Tuesday, June 28, 2011

A game-changer in Pittsburgh

Here's one way to build an ACO. Have the insurance company buy the hospital.

That's the news from Pittsburgh, where "Health insurer Highmark Inc. reached a provisional agreement to acquire struggling hospital operator West Penn Allegheny Health System for as much as $475 million," according to this story in the Wall Street Journal online. Here's more:

The bold move by Highmark, which has $14.6 billion in annual revenue and 3.1 million members in western Pennsylvania, will be closely watched around the country. As spending on health care spirals, insurers and health-care providers are looking for ways to cut costs—forging a range of more-integrated relationships in an effort to become more efficient. Some health plans are buying clinics, and hospitals are exploring payment models that increasingly resemble insurance. Still, insurers have shrunk from purchasing hospitals, which typically involve large investments and operating challenges.

As a friend of mine says, this is a game-changer. Think about it this way. The most successful systems in the country today have common ownership of an insurance company and a health system, especially where they can combine to dominate a geographic area. This works because they have a common bottom line and can organize their business to take advantage of competencies in the respective parts.

As the Pittsburgh Post-Gazette reports:

The long term goal, said Highmark CEO and President Kenneth Melani, is the creation of a new model of health care, one that is outcomes based, with an integrated delivery and financing system.

I'm thinking that the folks at UPMC have just woken up to their worst nightmare.

Imagine if something like this happened in Boston, leaving the dominant provider as an outsider if a major insurance company did the same kind of deal with another network of hospitals and physician practices.


Grete Smarts said...

I wouldn't be surprised if this is just a negotiating tactic...UPMC will realize there is no winner if they go to war with Highmark on prices. And Highmark dosent underestimate the brand power of UPMC in the Pittsburgh market.

Just wait...the UPMC/Highmark contract will be renegotiated in a way that is favorable to Highmark (lower prices) and UPMC (no rate war). Highmark will pay the $50 MM breakup penalty, and laugh it's way to the bank after saving several hundred million $$ through a better long term contract with UPMC.

If it works out, it will be sad and cynical, but a brilliant negotiating lever nonetheless.

Anonymous said...

There may be more to this than meets the eye. UPMC has its own health plan. Relations between Highmark and UPMC have been increasingly contentious as UPMC has taken on an increasingly dominant role in providing care in the region. In the past, Highmark has tried to sell plans that exclude UPMC, but they have led to minimal sales.

It will be interesting to see how this plays out.

Anonymous said...

The irony is that UPMC is the culprit here. In their ever-ambitious quest to dominate the insurer and provider market in the Iron City, UPMC refused to renew their contract with Highmark, leaving Highmark with no option other than to acquire WPAHS. As you noted, UPMC wakes up tomorrow with a well-funded competitor for the first time in a decade. An excess of ambition can be deadly.

Anonymous said...

It surely isn't good news for healthcare in Pittsburgh. Since when has a monopoly or any healthcare merger been good for consumers? But it ain't good for UPMC, for sure.

Barry Carol said...

The large employer community could have an important role to play here. It’s only recently that self-funded employers started to show more interest in limited network and tiered network insurance products. The Massachusetts AG also performed a valuable service in shedding light on the fact that powerful hospitals command higher rates than their competitors for quality that is often no better and sometimes worse. As employers educate their members that more cost-effective alternatives to powerful hospitals exist, the new insurance products should be more widely accepted over time. Also, insurers are starting to reimburse out-of-network providers at rates indexed to Medicare, usually 110% of Medicare more or less. Providers can then balance bill the patient but collecting the huge difference between their charges and 110% of Medicare will be an interesting challenge to say the least.

At the same time, integration will present some challenges for insurers as well. Hospitals see themselves as needing to fill beds while insurers want to keep patients out of the hospital. It would be hard for hospitals to accept global payments because it’s very difficult to estimate costs a year or more in advance. Also, hospitals are expensive to buy and difficult to manage. I see more potential in the movement toward salaried doctors working for hospital systems. It should be easier to enforce procedures like timeouts and the use of checklists in the OR and adherence to evidence based practice patterns, especially if we also get tort reform that includes safe harbor protection from lawsuits if evidence based guidelines are followed where they exist.

Finally, as I understand it, Highmark is already paying UPMC lower rates than its smaller competitors. I applaud their move outlined in the WSJ today but I don’t expect to see it widely copied anytime soon. I do expect to see a continuing move toward limited network and tiered network insurance products though.

Anonymous said...


I think one of the most interesting phenomena is the success of places like Geisinger Clinic which has its own insurance plan. Clearly they have been able to balance the competing interests of insurance companies and hospitals. It would be interesting to hear from them how they do that and are able to offer 'money-back guarantees' on things like heart surgery.
However, I imagine it's a heck of a lot easier to build that structure from the ground up, than for an insurance co. to buy a hospital and then try to merge the 2 cultures. Can't you imagine some of the conversations in the C suite?? Not least is, who sits in the chair behind the desk and who sits in front of it??!! ((:

nonlocal MD

Barry Carol said...

nonlocal –

Kaiser, of course, is the largest integrated delivery system that is also an insurer with about 8 million members on the insurance side and many hospitals. Geisinger, for its part, insures about 30% of the patients it treats if memory serves.

Insurers owning hospitals can work but it’s expensive and hard to manage and I don’t think that’s where most of them want to spend their capital. We have seen a number of recent investments by insurers in primary care practices and urgent care clinics. A few years back, United bought Sierra Health Systems, a very large multi-specialty clinic in Las Vegas, NV. I seriously doubt that United will buy any hospitals over the next five years. I don’t think Wellpoint will either. Humana owned some in the early 1990’s but they later divested them after results were disappointing.

From a pure health insurance standpoint, I think tiered networks have the most potential to both engage consumers to seek out the most cost-effective providers with lots of help from their referring doctors and to create countervailing power against powerful hospitals including those with famous brand names. I think most people in most markets will shy away from pure HMO’s unless they’re the only option offered by the employer or it’s all the person can afford. Tiered networks provide lots of provider choice but with differentiated coinsurance exposure depending on the combination of the provider’s price and quality. Finally, out-of-network payments are moving rapidly to a straight percentage of Medicare which I think is a good thing because it improves price transparency, it’s easy for consumers to understand and, again, it pushes back against powerful hospitals because they can’t collect high prices from insurers with whom they don’t have contracts.

clsmt said...

The long term goal, said Highmark CEO and President Kenneth Melani, is the creation of a new model of health care, one that is outcomes based, with an integrated delivery and financing system.

This is not new. It is Kaiser.

However, Kaiser is split into three parts. The insurance company, the physician group (which also owns some services) and the hospital network. These insurance Co. based businesses seem more integrated than Kaiser. I can imagine that being a bad thing....

Howard said...

The medical profession has been transformed from a caring profession to one of a commercial profession. The caregivers, be they physicians, nurses, allied health professionals etc. are now fungible commodities and the physician patient interaction has become a commercial transaction. Patients are now money winning or money losing biological structures.