HEALTHCARE LAW / INSURANCE LAW
The Challenge for Community Hospitals In the Age of "Cost Shifting"
October
23, 2003
By Christopher C. Gallagher*
and Walter L. Maroney
Presented to the HB 470 Chaptered Study Committee
Part I. Presented by Christopher Gallagher
The Problem
We represent many of New Hampshire's smaller community hospitals. Most
are not-for-profit charitable trusts. Their mission is to maintain a level
of medical preparedness that enables them to respond effectively to any one
of hundreds of medical maladies that may occur at any time within their service
area. Their services are "bundled" for the sake of economic efficiency
and cross-subsidy. Maintaining up-to-date response requires an operating
margin sufficient to support high-cost medical equipment, medical professionals
and investment in plant and facilities. The key to operating and financial
stability is adequate volume.
As Douglas E. Hall has effectively demonstrated in his earlier presentation
on cost-shifting, the pernicious impacts of systematic underpayments by government
have moved many providers beyond the economically beneficial process of cross-subsidization,
into the deleterious realm of "cost-shifting," a dynamic by which
structural support must be sought from New Hampshire health plans and their
carriers (principally Anthem and Cigna). Payors understand well the benefits
of hospital service cross-subsidies. They predictably resent cost-shifting,
and will continue to aggressively resist efforts to have them make up for
government underpayment. But providers cannot afford to absorb these underpayments,
and will try to pass them on through pricing.
Accordingly:
1. We can continue to expect more payor-provider contractual conflicts in
the years ahead, with the predictable consumer dislocation, and
2. Institutional providers in rural areas, with their low volumes, aging
populations, heavy dependence on Medicaid and Medicare, and negotiating
weakness, will be driven deeper into low and no margin operation. This can
adversely
affect both quality and access, because
3. New Hampshire health
care is still tied to the "health" of
our community hospitals and smaller hospitals are not in good position to "win" the
coming struggle caused by continued government underpayments.
Added Pressures
While the bargaining dynamic created by "cost shifting" unfolds
externally, the carrier/payors are morphing into a new business
model behind the scenes. Burned badly by previous efforts to aggressively
manage health
costs, they have now expressly returned to the more traditional
insurance business model of: assessing risk, managing the administration
of health
care payments, covering the cost with premiums. Resulting premium
rises have been stunning. And as premiums increase, healthier individuals
exit health
care plans, leaving an insured pool more prone to illness. This
raises their costs of coverage, further lifting premiums. In turn, more employers
and
employees exit the plans. Swelling salaries, shrinking endowments
and the skyrocketing costs of the new technology (including drugs) continue
to push
up provider costs. In short, the forces driving the conflict
between providers and payors are still building.
But the payors have found a way to produce profits in
this depressing scenario. Premiums have increased
by solid double digits for three straight years; profits are expanding
even faster. There is nothing wrong with profits,
but these particular increases raise an important policy concern. If
payors are using aggregated membership networks
to increase profits rather than to hold down costs, it is reasonable
to reexamine why government should continue to support
the continued use of aggregated membership in payor bargaining with
providers. In fact, if this new utilization of membership
is even possible, it is time for legislators to take a fresh look at existing
regulatory frameworks enabling such conduct.
Here's how
the
new model works.
The "Broker" Model
Increased premiums and
aggressive bargaining with providers are producing significant
profits for the health
insurance payors. State laws and a "market" that has rewarded
the acquisition of bargaining power to
gain leverage for holding down provider
costs have in the past encouraged the
aggregation of significant carrier buying
power. Indeed, by aggregating as many "members" as possible,
then steering them to agreeable providers,
HMO/payors were able to negotiate effective
provider contracts that held down costs
and premiums. Member aggregation resulted
in a societal benefit. But the old HMO
days are gone. Times have changed. Stung
by popular resentment aimed at insurance
company limits on choice, the carrier/payors
have left the cost-cutting fray. Payors
are now focused on profit. Payor buying
power has now become pricing power.
With carrier premiums and profit margins
soaring to record heights, the question
arises— should New Hampshire
laws still be supporting this use of
member aggregation? Is increased payor
bargaining power still a policy objective?
Will it interfere with the successful
implementation of SB 110? (As Harvard
Pilgrim's Ms. Packard has stated, trying
to negotiate after Anthem and Cigna
have "passed through" leaves
little room for competitive health insurers
to build critical mass in the New Hampshire
health insurance marketplace.)
According to the new "broker" business model, once
a desirable price is nailed down by secret contracts with providers
(sell side), the carriers can control the "buy side" by
steering its captive members to agreeable providers. Only now,
instead of holding down premium costs, this dynamic widens
the spread between the buy and sell sides. Like a broker's
commission, the spread between the cost of services, the return
on premiums, is then channeled to the carriers' bottom line.
And since contract prices are shrouded by "confidentiality," the
public can never know how much money is being diverted to the
carriers from the system. Only when payors announce their "earnings" is
it clear that they are draining substantial
funding out of the fragile health care system. The earnings
have
been announced.
The diversion is significant.
Conclusion
In sum, we have an environment where systematized
underpayment by government creates a need for
cost-shifting. Large incumbent
carriers predictably refuse to accept this shifted cost.
And if that doesn't produce enough conflict,
for-profit carriers
now utilize their aggregated buying power to gain profit
rather than to hold down costs. In this environment,
size matters.
Small providers, weakened in this new dynamic, find themselves
unable to bargain effectively. If "Any Willing Provider" legislation
is not to be enacted in New Hampshire as a means of "leveling
the negotiation playing field," it is still appropriate
to consider what should be done to address the new reality.
One thing is clear. Simply standing by, while smaller hospital
margins are compressed to the point of
nonexistence or negative numbers, does not seem advisable,
especially if it means that New Hampshire communities
can end up being underserved
by their local hospital.
CHC accepts the legislative reality that AWP
legislation is not a likelihood in New Hampshire
in the near future.
However, by taking no action while letting existing
market forces play
out a dynamic that will inevitably weaken smaller
hospitals, policymakers expose our state's health
care system to
a significant risk. SB 110 may or may not mitigate
the mismatch, but that
remains to be seen. (Even if SB 110 produces
more competition among insurers, it is unlikely
that such competition will reduce
the cost shift conflict between payors and providers, and its
many employer and employee victims.)
The following commentary
by Walter Maroney examines the legal dynamics of the
existing regulatory structures and the statutory context in which
these inevitable conflicts will
play out. It suggests "solutions" this Committee
might usefully examine. It attempts to answer
the questions raised by this introduction about
the present "tilt" of
the bargaining table, the precarious position
of community hospitals in New Hampshire, and
the need to bring new
thinking to a process that is being used now
for gains to payors rather
than to the New Hampshire consumer public.
Part II. Presented by Walter Maroney
We have been asked to speak to the committee regarding
the environment in which hospitals, insurers
and physicians find themselves today within the State of New Hampshire,
and in particular, to discuss systemic market
and regulatory issues
HB 470 was intended to address.
It has been suggested by some participants in this discussion that last
year's introduction of an “any willing provider” proposal should
be considered nothing more than a negotiating tactic in an ongoing and highly
visible commercial dispute between LRGHealthcare, which operates Lakes Region
General Hospital and Franklin General Hospital and Anthem Blue Cross Blue
Shield. Certainly, the legislation was introduced within the context of that
dispute. However, as I hope my remarks will make clear, its introduction
was far more a reflection of the significant structural deficits in the state’s
healthcare market and regulatory process which were exposed by aspects of
that dispute.
Indeed, in light of the fact that approximately twenty states now have some
form of “any willing provider” legislation on the books, at least
seven of which apply to individual or institutional health care providers,
it is clear that such legislation is being used in other states to address
similar systemic issues within their healthcare markets and regulatory structures.
New Hampshire is not immune from the national trends and issues which have
prompted such legislation in other states. Thus, it is important to understand
that introduction of an “any willing provider” proposal was responsive
to issues which clearly surfaced during the Anthem/LRGHealthcare dispute,
but continue to present a problem. As amended to AWP, HB 470 was never intended
to be limited to the underlying facts of a single dispute. It addressed issues
that have not gone away merely because the parties to that dispute were able,
through hard work on both sides of a negotiating table, to resolve their
contractual issues.
LRGH/Anthem
What happened in the course of the dispute was that a contracting impasse
between an institutional provider and a major insurer resulted in the potential
interruption of long-standing relationships between residents of the Lakes
Region and their local hospitals and personal physicians. It’s not
important to try to apportion blame for that situation. The fact is, it was
a natural consequence of two underlying issues: first, that New Hampshire’s
health care delivery system relies heavily on community hospitals; and second
that the private insurance market is currently dominated by two major insurers,
Anthem Blue Cross Blue Shield and Cigna, both of which offer (almost exclusively)
managed care products to New Hampshire’s consumers.
Due largely to geographic and historic factors, many of the twenty-four
non-profit and two for-profit hospitals located in New Hampshire
have evolved over time into the principal healthcare delivery
locus within geographically
discrete areas of the state. (See generally, Kane. N “The
Health of New Hampshire Hospitals,” N.H. Dep’t of Health and
Human Services, 2000.) State discharge data demonstrates
that people generally rely on their local hospitals for outpatient
and general acute
care. Physicians in local communities require privileges at the
local hospital to function; and in many communities where there
is no other geographically
proximate hospital, local physicians tend not to hold privileges
at other institutions.
At the same time, the recent report issued by Douglas Hall, co-director
of the NH Center for Public Policy Studies, entitled "Cost-Shifting
in New Hampshire Hospitals," (October 2003) (the "Report"); starkly demonstrates the market dominance of the major private
insurers in New Hampshire. According to data used for that study,
hospitals in New
Hampshire derived 46.6% of their aggregate gross revenues of
$2.79 billion and 54.9% of net revenues of $1.67 billion from
private insurers in 2001 (Report, Figures 3, 4 at pp.
4-5.).
Of 119,019 total inpatient discharges from all hospitals in-state
during that year, 45.1% or approximately 50,000 discharges involved
privately insured
patients; and 57.4% of 637,252 outpatient discharges were similarly
privately insured. The Report
also suggests that, in order to maintain economic viability,
New Hampshire hospitals should be targeting a roughly 5% operating
margin.
These are not unusual revenue or patient mix numbers, when compared to hospitals
nationally; nor is the 5% operating margin target suggested by Professor
Hall contrary to national norms. However, the situation in New Hampshire
is complicated by the fact that the private insurance market is almost entirely
dominated by two major firms. As such, the two major managed care insurers
offering products in this state inherently wield enormous market power over
both institutional and individual providers in New Hampshire.
It is no secret that, nationally, we are in an era of escalating medical
costs (including such difficult-to-control expenses as pharmaceutical costs
and costs associated with technology and labor), a trend to which no New
Hampshire provider or insurer can be immune. Thus, it should be expected
that, for the foreseeable future, the state’s hospitals must strive
to maintain margins sufficient to support their services to their communities,
while insurers will struggle to balance their often conflicting responsibilities
to provide fair returns to shareholders, and to limit premium increases to
policyholders. This is a recipe for ongoing conflict.
It was precisely this tension which led to the impasse in negotiations between
LRGHealthcare and Anthem last spring, but it is critical to note that these
tensions were in no way unique to those two entities. Impasses in negotiation
such as occurred in the Lakes Region last spring are likely to happen again.
Because of the enormous market presence–and market power--of the two
major insurers in this state, issues involving disruption of patient access
to local hospitals and providers are also likely to reoccur in the foreseeable
future in New Hampshire. In light of its resolution, it is perhaps less obvious,
but the LRGHealthcare/Anthem experience exposed weaknesses in the state’s
healthcare regulatory structure which need to be addressed systemically to
avoid the repetition of the profound disturbances to consumer’s relations
with their local hospital and physicians and potential dislocations that
arose during that experience. In the conflicts between providers and insurers,
which are surely coming, patients, employers and other consumers of healthcare
and health insurance will continue to be innocent victims.
The issues of consequence to this committee’s review in the Lakes
Region dispute arose as follows: LRGHealthcare and Anthem reached an impasse
in negotiations. LRGHealthcare then took the only real option available to
it in the current market, which was to notify Anthem of its intent to terminate
its contact. Anthem in turn took the position that, if LRGH chose to become
a non-network hospital, then physicians who had admitting privileges only
at the LRGH would fall out of compliance with the company’s credentialing
policies and so would be dropped from Anthem’s panel.
Again, without attempting to apportion blame or responsibility for this
situation, LRGHealthcare’s decision to leave the Anthem network would
have had a significant–at least short term–impact on access by
citizens in the Lakes Region to their community hospitals (an impact which
the company attempted in a number of ways to ameliorate). Anthem’s
decision to drop a large number of local physicians whose privileges were
limited to LRGHealthcare, on the other hand, would, if carried through, have
had a long term impact on resident’s access to community hospitals;
and on the viability of the affected physician’s practices.
Two things need to be said about this impasse. First, the fact that, at
one stage in the negotiations, a community hospital found itself facing what
it perceived to be a “take-it-or leave it” contract offer from
a dominant insurer and responded by reluctantly “leaving it” suggests
a market failure with potentially profound ramifications for citizens of
this state. Second, faced with this severe problem for its citizens, the
state found itself with very little regulatory capacity to address the issue.
In fact, the only real regulatory control over this situation was that exercised
by the Insurance Commissioner, under the so-called “network adequacy” standards
of the state’s managed care law, RSA 420-J:7.
Under that statute, every managed care insurer licensed by the Department “shall
maintain a network that is sufficient in numbers, types and geographic location
of providers to ensure that all services to covered persons will be accessible
without unreasonable delay.” RSA 420-J:7, I. The Department has issued
extensive rules delineating this mandate, which establish specific quotas
for numbers of primary care and specialty physicians who must be within specified
travel times from areas of coverage. NH Admin R. 2700. The failure of an
insurer to maintain network adequacy, as defined by the Department, is subject
to a wide range of potential remedies, ranging from corrective action orders,
see NH. Admin. R. 2701.08, to revocation of license. RSA 420-J:14.
In fact, it was under this authority that then Commissioner Rogers intervened
in the Anthem/LRGHealthcare dispute. But it would mischaracterize her authority
to suggest that the Department has any real capacity to address anything
other than the adequacy of the insurer’s network. It is not statutorily
empowered, nor is it systemically set up to address the underlying economic
and market issues which led to the Lakes Region impasse in the first place.
It is true that the Commissioner’s staff engaged in analysis of the
parties’ negotiating positions and offered suggestions that helped
bridge some of the gaps between the parties; and it was at the Commissioner’s
urging that the parties returned to the bargaining table. However, the limited
authority of the Insurance Commissioner under the network adequacy statute
is not enough. Simply said, the state does not have in place any mechanism
to address the disparity of market power in negotiations between health care
providers and dominant insurers; or the potential problems faced by citizens
caught in the crossfire of an impasse caused, in large part, by this disparity.
This is where a legislative response such as an “any willing provider” proposal
comes into focus. In simplest terms, an “any willing provider” statute
recognizes the enormous power wielded by dominant managed care firms through
access to their panels. By providing that “any willing provider” who
meets all other appropriate criteria – including quality standards – may
be a member of an insurer’s panel, such statutes work to correct the
market imbalance between providers and dominant insurers – in essence,
leveling the playing field by removing panel exclusion as an insurer’s
negotiating tool. In doing so, an “any willing provider” statute
could also lessen the chance for the kind of disruption of established doctor-patient
and patient-hospital relationships that could have resulted had there been
no resolution of the Lakes Region impasse.
However, the fact that the vehicle proposed by the original form of HB 470
to address these issues was an “any willing provider” statute
is less material than the fact that the proposal was an attempt to address
underlying issues in the New Hampshire healthcare market and regulatory structure
which surfaced during the Lakes Region dispute.
It may well be that there are other effective ways to address these issues.
Promotion of greater competition in the managed care market is obviously
one such vehicle. Obviously providers and insurers would stand on a very
different footing than is currently the case in New Hampshire if providers
had the ability to contract with a wider range of alternative insurers. Similarly,
the level of dislocation to citizens caused by an insurer’s decision
to exit a market, or to drop providers from an established panel would decline
in direct proportion to the level of consumer choice available in a market.
Where, as in New Hampshire, such market choice is limited, problems caused
by an impasse between one hospital and one large insurer can be disproportionately
large.
Alternatively it may be appropriate to examine establishment of a mediation
structure for provider-insurer disputes. There could be a very constructive
state role in such a process. For example, the Insurance Department, the
Department of Health and Human Services and the Director of Charitable Trusts
each have particularized knowledge of aspects of the healthcare and insurance
industries. A mediation panel composed of representatives of those agencies
could knowledgeably assist parties in an impasse to construct solutions which
are consonant with the state Health Plan, as well as other public interests,
including insurance premium management and the protection of charitable assets.
Third, it may simply make sense as a pro-consumer public policy, to bar
insurance companies from extending disputes with hospitals into the wider
community by linking those disputes to other contracts, such as independent
contracts with community physicians. Such legislation would ensure that the
principal source of consumer injury which could have occurred in the Lakes
Region dispute – massive interruptions of doctor–patient relationships – is
simply taken off the table as a potential response to a provider/insurer
dispute or impasse. Not incidentally, such legislation would also ensure
that no insurer could use its market power with respect to local physicians
as a negotiating tactic in a hospital reimbursement dispute. This would go
a long ways toward leveling the playing field between the dominant insurers
and the individual hospitals in this state; and to limit the scope of negotiations
between hospitals and insurers to a more rational discussion of the ways
in which they can find common economic ground in difficult economic times.
Fourth, it may be worth looking at private and/or governmental mechanisms
to increase the freedom of community hospitals to engage in a form of “collective
bargaining” with insurers. There are currently significant legal and
practical obstacles under state and federal antitrust laws to joint bargaining
by independent hospitals. While the law permits the formation of bargaining
consortiums under some circumstances, the stringent rules governing the structure
of such “bargaining units” make them cumbersome and, in many
cases, economically unfeasible. However, the state has authority to relax
traditional antitrust rules under appropriate circumstances; and this too
may be a useful way to level the playing field between providers and dominant
insurers.
In conclusion, it is important for this Study Committee to recognize that
a significant market imbalance exists between providers and dominant
insurers in this state; and that the state does not have in place either
a systemic
market or regulatory response to that imbalance. The fact that
the parties to the Lakes Region dispute reached agreement at the end of the
day does
not mean that the situation will not recur in other communities
throughout the state; or that the results of such situations will be as positive.
It
is therefore incumbent on the state to formulate a response to
the underlying issues discussed in these remarks so it may proactively address
those issues
before they arise again.
*Christopher C. Gallagher is admitted in New Hampshire.
Return to top of page
Return to Healthcare
Law Articles
Return to Employee Benefits
Articles
Return to Firm Publications
