News & Events

Insurers may slash rates to hospitals

Some patients might have to switch MDs

By Liz Kowalczyk, Globe Staff  |  May 24, 2010

Massachusetts health insurers say they want to freeze or slash payments to some hospitals and large physician groups this year, setting up the toughest contract negotiations in memory and creating the potential for disruptions in where patients get their care. Other providers would get small increases, at most.

Unlike in past years, insurers believe they have widespread backing from politicians, regulators, and employers to aggressively push back against large price increases, even if it means some unhappy providers drop out of insurers’ networks, forcing patients to find new doctors and hospitals.

Blue Cross Blue Shield of Massachusetts, the state’s largest insurer,this month sent letters to hospitals and large physicians groups “putting them on alert that the world has changed,’’ said chief executive William Van Faasen. Blue Cross recently began negotiations with 25 hospitals whose contracts expire in October, about one-third of its network.

Two other large insurers, Harvard Pilgrim Health Care and Tufts Health Plan, also have sent letters in recent weeks, requesting raterollbacks from some hospitals and doctors groups.

Many providers are in no mood to back down, however, after recently releaseddata showed that some hospitals and doctors groups are paid vastly more than others for providing similar services, because of their market power. The lower-paid providers are demandingmore equitable rates.

Hospital executives acknowledged that their industry must help control costs by becoming more efficient, but they said many hospitals are struggling and cannot withstand rate freezes or reductions, particularly since the state has cut Medicaid payments andthey expect the federal government to reduce Medicare rates under the new national health insurance law.

“The cumulative impact is unprecedented,’’ said Lynn Nicholas, president of the Massachusetts Hospital Association. She said “payers feel a mandate to do something and do something quickly’’ and are not being “sensitive to unique situations. Hospitals in the red are being asked to make payment reductions,’’ which could lead to layoffs, mergers, and closures.

Contract negotiations between health insurers and hospitals always have been tense and long, and often disappointing for those providers with little market clout. But hospitals and doctors groups with top name brands, large numbers of patients, or geographical dominance have been able to substantially raise their prices, sometimes with the backing of employers.

In 2000, Partners HealthCare, the parent organization of popularMassachusetts General and Brigham and Women’s hospitals, withdrew from Tufts’s provider network when negotiations broke down over money, meaning patients with Tufts insurance were not covered at Partners hospitals. Within days, major employers and thousands of Tufts members threatened to cancel their policies, and the insurer surrendered in little more than a week.

Since then, however, health insurance premiums have soared by an average of 7.5 percent annually and, with most Massachusetts residents now required to have insurance, health costs have become a major focus of politicians.

Investigations this year by Attorney General Martha Coakley’s staff and the administration of Governor Deval Patrickblamed the rise in medical spending partly onprice increases demanded by powerful providers. Last month, the Division of Insurance blocked insurers from substantially raising premiums for small businesses and individuals who buy their own coverage, and the state Senate last week passed Senate President Therese Murray’s measure to expand regulators’ authority over insurance premiums.

“To the extent that our negotiations might cause disruption, the public response to that disruption might be different than in the past,’’ Van Faasen said.

Blue Cross executives said their negotiating strategy will depend on a hospital’s situation; some providers that are highly paid or are earning a healthy profit on the insurer’s members will be asked to take rate cuts; those that are struggling may be offered small increases.

Southcoast Health System, which operates three hospitals (in Fall River, New Bedford, and Wareham), just began negotiations with Blue Cross, which is demanding a roughly 10 percent rate cut, even though the network’s hospitals are not among the highest paid in the state, said Bill Grigg, chief financial officer. Blue Cross said the cut it is requesting is not that large.

Because most of the highly paid academic medical centers’ contracts do not expire this year, the insurer is “unjustly’’ turning to hospitals like Southcoast for concessions, even though “we didn’t create this inequitable payment environment,’’ Grigg said. “The insurers are definitely emboldened now.’’

Blue Cross has asked some of the best-paid and largest teaching hospitals, including Partners and UMass Memorial Health Care, to reopen their contracts and accept cuts, said Andrew Dreyfus, executive vice president for health care services.

Harvard Pilgrim sent letters to 25 of its biggest hospitals and physician groups, asking them to reopen contracts and roll back previously agreed-upon increasesthis year. For those providers, and those with contracts expiring in January, the insurer will offer payment freezes or small increases of up to 3 percent, depending on the situation, said Rick Weisblatt, senior vice president for health services. “It is not our intention to beat up on the smallest providers,’’ he said.

Tufts is asking most providers to reopen contracts and reduce their rate increases for this year to 3.2 percent. For contracts expiring in 2011, “we’re going to take a very hard line in our negotiations,’’ said spokeswoman Patti Embry-Tautenhan.

Tufts Medical Center, which state officials pointed to as one of the lowest-paid teaching hospitals, begins negotiations with Harvard Pilgrim this summer and received the insurer’s warning letter. “My general knee-jerk reaction is ‘Go talk to someone else,’ ’’ said Tufts chief executive Ellen Zane. “We are underpaid.’’

Zane and Nicholas said the expected cuts in Medicare payments are a major concern for hospitals. Until now, they have counted on private insurers to make up for shortfalls in what the government’s Medicare and Medicaid programs pay. But insurers are drawing a line in the sand, just when Medicare has become shaky.

The hospital association projects that hospitals, nursing homes, and home health care agencies in Massachusettsface about $5.3 billion in cuts in the next decade, as the federal government redirects funding for health insurance.

A portion of those cuts will be made up by increases in other types of Medicare funding, but hospitals don’t believe the federal government will offset all of the cuts.

“There is an unprecedented amount of financial pressure,’’ Zane said. “There will be increased havoc’’ in the market.

Liz Kowalczyk can be reached at