Standoffs like Blue Cross-Children's Minnesota may become healthcare trend

Analysts see the potential for more contract disputes like the lingering impasse between Blue Cross and Blue Shield of Minnesota and Children's Minnesota due to tight margins at some hospitals and health plans, plus a trend for both sides to seek mergers that can increase leverage at the negotiating table.

Late last week, representatives of Blue Cross and Children's said they expected talks to continue through the weekend ahead of a July 5 deadline, at which point more than 60,000 patients at Children's would lose access to the hospital as an "in-network" option for their care.

Blue Cross says it needs Children's to agree to Medicaid payment rates that are more comparable to other hospital systems. Children's argues that those rates are too low and would force significant service cuts.

The fight has been unusually public. Both sides have laid out their arguments in dueling newspaper ads, and Children's launched a social media campaign to garner support under the slogan #standtallforsmall.

There aren't comprehensive numbers to show whether there actually is an increase in such disputes across the country, but the overall health care environment is changing in ways that promote conflicts, said Richard Bajner, managing director for health care at the consulting firm Navigant.

While health insurers have complained about hospitals gaining market power via consolidation — and driving harder bargains on payment rates as a result — hospitals say negotiations have become more challenging as insurers have bulked up through mergers, said Mark Pascaris, an analyst with Fitch Ratings.

"In 2017, there are lots of disputes like this that have risen from behind the conference room doors," said Allan Baumgarten, an independent health care analyst in St. Louis Park.

The hospital has a very high bond rating that reflects a strong balance sheet and a competitive position, said Pascaris, who follows the hospital for Fitch.

Blue Cross is the largest private health insurer for Minnesota residents. Last year, the insurer posted an operating loss of $322 million on $12 billion in revenue, although investment income helped trim the pretax net loss to $194 million.

Blue Cross is a large source of revenue for Children's, with the insurer last year paying for 32 percent of all patient days at the hospital. But that doesn't mean it has all the leverage since, in general, pediatric hospitals "have a reputation and a must-have status," said Dr. Robert Berenson, a fellow with the Urban Institute.

Without an agreement, Children's on Wednesday would become an out-of-network provider for Blue Cross subscribers, meaning patients could still go to the hospital in an emergency but would pay much higher rates for scheduled care.

For Blue Cross, it's the second major contract dispute in the past 12 months. In December, the insurer and Minneapolis-based Fairview Health Services agreed on contract terms weeks after a contract dispute went public that threatened patients' access to care as of Jan. 1.

"We empathize with families who may be impacted by the negotiations," said David Martinson, a spokesman for University of Minnesota Health Sciences, in a statement. "As a comprehensive pediatric care system here, we are here to help care for [Blue Cross] patients during this time of uncertainty and transition."

Blue Cross officials contend that hospital margins in Minnesota continue to be healthy and say they have successfully concluded contract negotiations with most health care providers. On Wednesday, Blue Cross announced it had extended for three years its contract with Gillette Children's Specialty Healthcare, a niche provider of inpatient pediatric services based in St. Paul.

"I don't see a pattern here," said Garrett Black, the senior vice president of health services at Blue Cross.

But the national environment is pointing to more contract disputes, said Bajner, even as health plans and health care providers are trying to partner in new ways to control costs.

Health care providers are seeing more patients covered by government insurance programs that provide lower reimbursement, Bajner said, plus fewer patients treated via surgical procedures that generate more revenue. Some insurers, meanwhile, have seen red ink in the individual market where self-employed people buy coverage.

Tight margins are a factor, Baumgarten said. But he also pointed to the expected switch to "value-based care," where hospitals and doctors will operate under contracts that include financial incentives for efficient care. Before moving into these contracts, Baumgarten said, hospitals have an incentive to keep the old "fee-for-service" payment rates as high as possible, to set a relatively high baseline for the new payment agreements.

Even so, Baumgarten said he still expects a resolution by the July 5 deadline. As a general rule, most contract disputes are resolved before patients experience disruptions, Berenson said.