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Consolidation stresses health care market

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A bitter dispute between the largest hospital chain in the United States and one of the nation's largest health insurers highlights strain in the relationship between providers and health care insurers created by consolidation in the health care market.

While independent analysts see both insurers and hospital systems as having strong negotiating power due to recent consolidation, employers and providers express concern that further consolidation in the managed care sector could limit their options in contract negotiations. Insurers, though, say consolidation is not the cause of pricing disputes and that they are merely trying to hold the line on rising health care premiums.

The battle between UnitedHealthcare, a unit of Minnetonka, Minn.-based UnitedHealth Group Inc., and Nashville, Tenn.-based HCA Inc., the holding company for more than 270 hospitals and other health care facilities, began with the Aug. 31 expiration of contracts for UnitedHealth members to use HCA facilities in Denver and parts of Florida. The failure to reach a new contract escalated into a public feud that included UnitedHealthcare filing suit alleging anti-competitive behavior on the part of HCA (see box).

"It's not the first, but it's the biggest (dispute) and it's going to become more predominant," said Dr. Edward Langston, chair-elect of the board of trustees of the American Medical Assn. in Chicago.

In its public statements, UnitedHealthcare said HCA's reimbursement rates were already among the highest in its network and that HCA was demanding rate increases that were unacceptable. For example, UnitedHealthcare said HCA demanded a commercial rate increase of more than 36% in Tampa, Fla., during the next four years. "The days of just being able to pass on health care rate increases are over," a UnitedHealth spokesman said.

The acrimonious dispute, which was settled on Nov. 3 with a contract, did not initiate a wholesale move of employers away from UnitedHealth plans and only a few employers allowed their employees to switch health plans, said Chris Watts, a senior consultant with Mercer Health & Benefits in Denver.

In Florida, Miami-Dade County Public Schools did not consider switching insurers even though its employees are enrolled in three UnitedHealth plans, said Scott Clark, risk and benefits officer for the Miami-based organization. Although several HCA hospitals are in the vicinity, most school employees receive services at a larger hospital system in the area, he noted. "For us to move 40,000 employees to another platform would have been impossible," Mr. Clark said.

Employers did have to step up their communication efforts to inform employees of how the dropping of HCA facilities from UnitedHealth's provider network would impact them. "It had a big impact on employers because they were dealing with their employees and there were a lot of dissatisfied employees who were planning to use (HCA's) facilities," Mr. Watts said.

UnitedHealth took some steps to alleviate the burden of the dispute on its members and employees, including providing a 7.5% rate credit to fully insured employers in Colorado.

A key factor in this dispute and other provider-insurer contract negotiations relates to market share. In Colorado, HCA is the largest hospital system while UnitedHealthcare is one of the top insurers, particularly since the merger with PacifiCare Health Systems Inc., which has a large presence in Colorado, Mr. Watts said. "Neither one could afford to simply walk away."

What happened in Colorado is a classic example of an insurer's strong market position, created in many instances by consolidation, leading to health care pricing issues, Dr. Langston said. "Now we're seeing the fallout of their market dominance," he said.

Health insurance market consolidation is a concern shared by employers. There are only about five or six insurers now large enough to handle the Miami-Dade school system's fully insured $250 million a year contract, Mr. Clark said. "I am concerned that further consolidation could limit the competition."

During a U.S. Senate committee hearing on competition in group health care in September, Stephanie Kanwit, special counsel for the Washington-based America's Health Insurance Plans, countered the AMA's claim that the recent health insurer consolidation has led to higher premiums. She noted that there are multiple competing health plans in every U.S. metropolitan area, including 20 health maintenance organizations in Miami and 16 in Los Angeles.

While there may be multiple insurers in a given market, though, if one insurer has a dominant position, it limits the choices for consumers and employers, Dr. Langston said. An April study by the AMA found that a single insurer had a 30% or greater market share in 95% of surveyed markets.

The negotiating power of both insurers and hospital networks, though, is very strong as consolidation among hospitals, including HCA, has allowed them to achieve more leverage and charge higher rates to payers, analysts say. "I would say at this stage, they're pretty much at equilibrium," said Joseph Marinucci, credit analyst with New York-based Standard & Poor's Corp.

The consolidation in the health insurance industry, though, has created barriers in the relationship between insurers and providers, Dr. Langston said. "It's acrimonious," he said. "It's take it or leave it."

While noting that the negotiations with HCA were tough, the UnitedHealth spokesman said nothing needs to be done to repair the relationship. "I would characterize our relationship as good," the spokesman said. "There are no hard feelings."

Insurers want to maintain a strong network of providers and outpatient facilities so they "don't want providers to go out of business," said Bradley Ellis, director at Fitch Ratings in Chicago.

In some respects, hospitals and insurers are beginning to see a degree of collaboration to achieve outcomes that work for both parties "because I think they both realize the issue of medical inflation is a major one and they can be part of a solution and not framed as a guilty party," Mr. Marinucci said.