A Tough Negotiator Proves Employers Can Bargain Down Health Care Prices | WUTC

A showdown with Montana’s hospitals

Bartlett arrived in Helena, the state capital, in fall 2014 as an outsider navigating a minefield of established relationships. From the start, she knew she would have to tackle the staggering bills from the state’s hospitals, which made up the largest chunk of the plan’s expenses. It wouldn’t be popular because they also made up a significant chunk of hospitals’ profits

Montana, like many large employers, self-funds its plan. That means it pays the bills and hires an insurance company or other firm to process the claims. More than half of American workers are covered by self-funded plans. As the boss in this arrangement, Bartlett assumed she would have access to detailed information about how much the plan, which was managed by Cigna, paid for procedures at each hospital. But when she asked Cigna for its pricing terms with the hospitals, Cigna refused to provide them.

Its contracts with hospitals were secret, Cigna representatives told her. That didn’t sit well with Bartlett, she recalls. “The payer cannot see the contract,” she says, “but we agree to pay whatever the contract says we will pay.”

A cumbersome querying process set up by Cigna allowed her to get individual claims and other limited information. But the company would only give her aggregate data, with things lumped together, to show what she paid each hospital. It was like telling a family trying to reduce its grocery spending that it could only see what it spent in a year, not a breakdown of what bread and fruit and other items cost at each market.

When Bartlett continued to demand information, Cigna balked; it needed to balance what she wanted with keeping the hospitals happy. “I don’t see the need for a balance,” she recalls telling them. “I am representing the payer.”

Cigna declined to answer questions about its relationship with Montana’s plan, but it said in a statement that it had prioritized the plan’s preferences and needs.

Bartlett ultimately settled on a radical solution: The plan would set its own prices for the hospitals.

In the illusory world of hospital billing, the hospitals typically charge a high price for a procedure, then give insurers in-network discounts. These charges and discounts might be different for each procedure at each hospital, depending on who has more leverage during negotiations.

The discounts, however, are meaningless if the underlying charges aren’t capped. When Bartlett looked at a common knee replacement, with no complications and a one-night hospital stay, she saw that one hospital had charged the plan $25,000, then applied a 7 percent discount. So, the plan paid $23,250.

A different hospital gave a better discount, 10 percent, but on a sticker price of $115,000. So, the plan got billed $103,500 — more than four times the amount it paid the other hospital for the same operation. Bartlett recalled wondering why anyone would think this was OK.

Under Bartlett’s proposed new strategy, the plan would use the prices set by Medicare as a reference point. Medicare, the federal government’s insurance for the disabled and patients over 65, is a good benchmark because it makes its prices public and adjusts them for hospitals based on geography and other factors. Montana’s plan would pay hospitals a set percentage above the Medicare amount, a method known as “reference-based pricing,” making it impossible for the hospitals to arbitrarily raise their prices.

Fed up, Bartlett ended the plan’s relationship with Cigna. Her battle to upend the status quo riled some employees of her own office, who complained that she was demanding too many changes. Some quit. Bartlett didn’t let up.

That Christmas, the Cigna representative sent each employee in Bartlett’s office a small gift, a snow globe. Bartlett didn’t get one.

But her ideas were exciting to Ron Dewsnup, the president of Allegiance Benefit Plan Management, a Montana-based subsidiary of, ironically, Cigna. Allegiance had been studying variation in hospital prices for years and had twice sent reports to Montana hospitals showing how their prices for the same procedures differed significantly. The company had also considered a reference-based pricing model, but it “didn’t have any employers that were serious about taking a stand,” Dewsnup says.

Allegiance got the state contract and began by comparing what the plan paid the 11 biggest hospitals in the state with the Medicare rates. The cheaper ones averaged about twice the Medicare rates, the most expensive one about five times the Medicare rates.

No one wanted to stiff the hospitals, but this was ridiculous, Bartlett recalls thinking. She determined the new rate for all hospitals would be a little more than twice the Medicare rate — still a lucrative deal, but a good starting point to get prices under control. The contracts would also prohibit a practice called “balance billing,” under which hospitals bill patients for whatever charges a health plan refuses to pay.

It would mean a boost for some lower-cost hospitals. Now, she had to persuade the more expensive hospitals to take less.

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A Tough Negotiator Proves Employers Can Bargain Down Health Care Prices | WUTC.