Relationship between Hospitals and Health Plans: Strange Bed Fellows are Getting Stranger

The relationships between hospitals and health plans has been fairly simple. It's all about exclusivity and the payment. Health plans would ideally like a discount for an exclusive relationship but may pay more for an exclusive relationship with the right hospital. That relationship can directly bring more business to the health plan because potential members may really want to be able to access care at that hospital. Additionally, a benefit design that provides limited or no out of network benefit can really accelerate membership growth for a health plan.

Hospitals tend to focus on payment first since they have higher fixed costs and don't have vehicles like a benefit design to drive business. Exclusivity or limited exclusivity is also a goal in hopes that their beds will be filled primarily with the members of well paying health plans. However, as I found with recent discussions with hospitals, it's secondary to payment. Their negotiating levers are limited. As a result, hospitals are mainly looking for the attractive partner first and if it turns into a beautiful relationship where they cook and remember each others birthday, that's a bonus.

Some hospitals and health plans work out a favored nation status with each other like the Michigan Blue Cross plan and area hospitals. Under this arrangement, the hospitals gave Blue Cross the guaranteed best price for any health plan. In relationship terms, that's like getting her agreeing to get together in the back seat of a Volkswagen. The Justice Department is calling that anti competitive behavior in its law suit against Blue Cross.

The result could shift the traditional health plan and hospital relationships. Both businesses have been growing so large in certain geographies that it's becoming hard to avoid anti competitive behavior. In 24 states, 2 or fewer insurance companies control 70% of the market. In some local markets, hospital systems like Sutter in Northern California or St Charles in Bend, OR can demand the best rates and don't have to worry about exclusive relationships (or using protection). AHIP, the health plan lobbying group, is continuing its bid to be the least effective lobbying organization by releasing statements over concerns of the anti-trust implications of Accountable Care Organizations (ACO's). Despite the logical and appropriate payment model of ACO's, AHIP is too concerned that it will give providers more market power.

As a result, the times are right for new thinking about the hospital and health plan relationship that doesn't mirror primal urges. With both industries teetering on the edge of an anti-trust law suit, the problem may be solved by others if hospitals and health plans don't come up with a solution. Personally, I think that focusing more on the exclusivity in the relationship could be the answer. ACO's create an opportunity for a long-term partnership and could (but not likely) be structured where there can be only one hospital or one health plan in this three way with primary care providers. Health plans and hospitals with similar market segments, philosophies or levels of quality might pair up and find more synergies pursuing common customers.

This is basically a model similar to Kaiser Permanente and closed systems only have historically had limited appeal. However, history is changing and it may be time to stop basing the relationship on how many dollar bills are required to be thrown on stage.