Every story needs a villain. In the story of the American healthcare system, that’s usually the insurance companies, who– by denying coverage to rape victims, obese babies, a breast cancer patient because she once had acne, and even over supposedly pre-existing conditions that patients never knew about— have managed to make themselves the most hated industry in the country.
But here’s the thing: they’re not the only bad guys… and sometimes they even end up on our side. In this post we’ll look at a showdown in Pittsburgh, where one health insurer stepped in to save a struggling network of local hospitals. Now, a giant health system is trying to punish the insurer– with a move that would reduce access to care and drive up costs.
There are three key players in this story: University of Pittsburgh Medical Center (UPMC), Highmark Blue Cross/Blue Shield, and West Penn Allegheny Health System (WPAHS).
UPMC is the largest health care provider in western Pennsylvania, with 54,000 employees, 20 hospitals, 400 outpatient sites and doctors’ offices, and its own 1.5 million-member health insurance division. It’s a nonprofit, but it rakes in cash, with more than $9 billion in revenue, and an operating profit of $406 million last year alone.
WPAHS is a much smaller health system. It operates two hospitals in Pittsburgh– West Penn Hospital and Allegheny General– and three community hospitals in the region. Financially it’s been struggling, with $1 billion in debt and tens of millions of dollars in operating losses the past few years.
The story so far
Pittsburgh City Paper’s Chris Potter sets the scene:
UPMC, as you’ve surely heard, has announced that in 2012 it will not renew its contract with Highmark, which insures more than 3 million Western Pennsylvanians. The reason: Highmark is seeking to merge with the Western Pennsylvania Allegheny Health System (WPAHS), UPMC’s rival hospital network. UPMC says it can’t be expected to do business with a direct competitor, although UPMC operates a health plan that’s been encroaching on Highmark’s turf for years.
The Highmark merger rescues WPAHS, by providing badly needed cash and loans, but it comes at a price. If Highmark’s contract with UPMC isn’t renewed, many patients could lose access to UPMC doctors and hospitals. They wouldn’t be denied service, but they would be charged the out-of-network rate.
The Beaver County Times points out that typically out-of-network services are only covered to 70%: “So an operation such as cataract surgery that would cost $3,800 would be covered only up to $2,660 if performed out of network, leaving a $1,140 bill for the patient, plus his deductible.”
One of UPMC’s arguments is that customers can simply move to other insurance companies that have recently signed contracts with them. The health system issued this statement:
“UPMC stands by our physician contract terminations. People should assure that they have access to UPMC physicians and hospitals now available to subscribers to UPMC Health Plan, Aetna, Cigna and United Healthcare, along with other potential national insurers. Only Highmark will not have UPMC physicians and hospitals in their network. This represents real choice in health insurance… .”
And at an August hearing before the state House Insurance Committee, UPMC CEO Jeffrey Romoff testified:
“By renewing its contract with Highmark, UPMC would also be renewing Highmark’s monopolistic lock on the insurance market, a state of affairs that no one except Highmark finds acceptable.”
But here’s the surprising part: Highmark’s dominance may actually be a good thing for the region.
Wait, why is a giant insurance monopoly good for Pittsburgh?
A study published in the journal Health Affairs found that in regions where one or two big insurance companies dominated, hospital prices were 12% lower than in places with competitive insurance markets.
It sounds counter-intuitive at first– usually monopolies and a lack of competition drive prices up. And that’s partly true with health care: that same study found that consolidation does drive up the cost of care… when it’s hospitals doing the consolidating. The trend in recent years has been towards giant health systems gobbling up smaller, independent hospitals– and those big health systems can demand higher prices.
But for insurance it works a little differently. The main service that insurance companies provide is bargaining for lower rates– the more members they have, the more power they have in their negotiations with health systems. The study’s author writes:
“Our results show that more concentrated health plan markets can counteract the price-increasing effects of concentrated hospital markets.”
So Highmark is actually working on both ends of the consolidation problem. Its massive size as an insurer gives it a fair footing in negotiating for lower rates with the equally massive UPMC. And by rescuing WPAHS it prevents UPMC from becoming the only choice for care for many residents.
A Highmark Vice President (of all people) puts it well:
“The bottom line is that our region needs a choice of financially sound health care delivery systems and independent community providers to effectively let market forces hold down cost increases,” Rice said in prepared remarks. “Otherwise, as we are already seeing, a single, dominant system can demand unreasonable payment increases from all private health insurance companies, which this region can’t afford.”
So, the insurance company is the good guy?
Well, in this case… sort of. The study shows that bigger insurance companies and smaller health systems holds down costs, and that’s the side Highmark is on here. However, dominant insurance companies might be simply pocketing most of that money they save– the study doesn’t say either way.
Even though bigger insurance companies help hold down health care costs, there are other ways. As we’ll see in a second, the best ways to hold down costs and improve access to care may be to cut insurance companies out of the equation altogether.
Right now there’s not a lot that state regulators can do– but there may be soon. Recently, a bill was introduced in the state House that would let the insurance commissioner step into contract disputes between a hospital and an insurer. If that bill passes, the commissioner could require the contract to continue for another term, if necessary.
But there are other, more ambitious alternatives:
- All-payer: In an all-payer system, the state would set the rates that all insurers pay each hospital. There’d be no such thing as out-of-network rates– with every insurer paying the same rates any provider would be “in-network.” Insurers would compete based on things like service and reducing administrative costs. Maryland has an all-payer system, and has had the second slowest growth in health care costs of any state. (Oh and the country’s top rated health system- John Hopkins.)
- Single payer: Basically Medicare, but for everyone. As with all-payer, government sets payment rates, but it also handles the administrative stuff, making insurance companies unnecessary. Vermont and Montana have announced plans to pursue single payer systems.
But with Republicans in control of the Pennsylvania state legislature, a switch to either system is unlikely in the near future. Which is a shame– health reform went a long way in reforming the insurance industry, but if we want a health care system that works, we’re going to have to deal with the giant health providers.