Hart Pushes Divestiture Bill

August 26, 2002
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GRAND RAPIDS — The Spectrum Health-Blue Cross Blue Shield of Michigan dispute has one area legislator planning to push legislation in Lansing that would require hospitals in Michigan to sell off their managed-care companies.

At minimum, Rep. Doug Hart wants to prompt a “discussion” on the propriety of the ownership link between hospitals and their managed-care subsidiaries.

While careful not to suggest that Spectrum Health’s majority ownership of Priority Health, a Grand Rapids-based health plan with some 352,000 members, has any connection to the Blues dispute, Hart sees the situation as an opportunity to pursue an issue that he’s been thinking about for more than a year.

By forcing divestiture, Harts wants to ensure that a hospital or health system’s ownership of a managed-care company “does not undermine honest negotiations” with other insurers and payers.

“This is a discussion that has not happened, yet it is absolutely essential we start examining those types of arrangements,” Hart said. “This is certainly an issue the state Legislature has to explore because to believe that hospitals’ ownership in managed-care organizations do not have any practical impact in the way managed-care organizations do business is not practical, and we have to figure out what the practical implications are.

“This is the right time to do it, given the current situation between the Blues and Spectrum,” he said.

Hart, a second-term Republican from Rockford, plans to introduce the measure in the House when lawmakers reconvene next month. He expects to have several co-sponsors of the bill.

Response to his intent is mixed, with some saying a public debate is needed on the pros and cons of the connection between hospitals and their managed-care companies. Others defend the links as a natural reality of today’s difficult health-care environment and say they help to generate continuity and efficiencies in how care is delivered and build understanding between HMOs and hospitals about the nuances of how each operates.

“I would seriously question why,” said Eugene Farnum, executive director of the Michigan Association of Health Plans. “One of the things we believe in is coordinated care to get the benefits for the patients.”

The association represents 26 managed-care health plans in Michigan, about half of which have ownership ties to health systems or hospitals.

Farnum says taking Hart’s logic further would mean hospitals shouldn’t own services such as long-term care facilities or wellness centers that enable them to fulfill their overall mission of providing for the health and care of the communities they serve.

“To us, health systems own a whole bunch of things. Does he think they should divest other stuff?” Farnum said.

Yet some wonder whether the ties between hospitals and managed-care affiliates are completely pure.

Paul Brand, president of Real Health, an employer-owned health plan based in Grand Rapids with 33,000 subscribers, considers Spectrum Health’s majority ownership of Priority Health the one unresolved issue from the 1997 merger of the former Butterworth and Blodgett hospitals that created the health system.

With Spectrum the dominant health care provider in the market and Priority Health growing and holding a major share of the local market, “we need a communitywide discussion about this,” Brand said.

“There is a tension and an inherent conflict when a provider owns a health plan and that health plan becomes dominant in a market,” Brand said. “Whose interests is the health plan that’s operated by a provider operating in? There’s the tension.”

Some in the health care community quietly raise questions periodically about the ties between Spectrum Health and Priority Health. Those concerns have become more open in light of the Spectrum-Blues dispute, as well as decisions in the past year by two managed-care plans, Care Choices and PHP in Muskegon, to leave the West Michigan market because they couldn’t effectively compete.

The Spectrum-Blues dispute centers around the health system’s demand for sizable increases in reimbursement it receives from the insurer. Spectrum wants higher reimbursement rates to help offset an annual $30 million loss incurred in providing care for Medicaid recipients and uninsured persons who don’t pay their bills.

The Blues claims it cannot afford to pay Spectrum any additional money because of the implications on health premiums that already are rising at double-digit rates annually.

The two sides continue to negotiate toward a resolution, with Spectrum planning to drop participation as of Sept. 1 with BCBSM’s Community Blue/Blue Preferred preferred-provider organization, the insurer’s No. 1 health plan, and the Blue Choice point-of-service health plan unless new agreements are reached that increase Spectrum’s reimbursement payments. Spectrum will end its participation in the Blues’ traditional health plan as of Nov. 1 if a new agreement is not reached.

At Spectrum’s Hackley Hospital in Muskegon, participation in the traditional plan won’t end until March 31, 2003, with the PPO and POS products coming to an end Sept. 1 this year and the Community Blue HMO on Oct. 1.

Executives at both Spectrum Health and Priority Health have steadfastly asserted that neither organization receives preferential treatment from the other. They point to the “even playing field” provision in the federal consent decree that provides for equal treatment of all HMOs by Spectrum.

Spectrum’s view is that it wants a healthy, competitive market among varying health plans, especially BCBSM, which is the “insurer of last resort” in Michigan and must accept all parties applying for health coverage.

“We want Blue Cross to be successful in West Michigan. There’s a niche they can fill,” Spectrum Chief Financial Officer Mike Freed said. “We want them to be here and we want them to be strong. We have no reason to treat them otherwise.”

Freed declined to comment specifically on Hart’s planned legislation, other than to say, “We are very proud of Priority Health as part of the Spectrum Health family.”

Even BCBSM, the state’s largest health insurer with 4.8 million subscribers statewide, doesn’t necessarily have a problem with hospitals owning competing health plans, including Spectrum Health’s stake in Priority Health.

“Right now, we’re not worried,” Blues spokeswoman Helen Stojic said. “To this point, no hospital has engaged in such an egregious practice with HMOs that would cause us to take some action on that legislation as far as supporting it.”

On the surface, the ownership ties between health systems and care plans can generate favorable economic results for employers and consumers because of the efficiencies generated by the relationship, said Ed Murphy, a principal in the health care unit of Mercer Human Resources’ Detroit office.

“The footprint of the platform of bringing a provider and a payer together offers some lower costs for the end player. The critical element is the devil’s in the details,” Murphy said. “There’s going to be a huge debate in that regard.”

Ron Palmer, president of Grand Valley Health Plan, a Grand Rapids HMO with about 20,000 members, believes reviewing those details and the overall issue of hospitals’ ownership of health plans is a good one to raise because “there certainly is, without question, a potential conflict.” Yet Palmer wonders whether the legislative arena is the proper venue for the debate, especially in a lame-duck session.

“The Legislature has an awful lot of things on its plate right now and I don’t know if this is going to rise to the top,” Palmer said.

Even Hart isn’t sure how far he can press the issue.

“If this is going to see any attention from the Legislature, this is the time to inaugurate the argument,” he said. “No question, this is going to be a tough fight. I walk into it with the understanding this will be controversial.”           

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