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Small Hospital Places A Bet With Big Insurance

Blue Cross Blue Shield of Massachusetts and Caritas Christi Health System are announcing a new agreement that some suggest may be a model for the rest of the country.

Under it, the non-profit insurer will stop paying the non-profit hospital on a fee-for-service basis for certain insureds:

Under the deal expected to be announced Friday, Caritas . . . will be paid to take care of about 60,000 Blue Cross members in its new program — whether or not they get sick. Caritas will use some of the payments for preventive services to help keep patients healthy. If Caritas can keep health-care costs under a certain budget, it can make a profit. But if health-care costs go over the agreed-on amount, Caritas is on the hook. . . . . Blue Cross is adding a carrot: If doctors and hospitals can meet certain quality targets, they can earn a bonus of as much as 10% on the value of the deal.

It sounds like a new approach to health costs.  But it reveals more about how the same old ways of controlling health care costs continue to thrive.

Here’s what I mean.

The model of the last few decades has been this.  Insurers and hospitals negotiate rates to pay for care.  The bigger and more important the hospital, the more leverage it has over the insurer.  The bigger and more important the insurer, the more leverage it can have back over the hospital.  So in Massachusetts, like other states, hospitals have consolidated into a small number of big hospital “systems.”  In turn, the health insurance business has become dominated by a small number of insurers, chief among them Blue Cross.

Simplified, here’s how these negotiations go.  The insurer threatens that if it doesn’t get what it wants, it will change its plan designs to make it less likely that patients will seek care at the hospital.  The hospital, says if it it doesn’t get what it wants, it will stop accepting the insurer’s customers.  It’s a game of high-stakes chicken, but deals usually get made.  They typically involve the hospitals agreeing to lower rates of pay for more routine care, and preserving higher rates of pay for more specialized care.  It’s a set up that encourages big hospital systems to get bigger, so they can capture more patients, and more focused on highly specialized care.  It also makes it far more likely that smaller insurers will end up paying more for the same care at the same hospital, as the hospitals try to offset lost revenue from them.

So what does this have to do with the new deal between Blue Cross and Caritas?

Well, less significant hospital systems like Caritas (which has very good doctors but has been notoriously troubled in recent years) have very little negotiating leverage with the big insurance companies.  For them, the game isn’t so much getting a good rate of pay for their services as it is getting patients through the door.  And so they need to figure out ways to get the insurer to encourage patients to go there.  What better way to do it than to enter into a high-profile new contract with the biggest insurer in the state?

Now, take a look at the numbers.  If I’m doing the math right, Caritas is going to get about $6,000 per insured per year.  With state Medicaid payments running at about $5,500 per insured, these Blue Cross patients not particularly interesting, financially.  Unless, that is, the program works as expected and Blue Cross ends up changing its plan design to encourage more people to go to Caritas for care, as opposed to the other major Massachusetts hospital systems.  And you know Blue Cross would love to be able, one day, to use its deal with Caritas as part of its negotiations with those other systems.

“It’s a bet,” said Caritas Chief Executive Ralph de la Torre.

That, it is.  But some new paradigm for health care?  Not so much.

*This blog post was originally published at See First Blog*

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