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Blue Shield, Sutter Impasse About More Than Money

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(Getty Images)
(Getty Images)

Contract breakdowns between insurance companies and health care providers are nothing new and often blow over after public posturing. But the current failure of Blue Shield and Sutter Health to come to terms on a new contract may be harder to resolve. That's because the main issues appear to be about much more than money.

While the negotiations grind on, more than 250,000 people in individual and family plans are waiting to see what happens. The contract between Blue Shield and Sutter terminated on Dec. 31.

To be sure, money is a factor. Sutter says that Blue Shield is "demanding reductions in what they pay our organization … that would have a devastating impact," said Bill Gleeson, a spokesman for Sutter. He says Sutter has asked for "less than a 1 percent increase."

But Blue Shield claims Sutter is pushing the insurer to accept "new and unprecedented contractual provisions," says Steven Shivinsky, spokesman for Blue Shield.

The most significant new contractual provision is a requirement to arbitrate disputes.


Now, to any average patient, a request to arbitrate disputes probably doesn't sound like a big deal. I know I've signed plenty of documents with various doctors over the years waiving my right to go to court and agreeing to arbitrate areas of disagreement.

But this is different.

Blue Shield's Shivinsky says that generally arbitration between insurers and providers goes something like this: A provider and insurer disagree on how much reimbursement there should be for, say, an operation. They can't agree, they go to arbitration. That happens all the time, he says. "It's appropriate, it's inexpensive, it's fast, and it resolves these issues quickly."

But Sutter's Gleeson says its arbitration requirement applies to all business practices, including any questions of anti-competitive business practices.

And that's where the two sides differ. Dramatically.

Blue Shield insists that any antitrust disputes should be resolved in public, in open court. Gleeson called the issue "a red herring."  As part of the current negotiations, Sutter wants to extend that arbitration requirement to all the self-funded plans that Blue Shield manages. (Many large employers pay health claims out of their own pockets and hire insurance companies -- like Blue Shield -- to administer the benefit.)

Blue Shield says that would be asking its customers to waive their legal rights. "We'd be telling our self-funded customers, you cannot sue Sutter for anti-competitive business practices in open court," Shivinsky said. These self-funded clients would be likely to drop Blue Shield and head for other insurers that haven't signed such a contract.

Sutter is already facing an antitrust lawsuit from the UFCW & Employers Benefit Trust, (UEBT) a self-funded trust which provides health care for 100,000 grocery workers at Safeway, Save Mart and other grocery stores. The suit charges Sutter with anti-competitive practices, including an "all or none" hospital requirement and limits on sharing cost information with patients.

Sutter has already petitioned to have the case moved to arbitration. It lost the motion and is appealing that decision. Gleeson denies that Sutter has such an "all or none" strategy and says it does share cost information with patients. "We absolutely expect to win the lawsuit on its merits," Gleeson said.

In a statement, UEBT said, "We applaud Blue Shield for standing firm against Sutter's attempts to impose new contract terms that would require private arbitration of anti-trust and unfair competition claims."

Concerns About Sutter's Market Power

Sutter has long been criticized not only by insurers but also by employers and economists for accumulating market power and then increasing prices. Sutter has been on a years-long hospital buying spree in Northern California, resulting in higher rates in the region, economists say. Case in point: According to an FTC study, increases in rates at Oakland's Summit Medical Center ranged from 29 percent to 72 percent after it was bought by Sutter.

Glenn Melnick, a health economist at USC, called Sutter the "poster child for developing a model to accumulate and protect their market power." He says this market power has created a "price umbrella" in Northern California, where competitors just have to be a "little bit cheaper than Sutter."

Even adjusted for Northern California's higher cost of living, Melnick said a commercially-paid hospital day in a Northern California hospital averages 36 percent more than a day in a Southern California hospital -- about $1,800 more for each hospital day.

"In Southern California, there's no dominant [hospital] system," he said, "and we don't have as many medium-sized systems," leading to more price competition in Southern California.

Blue Shield Rate Hikes

Blue Shield has been chastised for its own rate hikes. Last January, California's insurance commissioner called a nearly 10 percent rate hike on grandfathered plans "excessive and unreasonable." At that time, total increases over two years came to an average 32 percent.

Both sides say they want to come to an agreement. In the meantime, many policyholders have received letters saying the two sides have agreed to a "transition period" lasting until either April or June, depending on the policy.

But Palo Alto insurance broker Chris Acker isn't so sure people really have that much time. Open enrollment for health insurance closes Feb. 15. "The plan wasn't canceled," he said. "The provider just canceled the contract."

It does not seem that people would be able to claim a special enrollment period and sign up for new insurance. when the transition period ends.

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