The structural dynamics and market pressures that produced this escalation of conflict may help to clarify why it has happened, whether it can be avoided and how it may play out in the future. Some analysts see a zero-sum financial conflict between third-party payors and health care providers that will likely worsen. As the parties continue to be squeezed by increasing costs, by this view, they will continue to deploy their market clout or their legal options, or both, to settle disputes. Others more optimistically point to models of cost control that ultimately require collaboration between payors and providers, such as information technology investment to implement best practice guidelines and reduce clinical variation, waste and medical errors.

Conflict Escalation

Recent examples illustrate the intensity of acrimony between health plans and providers throughout Pa. The point is also underscored by several hospital systems and three health plans—Independence Blue Cross, Highmark and Aetna—declining to be interviewed for this story, several of whom cited the sensitivity of the issues surrounding their conflicts.

Chester County Hospital filed a federal antitrust lawsuit against Independence Blue Cross (IBC) in early May accusing it of using dominant market power to coerce the hospital into signing a provider contract and to provide care at prices that are below cost. The suit alleges that IBC violated antitrust and related laws by acquiring and abusing its dominant market power in southeastern Pa., and seeks damages in excess of $60 million and a breakup of IBC into separate companies. IBC filed its own lawsuit against Chester County Hospital in June, accusing the hospital of breach of contract and asking the federal judge to terminate the agreement.

A year ago, IBC sued Grand View Hospital in Bucks Co. for slander and negotiating in bad faith two weeks before the reimbursement contract between the two entities was to expire, alleging commercial disparagement and breach of duty to negotiate in good faith, libel and slander. Grand View countered that it lost millions of dollars each year because IBC does not reimburse the hospital for the entire cost of its services and estimated that it would likely lose $5 million in the coming year if it continued to be reimbursed under the terms of the expiring contract.

In early 2000, a tense and highly-publicized game of contractual brinkmanship played out when the Jefferson Health System had threatened to terminate its hospital contracts with IBC, claiming that it had been losing millions of dollars treating IBC members. IBC called Jefferson’s request for payment increases unreasonable and said that they would cause health insurance premiums to escalate in double digits. The two ultimately came to terms.

Concurrent with that struggle, IBC had been seeking to dismiss a lawsuit brought against it by Children’s Hospital of Pennsylvania, which sought reimbursement for full billing charges after a reimbursement contract between the two organizations had lapsed the previous summer, which was followed by months of failed contract negotiations. The lawsuit also alleged that IBC made unilateral payment reductions in its contract and sought contractual guarantees for payments within 45 days and 10 percent penalties for late payments. The two entities ultimately reached a contract agreement after 19 months of negotiation and a seven-month fight in federal court.

UPMC Health System and Highmark Blue Cross Blue Shield had been engaged in a high-stakes, high-profile contract dispute that faced a June 30 deadline as this story went to press. Contingency plans were postulated in the press over what to do with a potentially massive displacement of Highmark patients seeking health care in UPMC’s hospital network. The Pittsburgh Business Group on Health had weighed in during the conflict and called for an independent mediator if the two could not reach a contract agreement prior to the deadline.

Further impeding a contract agreement was Highmark’s push for regulatory approval to penalize hospitals that don’t give it their best prices. After filing with the Pa. Insurance Department for blanket permission to insert "fair payment" provisions in any of its western Pa. hospital contracts, which would require hospitals to pay Highmark at least the best prices it pays other insurers or accept penalties, Highmark moderated the request by saying it would instead try to negotiate them in individual contracts on a case-by-case basis. UPMC labeled Highmark’s demand a "most favored nation" provision and called it anti-competitive.

Conflict between the two entities reached another crisis point last year, when Highmark, along with HealthAmerica, HealthAssurance and Gateway Health Plan, had filed an antitrust lawsuit against UPMC to block its then-proposed merger with Children’s Hospital of Pittsburgh, alleging that the merger would give UPMC monopoly power over pediatric services in Allegheny County. Highmark also sought a preliminary injunction to block the merger until the lawsuit was heard. The insurers dropped the lawsuit after the Pa. Attorney General approved the merger and bound the hospitals to a consent decree.

Physicians are also showing a willingness to sue insurance companies. The Pennsylvania Orthopaedic Society is seeking to join a class action physician lawsuit against IBC, alleging that the insurer maintains a pattern of denying and reducing payments to orthopedists. The original lawsuit was brought by two Philadelphia-area orthopaedic surgeons who allege that IBC improperly and unilaterally downcoded their requests for reimbursement and that IBC bundles codes, failing to fully reimburse the doctors when two or more distinct procedures are performed. The lawsuit seeks to permanently bar IBC from continuing these practices in the future and to order IBC to open up its records for inspection so that the extent of its violations of the orthopaedic surgeons’ contractual rights can be fully ascertained.

According to the Philadelphia Inquirer, a consortium of lawyers across the state has brought class action lawsuits against Highmark, IBC and Capital Blue Cross seeking rebates, credits and increased benefits to subscribers, in light of the nonprofit insurers’ accumulation of huge surpluses that far exceed state requirements.

This June, a group of Pa. legislators unveiled House proposals that would impose restrictions and greater scrutiny on nonprofit Blue Cross and Blue Shield companies with large cash surpluses and profit-making subsidiaries, as well as a proposal calling for a House investigation of insurance reimbursement rates to physicians and hospitals.

Causes of Conflict Escalation

Several trends have coincided to foster adversarial mentalities and destructive relationships between health insurance companies and health care providers.

The dynamics of health care markets in recent years have contributed to the souring of those relationships. The promise of managed care exclusivity, whereby providers gave health plans discounts in return for preferred patient volume, has been largely unsuccessful, especially for providers, says Martin Arrick, director of the public finance department at Standard & Poor’s. "The broad move to get rid of exclusivity led everyone to say, ‘Look, these are the rates we need,’" he adds.

Managed care companies suffered from their own economic pressures. For years many of them had coveted market share without increasing premiums to employers, only to yield flat revenues, says Arrick. The insurance underwriting cycle has also been beset by worsening investment opportunities over the past few years, leading insurers to raise premiums and to bargain harder with providers, says Robert I. Field, J.D., MPH, Ph.D., senior fellow at the Leonard Davis Institute and director of the Health Policy Program at the University of the Sciences in Philadelphia.

At the same time, substantial consolidation by hospitals and the physician practices they purchased brought increased bargaining strength, further raising the pressure on third-party payors, notes Field.

Provider networks having the leverage of volume or service niche increasingly used "stare-down" negotiation tactics to demand higher payments by threatening to cancel contracts, says Arrick.

Some evidence would appear to indicate that Pa. hospitals are able to deploy clout successfully. An analysis of 2001 Interstudy data of private HMO payments in the 25 largest metropolitan statistical areas in the U.S. show that per-member-per-month inpatient hospital payments by HMOs in Philadelphia and Pittsburgh were the second and third highest in the country, respectively, according to Stephen Foreman, J.D., Ph.D., M.P.A., director of the Pennsylvania Medical Society Health Services Research Institute.

But hospitals in Philadelphia have very high fixed costs, including malpractice insurance and labor, and the reimbursement data may reflect the actual cost of doing business, says Field. Early-1990s predictions that overbedded markets would shake out excess capacity and force a large number of hospitals to close have not held true, Field notes, and hospital systems today must use their negotiating clout for the additional burden of maintaining that capacity and keeping beds and institutions open.

The Interstudy reimbursement rankings may belie the fact that hospitals across the nation are all hurting financially. The payment-to-cost ratio of Pa. hospitals is near the bottom ten states in the U.S., notes Nancy Bell, vice president of health care finance and insurance for the Hospital & Healthsystem Association of Pennsylvania (HAP).

One-third of Pa.’s hospitals, or 61 facilities, lost money in 2001, compared to 68 hospitals the year before, while a total of 68 hospitals had negative average operating margins during the last three years, according to the latest analysis by the Pennsylvania Health Care Cost Containment Council (PHC4).

Considerable financial burden on hospitals comes from dramatic advancement in care technologies, for which costs are rapidly outstripping previous and current health insurance reimbursement arrangements, says Jeffrey Lenow, M.D., medical director of JeffCare, Inc., the physician-hospital organization of Philadelphia’s Thomas Jefferson University Hospital.

The single biggest factor driving health care costs, particularly in western Pa., is an aging population, says John Paul, executive vice president of UPMC Health System. The baby boomer generation is now entering its 50s and 60s, bringing geometric growth to health care needs and costs, he adds. Paul also points to a virtual explosion in the volume of drugs currently available on the market that are improving longevity, as well as quality of life.

When efforts by insurers to manage the volume of health care utilization failed to produce the dramatic cost savings that were promised, says Paul, insurers stepped up their pressure on providers to reduce prices. "The collaborative spirit and shared vision that used to exist between insurers and providers has been replaced at some insurance companies with finger pointing, half truths, and at times underhanded dealings that try to pit one group of hospitals against another, and primary care physicians against specialists," says Paul.

Payment delays and denials by insurers also remain a major problem for Pa.’s hospitals, says Bell. Although the PHC4 report showed a statewide reduction in days of accounts receivable by four days last year compared to the previous year, the statewide average for hospital days of accounts receivable is still 62 days, she adds, noting that Pa.’s prompt payment statute—Act 68, passed in Jan. 1999—requires managed care plans to pay clean claims within 45 days of receipt.

Bell also says that hospitals are seeing an increase in reimbursement denials for emergency room treatment, as well as denials for certain days of preapproved per diem inpatient reimbursement, phenomena she attributes to cash flow management tactics of managed care plans. Hospitals have begun to send claims by registered mail to reduce the number that she says are "lost" by the health plans. HAP has not been able to quantify the impact on Pa. hospitals of these phenomena.

Hospitals have begun to get more aggressive with managed care contracts, says Bell, by trying to negotiate in benchmarks on payment denials, agreements not to deny days unilaterally in the middle of a patient stay, and requirements that the plan notify the hospital upon receipt of a claim.

Hospitals think long and hard before considering litigation, but it may be a necessary tool of last resort, says Bell, after hospitals have exhausted their negotiations and their filed complaints with the Pa. Insurance Department.

High-stakes negotiations, intensified by health insurers with highly concentrated market shares having to answer to patient demand for access to hospital networks containing many institutions throughout a region, are a prescription for lawsuits, Field maintains. "The calculation is that you are better off trying to defend your position in court than to risk the negotiating table," he says, noting that a player can maintain the status quo with an injunction rather than capitulate to lesser terms.

Physicians in Pa. have far less bargaining power than do hospitals. Whereas provider integration in Pa. was driven by the hospitals, physicians in the state have traditionally not been as organized into IPAs and large multispecialty practices as in other states such as New Jersey, leaving them particularly vulnerable at the negotiating table, says Field.

According to the Interstudy data, per-member-per-month payments by private HMOs to physicians in Philadelphia were the lowest in the nation and physician payments in Pittsburgh were the sixth lowest, according to Foreman. The best paying of the nation’s largest metro regions, Houston, provides more than double Philadelphia’s level of HMO reimbursement to physicians.

The market power imbalance between physicians and health insurers in Pa. is greatly magnified by highly concentrated health insurance markets in Pittsburgh and Philadelphia. "I don’t see physicians as having the wherewithal to take on the reimbursement issue. If an insurer has 40 to 60 percent of one’s patient population, where is the leverage?" asks Deborah Robinson, Esq., a health care attorney with Houston Harbaugh in Pittsburgh.

"We’re dealing with market breakdown in Pa.," says Foreman, noting that an ideal market has small buyers and sellers and free entry by competitors, whereas the Philadelphia and Pittsburgh health insurance markets are dominated by entities with reserves large enough to underprice any competition.

The traditional approach taken by physicians beset by reimbursement pressures has been to leave the area. Physician overhead costs continue to rise, especially from malpractice insurance costs, and physicians are hard-pressed to find costs that can be trimmed, says Robinson, adding that the new Health Insurance Portability and Accountability Act (HIPAA) patient privacy protection rules that will go into effect this and next year are going to cost practices a lot more money to implement. The American Hospital Association projects that hospitals nationwide will have to spend from $4 billion to $22 billion to meet the new privacy rules.

Further Escalation or Conciliation?

From a market standpoint, the likelihood of improved provider-insurer relations seems remote. Pa.’s large health insurers do not appear ready to give up their considerable market leverage. Their ability to continue to get double digit premium increases beyond the year 2003 is very unlikely, and they can be expected to seek revenue enhancement through a tougher series of negotiations with providers in the coming years, believes Arrick.

To the extent that financial pressures remain high and lawsuits remain a viable avenue of recourse, negotiation conflict will continue to evoke lawsuits. Fixed costs such as salaries and malpractice insurance continue to rise; as do compliance costs of HIPAA, Stark II and anti-fraud infrastructure; while reimbursement from Medicare and Medicaid continues to be flat, notes Charles I. Artz, Esq., a health care attorney in Harrisburg.

Physicians continue to be faced with health plans that find aggressive and creative ways of avoiding payments, including combining reimbursement codes and reducing payments with concurrent and retroactive audits, he adds. "Given such an incredible imbalance in contract negotiating power and political clout," says Artz, "there’s only one place left to fight your battles—that’s in court."

No other natural remedy exists, he maintains, noting that the Pa. Superior Court has recently ruled that physicians and hospitals cannot sue health plans for failing to meet Act 68’s prompt payment requirements, and that they instead must file complaints with the Pa. Insurance Dept., which Artz says has not demonstrated regulatory enforcement of any substance.

Artz believes that a class action breach of contract lawsuit with significant punitive damages against a health plan could hurt enough to shift negotiating balance more toward physicians, and that plaintiff attorneys are willing to work on contingency fees, given the potential for high damages in such cases.

Six pediatricians in Kansas City, Mo. successfully brought such a lawsuit against Blue Cross and Blue Shield of Kansas City, alleging that the insurer breached a Medicaid pilot program contract with them by not paying capitation rates properly and breached fiduciary duty by not sharing profits with the physicians, American Medical News reported recently. The jury awarded the physicians over $6 million, including $3 million in punitive damages. The case has reportedly sparked inquiries from physicians and lawyers across the country interested in pursuing similar cases.

A recent U.S. Supreme Court ruling may give providers a new bargaining chip to secure proper reimbursement for care that was formerly denied by a health plan as medically unnecessary. The court ruled that states may provide independent review by a doctor when an HMO refuses to pay for a patient’s medical treatment, and that state laws incorporating such reviews are not pre-empted by the Employee Retirement Income Security Act (ERISA). Given the insurance industry’s criticism of the ruling as adding greater cost to health insurance coverage, however, the ruling may induce health plans to try to lower reimbursement further.

Cooperative alternatives may have the power to diffuse unproductive conflict between health plans and providers. Both stand to benefit from information technology systems that promise effective claims payment, claims review, medical records warehousing, clinical protocols, pharmacies integrated with laboratories and medical data, and decision support capabilities for physicians, says Field, who notes that neither side can effectively fulfill these functions alone. HIPAA, he predicts, will enhance the imperative for cooperation.

Advanced care technologies, although expensive, can eliminate wasteful spending on services such as duplicative tests and imaging that are re-ordered in one place because the last results were not quickly and easily accessible in another location, argues Paul. Given its promise of improving medical outcomes and lowering costs in the long-term, he maintains, it is ironic that insurers are now aggressively attacking the practice by academic medical centers of transferring the types of care and technology that used to be available only in their hub to outlying areas in the suburbs and to community hospitals in more rural counties.

Paul also believes that insurers should view medical research as having great cost reduction potential rather than see it as a driver of cost escalation, and he points to therapies and treatments being developed as a result of breakthroughs in biotechnology and the human genome project.

Best practice guidelines and protocols are still not being used as widely as they should be, and providers and insurers both need to do more to isolate practices that fall outside the guidelines and identify variation at the individual provider level, says Paul, who believes that such cooperative efforts can produce considerable gains in both quality improvement and cost reduction.

Lenow believes that the future of health care is going to be determined by "evidence-based accountability" involving prudent and efficient care management that promotes inter-industry cooperation. Evidence-based disease management programs, for example, are revealing numbers of unnecessary medical tests and unwarranted lengths of stay in the hospital. Such models could be configured to tie care efficiencies to reimbursement bonuses, he says.