The Advisory Board Company. "What we've determined is that payers are more willing to engage with providers that already have some experience with managing risk and can demonstrate the ability to reduce costs of care while maintaining high-quality outcomes," wrote the authors of the report.

Are these fallouts just business as usual?
It is important to remember that negotiations between payers and providers are standard business practice, and even when a contract is terminated it doesn't mean the relationship between the parties is over. Many times, negotiations still continue.

For instance, Carolinas HealthCare and UnitedHealthcare were unable to reach a new agreement before their contract expired Feb. 28, leaving 12 hospitals and a number of physician offices out-of-network for UnitedHealthcare members. However, a UnitedHealthcare spokesperson, Tracey Lempner, says the two organizations are still involved in negotiations and "continue to meet regularly." She says, "Our goal has always been to have CHS continue its participation in our network."

The same goes for University of Chicago Medicine and Humana. Although no agreement has been reached, a Humana spokesperson, Cathryn Donaldson, says, "Humana remains open to negotiating a new agreement that aligns with our members' need for affordable healthcare coverage."

The personal nature of these disputes, along with the back-and-forth blame that often accompanies these disagreements, attracts media attention. Like the dispute between Grady Health System and Blue Cross and Blue Shield of Georgia, many providers and payers pass blame as to why negotiations aren't successful.

Additionally, the parties sometimes provide conflicting information after negotiations have failed. For instance, Carolinas HealthCare and UnitedHealthcare provided conflicting accounts after their split. The health insurer began telling its members they would be considered out-of-network at Carolinas HealthCare hospitals and would begin paying more to use those facilities once the contract expired. However, a system spokeswoman told the Charlotte Observer that Carolinas HealthCare decided to extend temporary waivers to UnitedHealthcare members so they would be billed as though they were in-network.

Failed contract negotiations between providers and payers make headlines and disrupt patients, but these types of disputes are commonplace in other industries.

"These disagreements may seem more radical in the healthcare industry because of the relationship that people have with their physicians," says Ms. Coffman. "Whereas in other industries it is less of a personal nature."

These disputes are also part of healthcare taking on more traditional market functions, experts say. "Ultimately, those market dynamics are going to be helpful for the industry," says Mr. Judy.

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