It's about to get even nastier in the health care industry

This summer was a pretty nasty time for the health care industry. The only thing that was missing from the angry Town Halls was pitchforks and torches. Their absence was probably only due to the fact that people don't own pitchforks anymore or know how to make a good medieval torch.

The next series of developments has the potential to make the Town Halls look peaceful.

Hospitals and insurance companies have had a truce for about a decade. Hospitals consolidated and gained enough market power to get paid what they wanted from insurance companies. Insurance companies had no more leverage and for the most part paid hospitals what they wanted with modest discounts. Ugly battles like the 2001-2003 struggle between Sutter Health System and Blue Cross of California where both took to the air waves to denounce the other as greedy were rare.

In the Pacific Northwest, the health care wars are starting again. Health Net, a large west coast carrier with about a 10% market share in the region, struck first in Central Oregon. Central Oregon health services are controlled by the Cascade Healthcare Community (CHC) hospital system. Most of all health care services in that part of the state from surgeries to bed pans flow through CHC's hospitals. Central Oregon also has some of the highest health care costs in the state and CHC spends more time worrying about flossing than their reimbursement negotiations with insurance companies.

Health Net added an additional 10% to the price of their health insurance plans in Central Oregon and attributed the increase directly to CHC. Just like Sutter and Blue Cross, they took their negotiations public and accused the CHC hospital system of making their health insurance plans 10% more expensive than the rest of the state.

The second blow was struck this week by Lifewise, a smaller health insurance plan with 75,000 members and a relationship with Premera, a Washington Blue Cross plan. Lifewise accused the Portland-based 5 hospital Legacy Health System of making just too much money. Specifically, they issued a press release that the hospital system was making a 30% profit margin on services provided to patients with Lifewise health insurance. In this era of bonus and greed scrutiny, the publication of a 30% margin is not accompanied with a Company of the Year article but speculation of a Congressional investigation.

To be fair, hospitals generally make these types of margins on services provided to patients with private insurance since they lose more than 30% on patients with Medicaid and get paid little for services provided to uninsured patients. Hospitals probably break even at best with Medicare patients. Therefore, hospitals need a healthy margin on patients with private insurance to make up for losses on patients with government insurance or no insurance.

Hospital margin by line of insurance will likely become public knowledge because this is probably only the beginning of some renewed very public battles between hospitals and insurance plans. This can also be called the first unintended consequence of health care reform. There will be less money flowing into the health care system in the future so stakeholders are already positioning themselves to lose as little as possible.

The previously opaque negotiations between health care intermediaries will become increasing acrimonious and public. Which is unfortunate since a more systematic approach with closer cooperation between health care stakeholders is what is really needed.