Health Plan-Provider Contract Showdowns Trigger Network Instability

Consumers May Face Higher Costs, Threats to Caregiver Choice and Anxiety as Plans Scramble to Maintain Stable Networks of Hospitals and Physicians

News Releases
June 28, 2001

Alwyn Cassil: (202) 264-3484

ASHINGTON, D.C. - Patients increasingly may face the tough choice of paying more to stick with their doctors or finding new caregivers if contentious contract showdowns escalate among health plans, doctors and hospitals, according to a study released today by the Center for Studying Health System Change (HSC).

"Across the country, health plans are scrambling to maintain stable networks of hospitals and doctors, as plans and providers struggle to resolve hotly contested contract disputes," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded solely by The Robert Wood Johnson Foundation.

Two new HSC Issue Briefs - Provider Network Instability: Implications for Choice, Costs and Continuity of Care and Health Plan-Provider Showdowns on the Rise - describe the growing trend of contentious contract negotiations between health plans and providers and provider organization insolvencies that can fuel network instability.

"Some of the issues of greatest concern to consumers - caregiver choice, costs and continuity of care - depend on health plans’ ability to maintain stable provider networks," Ginsburg said. "When plans and providers refuse to blink over contract terms, patients may suddenly have to change physicians and hospitals or pay more for out-of-network care."

The findings suggest a significant shift in the balance of power from health plans to providers - especially prominent hospitals and physician organizations that have achieved the market clout to demand significant payment increases. HSC’s recently completed site visits to 12 nationally representative communities found evidence of network instability in more than half the markets studied: Boston, Greenville, S.C., Miami, Northern New Jersey, Orange County, Calif., Phoenix and Seattle. Other study markets are Cleveland, Indianapolis, Lansing, Mich., Little Rock, Ark., and Syracuse, N.Y.

In Seattle, for example about 150 specialists refused to renew contracts in January 2000 with Regence Blue Shield to protest a new payment system. The standoff lasted six months before Regence agreed to modify the new payment system, but, in the interim, patients either had to find new physicians or pay higher out-of-pocket costs to see their current physicians.

Health plans have long threatened to exclude providers from plan networks unless providers acquiesced to steep payment discounts. However, Orange County’s St. Joseph Health System essentially turned the tables on plans last year, threatening to exclude plans unless they agreed to significant payment increases. Major plans scrambled to meet the new requirements, and, ultimately, all reached agreement except PacifiCare. When the full impact of the PacifiCare contract termination is known later this year, as many as 50,000 people may have to change plans or providers.

A number of market forces - including the managed care backlash, consumer demand for broad choice of physicians and hospitals, rising medical costs, increased provider consolidation and newly emerging inpatient capacity constraints - are converging to give many providers the upper hand in contract negotiations, according to Cara S. Lesser, HSC director of site visits.

"Emboldened by the changing market dynamics, providers are testing the waters to see just how far they can push their growing bargaining clout," Lesser said. "We expect these contentious contract negotiations to become more common across the country, and that means consumers are likely to face more network instability and with it the threat of restricted choice and higher costs."

Network instability in Medicare and Medicaid plans has been particularly acute. When providers refuse to contract with Medicare and Medicaid plans, which receive fixed government payments, plans often are unable or unwilling to pay providers more to remain in plan networks. Because Medicare and Medicaid plans usually offer no out-of-network coverage, beneficiaries have to pay the entire bill if they want to continue seeing their physicians.

An example of the network instability problem in Medicare plans is that plans serving 3.6 million beneficiaries - or 65 percent of the total 5.6 million Medicare+Choice enrollees - used a December 2000 payment increase solely to shore up provider networks rather than increase benefits, reduce beneficiary premiums or set up reserve funds.

Insolvencies of large provider organizations, such as physician practice management companies, also have caused considerable network instability. When physician organizations fail, plans must quickly develop new contracts with individual physicians to ensure enrollees can continue seeing their physicians. For example, in Orange County, KPC Medical Management, a large practice management company, abruptly closed 38 clinics and filed for bankruptcy in late 2000, generating fears about continuity of care and jeopardizing access to patient records for up to 300,000 people.

Even when consumers aren’t directly affected by a contract dispute or a provider insolvency, the extensive publicity of these highly contentious disputes fuels consumer anxiety about the security of their own caregiver relationships. In recent contract showdowns, plans and providers have used the news media, advertisements, mass mailings and other direct appeals to patients to tell their side of the story.

In Boston, consumers watched as contract disputes erupted between Partners HealthCare System - which includes the renowned Massachusetts General and Brigham and Women’s hospitals and more than 4,000 affiliated physicians - and Tufts Health Plan and Harvard Pilgrim Health Care. While the hospital system and plans eventually settled their differences, an estimated 100,000 people enrolled in the Tufts plan alone could have lost access to their usual physicians.

Once viewed as natural allies of health plans trying to reduce costs, employers increasingly are intervening in contract disputes on the side of providers. Large employers can pressure plans to maintain broad provider networks by threatening to drop plans that lose key provider groups. In Boston, for example, Tufts faced intense pressure from employers who threatened to take their business elsewhere if Tufts didn’t retain Partners HealthCare.

In some communities, employers have established performance guarantees requiring plans to minimize physician turnover, maintain adequate numbers of providers and provide notice of contract terminations or face financial penalties. Additionally some state policy makers and health plans are stepping up scrutiny of providers’ financial health.

Several states are already experimenting with policy options ranging from mediation and informal problem solving to regulations defining the rules of engagement and disengagement between plans and providers.

"As employers, plans and consumers grapple with growing network instability, policy makers increasingly will be pressed to protect consumers from significant care disruptions," Ginsburg said. "Policy makers will want to look out for consumers’ interests while maintaining a level playing field for both providers and health plans."

Stakeholder Comments on the HSC Study

Allen Feezor, Assistant Executive Officer, Health Benefits, California Public Employees Retirement System (CalPERS)
"Highly visible contract disputes equal needless patient anxiety. We are tracking the amount of network disruption and will be giving this disruption factor greater weight in future health plan evaluations. We’re also looking at disruptions by provider groups, hospitals and health systems and plan to provide our enrollees with this information. And we’re seeking contract language requiring providers and plans to jointly sign any notification or communication to our enrollees about a contract termination. Our goals are to discourage unnecessary patient angst, preclude enrollees from being put in the middle or receiving conflicting information and provide enrollees with information to make more informed choices about plans and providers."

Robert Berenson, M.D., senior adviser, Academy for Health Services Research and Health Policy, and former director of HCFA’s Center for Health Plans and Providers
"Network instability in Medicare has become rampant and is one of the biggest problems facing the health system today. When network disruptions occur in Medicare managed care plans, beneficiaries face the same tough choices as privately insured people. The extent of network disruptions poses a dilemma for regulators who are concerned that enrollees receive the care they signed up for. It raises the issue of whether the beneficiary lock-in provision scheduled to go into effect in the Medicare + Choice program next year should be reconsidered."

Karen Ignagni, president, American Association of Health Plans
"Health plans increasingly find themselves caught between the demands of providers for steep increases and the expectations of employers and families who want affordable coverage. This has implications for provider choice and for the continued availability of managed care plans to serve financially vulnerable Medicare beneficiaries around the country."

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