If you went to St. Luke’s Regional Medical Center in Boise for a knee replacement, you would get a bill showing $76,000 in charges. But if you had the Idaho Statesman’s insurance plan through Aetna, the hospital would have knocked that charge down to $49,000 — and Aetna would calculate your out-of-pocket cost based on that price.
If you instead went to St. Luke’s Magic Valley Regional Medical Center in Twin Falls, you would get a bill with $61,000 in charges. But don’t think you would be saving $15,000 just by driving a couple of hours. Aetna’s negotiated rate with that hospital is $53,000 — $4,000 more than in Boise.
Based on the Aetna cost estimator — which cautions users that its numbers are just estimates — the negotiated discounts for a knee replacement at hospitals in South and Southwest Idaho range from 12 percent to 35 percent. For a routine childbirth, with no Caesarian section or complications, the discounts range from 40 percent to 59 percent.
Why such a difference? There are a handful of reasons, but once-secret documents released after a successful antitrust lawsuit against St. Luke’s Health System show that power struggles and competition are two big ones.
Hospitals have contracts with health insurance companies. The insurer agrees to pay the hospital a certain amount on your behalf. The hospital wants the most it can get from the insurance company, and the insurer wants to pay as little as possible.
Both sides use negotiating tactics to get what they want. The outcome can determine whether you pay $20 more each month in insurance premiums or $2,000 more for a surgery.
Documents from the federal antitrust lawsuit lifted the curtain on those negotiations. They detail the strategies used by hospitals and insurance companies, including Idaho’s largest and most powerful health care organizations: St. Luke’s and Blue Cross of Idaho.
The Idaho Statesman obtained the documents late last year through a lawsuit, joined by several media organizations, to open what had been a mostly closed-door trial between St. Luke’s and the Federal Trade Commission, the Idaho attorney general and St. Luke’s competitors Saint Alphonsus Health System and Treasure Valley Hospital. The plaintiffs argued that St. Luke’s acquired near-monopoly power over primary care in Nampa when it bought Nampa’s Saltzer Medical Group in 2012.
The FTC and other plaintiffs also said St. Luke’s would have too much bargaining power over Idaho insurance companies if it owned Saltzer, giving St. Luke’s up to 80 percent of the Nampa primary-care market.
“I would argue that (insurance negotiation is) one of the big impetuses for a lot of the mergers and acquisitions that are taking place today,” said Paul Levy, a former Boston hospital CEO who now writes about the health care industry and advises hospitals and medical schools.
“Now, often these hospitals that are doing these mergers and acquisitions argue that they’re doing it for the benefit of better patient care. They say, ‘We will be better able to manage care across the continuum of care — primary, secondary, tertiary, rehabilitation and everything else ... and we’ll have electronic medical records,’ ” Levy said. “And there’s an element of truth in that. But underlying it is a business proposition, which is they want to get big enough to get better rates.”
THE POWER STRUGGLES
About six years ago, St. Luke’s and Blue Cross of Idaho were wrangling over what the insurance company should pay whenever a Blue Cross patient went to a hospital owned by the Boise-based system.
St. Luke’s threatened to pull its Ketchum hospital — the only one in that region of Idaho — out of Blue Cross of Idaho networks “if we do not dramatically increase the rates at this facility,” according to Blue Cross internal documents.
When a patient goes to an “out of network” hospital or doctor, the bill from that visit can be twice as expensive. Losing a large system like St. Luke’s from its network would have damaged Blue Cross of Idaho’s ability to compete with other insurance companies.
“Size matters,” Levy said. “And the objective of many hospitals and hospital systems is to get sufficiently big in a given geographic area so that you have leverage over the insurance company — because if you’re big enough, the insurance company needs your facilities in their network, because if they don’t have your facilities in their network, they can’t sell their product to the employers in town or the individuals in town.”
That was a central theme of the trial: If St. Luke’s employed too many doctors, its opponents argued, it could hamstring its competitors and erode the power of insurance companies to negotiate lower rates.
The lawsuit was a boiling-over of tensions that had been simmering for years as St. Luke’s bought hospitals and formerly independent clinics across southern Idaho.
St. Luke’s has argued consistently that its goal is to create a system with a single vision and the girth to achieve better health care, lower costs for consumers and a healthier community.
Levy noted that acquisitions are happening across the country, encouraged by a move toward total-cost-of-care payments that reward health care providers for cooperating with each other.
“They actually do not cut costs,” Levy said. “They are carried out in great measure to have leverage over the insurance companies, and then the rates go up. Now, it’s really hard to feel sorry for an insurance company, of course. If you say, ‘I feel sorry for Blue Cross,’ you feel a little nauseous. The truth is, they want to do the same thing on their side. ... The insurance company wants to be big enough to lord it over the hospitals. ... That’s just the nature of commerce.”
The trial records show that St. Luke’s went into negotiations for its 2010 contracts with a proposal for Blue Cross: Pay 12 percent more when Blue Cross members got medical care at St. Luke’s Ketchum hospital.
Blue Cross had started the bidding at 5 percent. The two went back and forth, eventually settling on 8 percent.
How did the two powerhouses of Idaho health care arrive at that number?
“You start in a place that is ideal for you, and figure out where in the middle you’re willing to go, and to some extent in these kinds of relationships, (a) bilateral monopoly, it’s whoever blinks first more than anything else,” said Deborah Chollet, senior fellow at Mathematica Policy Research, a New Jersey company, where she is a researcher in private health insurance.
The easier it is for either an insurer or health system to get fed up and walk away from a negotiation because other options exist in the marketplace, the easier it is to get what it wants. Walking away “turns out to be harder for the health system to do that than it is the payer, typically,” Chollet said.
St. Luke’s internal documents talk about wanting to get the highest payments possible from insurers.
When asked about that, a Blue Cross executive said, “I think that sets up the dynamic well” for the negotiations between the two companies.
St. Luke’s Chief Financial Officer Jeff Taylor took issue with the Statesman highlighting one set of negotiations as an example of how St. Luke’s and Blue Cross have done business.
“To isolate one single hospital may take things a little out of context,” he said.
NEGOTIATIONS ‘MAY GET UGLY’
A year after the Ketchum negotiations, St. Luke’s executives turned their attention to 2011 contracts, both systemwide and for individual hospitals or regions. They wanted single-digit raises for their Boise, Meridian and Magic Valley hospitals — and they wanted to start setting payment rates as a system instead of going hospital by hospital. They expected public blowback from Blue Cross of Idaho.
“Luke’s must be prepared to walk away, may get ugly,” Taylor told other hospital leaders, according to minutes of an internal meeting in September 2010.
Blue Cross of Idaho “will definitely go public, Luke’s (needs) to prepare. Beth should be involved,” he said.
Taylor was referring to Beth Toal, the chief of public relations and media for the health system. The executives talked about public relations playing a role, because, they said, Blue Cross of Idaho “will say Luke’s is unreasonable.”
Around the same time, a separate power struggle ensued.
St. Luke’s was on an acquisition streak. It had purchased two surgical centers in Boise at the end of 2009, designating at least one of them as a hospital facility and billing services to Blue Cross at higher, hospital-based, rates. Blue Cross did not take kindly to this development.
There were more than 1,000 surgery center claims billed as though they had happened in a hospital, resulting in overpayment of either $2.9 million or $3.2 million, according to internal documents.
Blue Cross said the hospital system was operating in bad faith and withheld $2.6 million of payments.
The two businesses met in June 2010 to talk out their dispute. Blue Cross “initiated the discussion with an explanation that St. Luke’s purchase of the two surgery centers and subsequent billing of those services as (a) department of the hospital is a major cost increase for our policyholders,” according to minutes from that meeting.
It took almost a year to reach an agreement, but an April 2011 settlement document suggests Blue Cross agreed to pay $1.6 million, or half of the disputed charges.
“We value our relationship with Blue Cross and arrived at the settlement where it was basically shared equally,” Taylor said in an interview. “They want to make sure they’re paying appropriate and valid (amounts), so they would use their payment structure as leverage to get what they want.”
THE NEW REGIME?
Taylor said the adversarial nature of negotiations — one side trying to get the most money possible, the other side trying to give up the least money possible — is a function of the old model of health care.
Around the time of these negotiations, St. Luke’s was moving toward a model its executives say rewards both the insurer and the hospital for bending the cost curve of health care.
According to the documents, Blue Cross of Idaho wanted to pursue that kind of arrangement for years with St. Luke’s. But the two businesses couldn’t agree on terms.
St. Luke’s found a partner in another insurer.
In 2012, St. Luke’s announced it had created a relationship with Select Health, an insurance company based in Utah. St. Luke’s would move its workforce of more than 10,000 to a Select Health insurance plan, built on a network that consisted mostly of St. Luke’s. That would help Select Health secure a foothold in Idaho’s insurance market. Select Health would pay St. Luke’s a certain amount of money to cover everyone with that insurance plan, and if St. Luke’s was efficient with that money, it could keep what hadn’t been spent.
This announcement alarmed Zelda Geyer-Sylvia, the CEO of Blue Cross of Idaho.
She wrote in a letter to Blue Cross board members that “this recent development could potentially result in significantly better reimbursement rates for St. Luke’s, presenting additional challenges for BCI, particularly given the large number of provider acquisitions secured by St. Luke’s over the past two years.”
Blue Cross should be careful — when negotiating its payment rates for St. Luke’s — not to agree “to higher provider rates (that) would essentially subsidize these new products and could adversely impact BCI’s competing products,” she wrote. “We need to be careful not to subsidize their new business venture. ... ”
Geyer-Sylvia declined to be interviewed. Dave Jeppesen, Blue Cross’s senior vice president of sales and marketing, said the company views competition as “a good thing.”
“It makes us better as an organization, and it makes the market better in terms of driving better cost to members and the market in general,” he told the Statesman. “I don’t think any company is thrilled when a competitor comes in.”
Taylor, meanwhile, elaborated on why St. Luke’s decided to develop its new insurance model with Select Health instead of Blue Cross.
“Blue Cross of Idaho had roughly 60 to 65 percent of the market” at the time, Taylor told the Statesman. “Over an extended period of time, (Blue Cross has) enjoyed ... some of the lowest rates in the market, partly because of their size.”
And as a result of its partnership, St. Luke’s and Select Health now “have close to 75,000” customers under the umbrella of that contract, eligible to go to a network of mostly St. Luke’s hospitals and doctors.
Taylor said the relationship has paid off. Select Health in its third year is offering Idaho consumers lower year-over-year rate increases than “has historically been presented in the market,” he said.
Select Health has retained 99 percent of its customers, Taylor said.
Taylor said St. Luke’s goal is to eventually have the same kind of total-cost-of-care contract with all other Idaho insurers.
“We believe the payment model needs to change, and we also are willing to take accountability for a global (health care) budget,” he said. “Select Health, based on my interaction, is very happy with our relationship, and we look at it over a long period of time, and we believe this model will be beneficial for the entire community into the future.”
Levy, the former Boston hospital CEO, is skeptical. So is Chollet, the health insurance researcher, who said St. Luke’s and Select Health are on the business equivalent of a first date.
“Let’s say you bring in that insurance company and make it a partner of yours, and the insurer starts to sell products with a limited network,” Levy said. “Then you’ve locked in your customer base for years to come.”