The past decade has seen unprecedented consolidation of health insurance companies. According to the Wall Street Journal , a series of 500 insurance mergers over the past twelve years has led to widespread dominance by one or two health plans in insurance markets throughout the country. Two insurers now control 70% of the market in 24 states, up from 18 last year. According to the Department of Justice guidelines, 94% of the country’s insurance markets are defined as “highly concentrated.” All healthcare is local. Increasing market power enabled insurers to lower reimbursements to hospitals and physicians, thus increasing their own profitability. To illustrate, amidst a deep economic recession the nation’s five largest health insurance companies increased their profits by 56% in 2009. The monopolistic characteristics of the insurance industry have historical roots. After WWII, Congress gave the insurance industry an exemption from the anti-trust laws. Insurance companies were viewed as agents of employers and could not be held accountable for actions that would be illegal in other industries. This included retaliatory action towards non contracted providers, excluding providers who did not agree to their terms, ignoring assignment letters directing payment to providers, and refusing to share information on benefits in spite of the right by an employee to receive treatment out of network. As payers consolidated, independent hospitals, physicians and ancillary providers were not able to achieve reimbursement that allowed them to stay independent. This drove a tremendous wave of hospital consolidation. Nationally there were over 900 hospital mergers in the late nineties and this trend continued throughout the past decade. By 2003, 90 percent of Americans in metropolitan areas faced a “highly concentrated” hospital market, according to U.S. antitrust standards. Regional hospital chains began to trade facilities in order to “beef up” their market power. In other words, they gained better rates from the payers if they controlled more of the healthcare dollar. Physicians turned to hospital employment to address their reimbursement problems. From 2003 to 2008, the percent of physicians employed by a hospital increased from 25% to 38% nationally, according to MGMA. In our experience, we saw hospitals achieve 20% to 30% greater reimbursement for the professional fees of their employed physicians than doctors could achieve as independents. Cardiologists recently absorbed a 41% decrease in professional fees and office based nuclear medicine reimbursement. This resulted in a national rush to hospital employment by these specialists. Ancillary service providers had the fewest options. As hospitals consolidated their reimbursements increased substantially, while the independent ancillary providers’ reimbursements continued to erode. These providers include off campus radiology, ASCs, Physical Therapy and other forms of outpatient treatment. Strategies for Survival Out of network strategies From 2001 to 2006, we operated our centers as substantially out of network. This was the best way to attack the consolidation going on around us. Our strategy was to provide patients the benefit of their in network copays and deductibles as an out of network provider. This sounds simple enough but it was not easy. In most centers, we notified every payer annually that we were doing this. In some venues, we stamped it on every claim so that the insurer could not come back and claim a refund due to a “secret” discount to the patient. We also needed to counsel the patient to confirm how this strategy would work and how we would close their claim. They would need to know that the EOB would not be accurate, that we were out of network because their insurer would not agree to a contract that would allow the facility to continue operating. If the patient misunderstood and complained to the physician’s office, it would cause problems with our surgeon and his scheduler. They might reduce their utilization of the center. Under this system, the financial rewards were excellent. We treated every patient like four patients because that was the ratio of the difference in reimbursement from in network to out of network. In one center, two major payers covered 50% of patients. The two insurers offered between $650 and $850 per case. Medicare covered another 20% (paying $650 per case). Our costs were $1,100 per case and we performed 3,800 cases. The losses would approach $1,000,000. If we contracted with both payers, we would need to achieve an unreasonable reimbursement on the 30% non contracted patients to make up on the losses from 70% of our patients! Consequently, we operated for 4 years with a contract with the payer representing 30% of the patients and out of network with the payer representing 20% of the patients. This strategy is still viable in some areas of the country. However, it is fraught with risk and work and must be executed meticulously. It has to be reviewed by the physician or center’s attorney and approved as compliant with state and federal laws. Affiliate with a local Health System In the center described above, executing the out of network strategy, we worked the strategy for as long as we could. At the end, the one major payer we were still out of network with was paying a maximum reimbursement, no matter what we did to the patient or how we precerted the case, of $250. They instituted this policy without notifying the center, the patient or the employer. After going to the state insurance commission and receiving no assistance, we knew we must sue or change our strategy. The problem with suing was the cost, the time and the uncertain outcome while our revenue would be shrinking. Consequently, we decided to pursue a partnership with the strongest health system in the market. What we did not know was the market was under-bedded and the health system enjoyed unusual pricing power. We sold 49% of our ASC to the system. This occurred after nearly 18 months of negotiating. We achieved control by the physicians over the administrator, the accountant, the medical and clinical staff, the anesthesia provider, the new partners allowed to buy in, the manager, the accrediting body, and the policies and procedures. The health system controlled the budget, capital investments over $200,000, and an appeals process for any dispute with the physicians using their community board. This outcome addressed all of the physician’s issues about losing control. Essentially, they continue to operate as they did when they were an independent center. What happened on the contracting front? Over the course of a year, the health system achieved contracts for the center that reimbursed 100% percent of charges. Our revenue per case increased to nearly $2,700. This still represented a bargain to the payers as they pay the hospital nearly billed charges. Our income is less than half of that. This model worked so well that we have subsequently partnered with eight health systems across the country. In most cases, it has worked well. However, in markets where there are too many hospitals, the hospitals enjoy no more pricing power than our ASCs alone. However, the hospitals do enable us to become contracted when we have been frozen out of contracting as an independent in an over built market. Negotiate the best deal possible Today, with the tactics of the insurance industry becoming more aggressive and, some would say, underhanded in dealing with out of network providers, we are seeking to contract with every payer that represents more than 10% of the market or has no out of network benefit. This is ultimately best for the patient and easiest on the facility for collecting what is due. We have been successful in those instances where we have physicians that represent desired specialties to the payers – orthopedic and spine surgery are two attractive specialties. However, in very concentrated markets, even this does not enable us to achieve profitable contracts in many cases. Conclusion Recent actions by the insurance industry deemed egregious by our legislators caused an erosion of their historic protections. In February, Anthem announced a 39% increase in individual policy premiums for California. This occurred after Anthem Blue Cross’s parent company, Wellpoint, earned a record $2.7 billion in profits for the last quarter of 2009. This action reignited the healthcare reform effort. The House of Representatives voted immediately to remove the industry’s anti-trust protection. In the final healthcare reform bill, the government reserves the right to roll back any premium increases they deem to be excessive. This was not in the Senate bill but was added to the “fix” quickly passed by both Houses. Just this week, Anthem admitted making “mathematical errors” after the California actuaries pointed out double counting of expenses. Why is it, when they make a mistake, it is always in their favor? Due to thoughtless and, some would argue, stupid decisions and timing, the insurance industry brought down on its head the full weight of the federal government, ensnaring the entire provider industry in the process. As a turnaround company, we often find opportunities in highly concentrated payer markets. We have found several strategies to bring profit to these markets. The most effective long term strategy seems to be partnering with health systems, negotiating operating controls, and allowing them to contract for us. We do not achieve parity with their hospital out patient reimbursements, but we achieve a 20% or more increase in our contracted rates. The side benefit is we make peace (and friendships) with the hospitals. This takes stress off the facility medical and office staff too!