🔒Amid rising costs, hospital and health insurer contract disputes become more frequent, contentious

It has become all too common: A healthcare system and an insurance company approach the expiration date for their contract and become embroiled in a nasty dispute.

Letters from each blaming the other side are sent to patients covered by the insurance company, warning that their physicians may end up out of network if a new contract is not reached before the expiration deadline.

The letters, which are posted to the insurer and health system’s websites, also inform those affected that state law requires a 60-day grace period after the contract expires.

And then, just as suddenly as the dispute was made public, a new contract is reached and all is well again.

If this sounds familiar, it should. Over the past 10 months, there have been five public health system vs. insurer disputes. Four were resolved — two before the contracts expired, two after but before the end of the grace period.

The fifth — between Hartford HealthCare and UnitedHealthcare — remains ongoing. The deadline for a new contract is midnight, March 31.

The number of disputes in less than a year raises questions about why they seem to have become more frequent. The reasons, experts say, range from changes in medical care and state law to financial and political pressures — on both sides.

Inflation impact

Paul Kidwell, senior vice president for policy for the Connecticut Hospital Association (CHA), says the negotiations are, in fact, getting more challenging.

“I do think we have seen more of the negotiations getting closer to the point at which notifications have to be made … and it’s more visible,” he said. “The ones that we hear about certainly are the ones that get closest to the deadline, where there’s a real threat that the provider would have to go out of network.”

Kidwell said the number of disputes is growing for a basic reason — rising costs.

The CHA published a report in December that concluded Connecticut hospital costs for drugs and supplies grew 10% and 6.8%, respectively, in fiscal 2023, or by $249 million and $92 million.

“What we’ve heard, first and foremost from a hospital perspective, is we’re living in a period of inflation, where our costs have risen dramatically faster than in the prior periods,” he said. “In order to remain viable in our communities, (hospitals) have to make sure that we’re covering those costs, and we don’t have many options for where to go to cover those costs.”

That’s primarily because Medicaid reimbursement rates in the state are so low, he added. In fact, reimbursement rates for most physician services were set by the state in 2007 at 57.5% of the Medicare rate and have been adjusted only for a handful of providers since.

“We negotiate with commercial payers and that’s where we negotiate to make up the difference,” Kidwell said.

Less competition

While rising costs is one issue, there are many more, says Susan Halpin, co-principal for the government relations group at Hartford-based law firm Robinson + Cole and executive director of the Connecticut Association of Health Plans, which represents one regional and four national health insurers.

“I think it’s a broad range of points that negotiations take on,” Halpin said. “In terms of broad categories, quality and reimbursement, I think, are the two headings, but it gets into the case mix. It gets into location differentials, and updated delivery models, like whether services are being performed outpatient as opposed to inpatient.”

There are also sticking points, Halpin said, on coverage of new drugs and therapies, or new treatments or facilities like proton beam centers, which will soon exist as a cancer treatment option in Connecticut.

As far as rising costs are concerned, she notes that insurance companies face demands from lawmakers, employers and consumers to keep premiums, deductibles and co-pays down.

“So, ultimately, it really does come down in most negotiations to an issue of payment rates,” she said.

Halpin, though, also notes that another trend has put upward pressure on costs: hospital consolidation.

“The most dramatic factor is the increase in provider and hospital consolidation, and the fact that market power has really shifted in favor of those organizations by virtue of their size,” she said.

Connecticut’s healthcare landscape is dominated by three major systems — Yale New Haven Health, Hartford HealthCare and Trinity Health Of New England — which collectively own 14 of the state’s 27 acute care hospitals, and accounted for $12.4 billion, or about 70%, of the industry’s $17.6 billion in net patient revenue in 2023.

Conversely, the number of health insurers offering fully insured small group coverage in the state has also shrunk dramatically with three payers — Aetna, Harvard Pilgrim Health Care and ConnectiCare — exiting that market in recent years.

Halpin added that insurers have seen a dramatic increase in the size of hospitals’ requested price increases, “often in double digits, double the rate of inflation. There are probably a number of factors that go into that.”

Halpin said health systems often cite higher labor costs due to workforce shortages and general inflation, but the requested increases are exacerbated by the low Medicaid and Medicare reimbursement rates.

‘All-or-nothing’

Stephen M. Cowherd, who chairs the healthcare practice at law firm Pullman & Comley LLC and represents health systems, said there are other pressures on costs that need to be taken into account, including the regulatory environment.

For example, Gov. Ned Lamont in 2023 signed a law that limits what policymakers said were anticompetitive practices. The law includes restrictions on so-called “all-or-nothing” clauses in provider contracts, which typically require payers to either contract with all providers within a health system or none, which some argue could lead to higher costs.

“Overall, I think that law tended to put the hospitals at more of a disadvantage than they had been in terms of negotiation,” Cowherd said.

Cowherd also noted that all insurance companies are for-profit businesses with shareholders to serve, while most hospitals are not-for-profit entities that serve all patients, even those without the ability to pay.

“When I’m arguing with a large insurance company, I always point to their quarterly profits and say, ‘look at your mammoth millions and millions of dollars in profit compared to my client, which may have a 2% to 4% operating margin.’” he said.

Kidwell said there are several bills proposed in the state General Assembly’s current session that also could affect contract negotiations.

One — House Bill 6871 — was suggested by Lamont and would cap out-of-network costs for hospital inpatient and outpatient services at either 240% of Medicare, or at an amount to be determined by the state Office of Health Strategy, which regulates the industry (OHS).

The CHA and 13 other medical associations have signed a letter to the legislature’s Insurance and Real Estate Committee opposing the bill, saying it “unfairly favors insurance companies in payer/hospital negotiations.”

“Were such a cap in place, in-network rates could be pushed closer to Medicare payments, which do not cover the cost of care,” the letter states, adding the bill could lead to “more than $700 million in reduced payments to hospitals.”

Caught in the middle

Halpin, who represents health insurers, says they also face pressure from state and federal policies.

“We have a number of proposals pending in the legislature that essentially want to hold us to the benchmark standards for price increases,” she said. “On the other hand, we have a number of proposals at the legislature that will increase costs significantly by mandating more services and fewer cost controls. So really, the payers are kind of getting caught in the middle of different policy objectives.”

Despite that, she doesn’t believe we’ve yet reached a point where a contract negotiation between a health system and insurer will end without a deal.

“I do think it’s rare that an agreement isn’t reached before a major system exits a network,” she said.

Cowherd agrees.

“It’s brinksmanship, at the end of the day,” he said. “A hospital has to serve its community, and that’s made up of patients. By the same token, the insurance companies have to serve their beneficiaries, and you can’t have one of your beneficiaries saying” they can’t see their preferred doctor.