$$$ HMOs & hospitals

pickledpepperRN · May 12, 2003

http://www.kpmginsiders.com/display_reuters.asp?cs_id=65838

HMOs and Hospitals Butt Heads Over Health Costs

By Kim Dixon and William Borden

CHICAGO/NEW YORK, May 9 (Reuters) - Everyone agrees that soaring health care costs need to be reined in, but try to pin down the cause of medical inflation and arguments break out.

The debate is critical at a time when government regulators and medical providers are trying to curb health-care spending, now at $1.5 trillion, or one-sixth of the U.S. economy, and still growing at a double digit rate annual rate.

For years, the giant pharmaceutical companies' costly products have been pushing the price of medicine higher. But increasingly it's local hospitals, not multinational drug companies, that are getting the rap..

"We've gotten fixated on drugs, but hospitals are the big enchilada," said Stuart Altman, a health cost economist at Brandeis University.

Hospital outpatient prices soared nearly 15 percent last yea, and in-house costs surged 11.7 percent, according to research by Goldman Sachs analyst Matthew Borsch.

Outpatient hospital care eclipsed prescription drugs as the fastest-growing driver of health care spending in 2001,, according to the nonprofit Center for Health System Change.

"For us, it all revolves around the hospital issue," said Jay Gellert, chief executive of Health Net Inc., a big California-based health insurer in a meeting with investors this week.

Insurers are sharpening their aim on hospitals as they try to reduce the amount the pay in health costs.

A flap between Blue Cross Blue Shield of Tennessee and hospital company HCA Inc. illustrates the conflict. A contract between HCA, which runs 14 hospitals in the state, and the health plan ran out last year, yet the sides remain deadlocked.

HCA's lowest offer would boost rates more than 20 percent, said Blue Cross spokesman Bill Steverson, adding, "It was something we couldn't accept."

HCA said it asked for only a 9 percent increase late last year, when the talks were at their closest to reaching a deal. "We're not asking anything more from Blue Cross than we are from the other (managed care firms)," said Cheryl Chubbs, vice president of HCA's MidAmerica division.

BAD PRESS

Hospitals blame consumer demand for pricey new medical technologies and the increased cost of doing business for the increases. Ultimately, analysts say, it's a power struggle in the industry over who will assume unwanted costs.

Those who pay the bills have new ammunition in the ongoing battle. Government probes of two hospital companies, Tenet Healthcare Inc. for allegations that it overcharged Medicare and HealthSouth Corp.'s accounting scandal.

Publicly traded hospitals sit in the "position where they don't want to be on the front page of a newspaper arguing over rates that are substantially greater than underlying inflation," WellPoint Health Networks Inc. Chief Financial Officer David Colby said this week.

An industry source said Tenet's troubles with regulators left the company vulnerable at the bargaining table.

"They (Tenet) don't have any negotiating leverage, so it's been forced on them," the source said.

Tenet spokesman Steven Campanini called that assertion "absolutely false ... Because of the strength of our hospitals' market positions, Tenet's negotiating leverage with our managed care partners remains strong."

CHARGES DON'T REFLECT COSTS

Still, after allegations surfaced that Tenet overcharged the federal Medicare health plan by rapidly boosting charges, Health Net struck a better deal with Tenet, tenethe nation's second biggest for-profit hospital chain. Under the new contract, 27 Tenet hospitals will be paid on a fixed or per-diem system, instead of fees based on retail or "gross charges" that can inflate costs.

In addition to these charges, HMOs are looking at so-called stop-loss provisions, which shift a higher slice of costs to health insurers once a certain dollar threshold is met. Health plans don't want to get stuck footing big chunks of the bills for the sickest, hardest-to-treat patients.

Melissa Gannon, vice president at Weiss Ratings, which evaluates insurance industry, leading managed care companies to devise "creative ways" to curb costs. Hospitals still are reluctant to roll back prices at a time when their own costs are rising. As it stands now, "I would say the balance of power is on the hospital side," said

HCA, which is also the largest U.S. hospital chain, said several health plans are pushing HCA to switch to a per-diem pricing system, yet he said HCA isn't budging.

"We are pretty staunch in our stance of doing stop losses in our contracts," HCA spokesman Jeff Prescott said.

BearingPoint, Inc., formerly KPMG Consulting, Inc., is an independent consulting firm and is not affiliated with KPMG International or any KPMG member firm.