Health Insurers’ Growing Clout Stirs Concerns

The 88-page document from Blue Cross arrived like an uninvited guest a few weeks ago in the executive offices of 350 California hospitals.

Cut prices, the giant health insurer demanded of hospital administrators, or risk being relegated to “second-tier” status in the huge Blue Cross network. Patients would have to pay hundreds of dollars a day out of pocket to use hospitals that didn’t knuckle under. Or the hospitals could be cut off completely from Blue Cross members’ business.

Blue Cross says it is simply being responsive to employers’ demands for lower health care costs. But hospital administrators angrily accuse the firm of using its ever-expanding marketplace muscle to dictate how Californians get their health care.

“This Blue Cross initiative is a monopolistic, highhanded way to dole out health care based solely on price, not on quality,” said David Langness, a spokesman for the Healthcare Assn. of Southern California, a hospital trade group.

The conflict is a sign of a dramatic tug of war for power developing as price becomes paramount in the world of health care and big insurers grow bigger.

Mergers and muscle-flexing by some of California’s biggest health-insurance plans are causing turmoil for doctors, patients and hospitals, sparking concern that the emerging medical behemoths will exert too much control over the health care system.

Critics point out that Blue Cross’ gambit follows its agreement in April to merge its biggest subsidiary, WellPoint Health Networks, with Health Systems International, the corporate parent of the Health Net health maintenance organization. The merger will create a managed care company with 4.2 million members in California.

Similarly, FHP International, an Orange County-based HMO, last year swallowed up rival TakeCare Inc., an HMO with headquarters in Northern California.

Indeed, a growing number of academics, business analysts and consumer advocates have begun warning that California might soon be dominated by a handful of plans with the market clout not only to set prices, but also to ease up on quality standards.

“If the number of plans gets too small, that could be a problem in terms of less competition and performance,” said Tom Elkin, who until last week was health care chief for the California Public Employees’ Retirement System, one of the nation’s most influential health care purchasers.

Today, about 12 million Californians belong to HMOs, with millions more enrolled in other types of less-restrictive managed care plans. And already, the state’s five largest managed care firms--Kaiser Permanente, Health Net, Pacificare, FHP and Cigna--account for 8.2 million, or 70%, of all HMO members in California. Not-for-profit Kaiser accounts for roughly half that number.

By the year 2000, Elkin predicts, as few as three giant health plans will dominate the state.

Critics contend that the for-profit plans, in particular, already are disrupting important doctor-patient relationships and, in some cases, limiting consumer choice and diminishing the quality of medical care.

“What’s happening in the marketplace is that you have a handful of 800-pound gorillas battling it out,” said Judith Bell, co-director of the San Francisco office of Consumers Union, publisher of Consumer Reports magazine. “It begins to look questionable whether individuals will have the clout needed to get quality care.”

Health plan officials and other experts, however, insist that bigger can be better for consumers.

Larger companies, they say, can use their market influence to bring efficiency and thriftiness to a medical industry that has grown bloated and wasteful.

Westcott W. Price III, FHP’s chief executive, said his company’s $1.1-billion acquisition of TakeCare has benefited consumers in several ways. Before, FHP had no membership in Northern California, a stronghold for TakeCare. Now, he said, the combined firm can offer statewide medical services to corporate customers and members. Moreover, the cost savings resulting from the union have helped FHP cut commercial premiums by about 2%.

Blue Cross, meanwhile, has dubbed its new program “Partnerships for Quality.” Preferred hospitals under the plan will be those “willing to propose rates that are competitive,” executive Max Brown said.

The Blue Cross proposal would require hospitals to submit detailed information on pricing and medical outcomes, which then will be used to separate hospitals into two distinct groups.

First-tier hospitals will have several advantages, such as “close electronic linkages” with Blue Cross. Doctors “will be encouraged to channel patients to these institutions,” according to the 88-page proposal. Second-tier hospitals, by contrast, “will not be prominently featured” in Blue Cross directories, and patients will have to pay $100 to $200 more per day to use their facilities.

Officials of hospitals in Los Angeles, San Francisco and other metropolitan areas where market competition is most fierce complain that Blue Cross is effectively pitting hospitals against each other in a bidding war designed to drive down prices. One hospital official said privately that hospitals are attempting to gather intelligence about rivals’ bids in an effort to enhance their own position.

The hospitals’ responses are due July 6.

“This approach assumes that all hospital care is a commodity, like corn or jet fuel, and everyone makes a bid on the basis of everything being the same,” said a top executive of a major Los Angeles County teaching hospital who declined to be named for fear of angering Blue Cross.

“But anyone who has been to a hospital knows the quality is quite different,” the executive said. “If you’re having a baby, a hospital with a neonatal intensive care unit may be more desirable, just in case. But the hospital with no intensive care for babies is going to be less expensive.”

Blue Cross’ Brown said the insurer is under “enormous pressure” from employers--the biggest purchasers of health care--to reduce costs. He notes that employer groups, such as San Francisco-based Pacific Business Group on Health and CalPERS, increasingly are requiring health plans themselves to bid for their business.

“We thought this was a very fair way of getting the hospitals to reassess what they are doing,” Brown said. “We’ve had hospitals tell us they are beating their brains out to keep costs down but not compromise quality, but it’s not doing them any good.”

A likely result of Blue Cross’ undertaking, industry analysts say, is that the insurer will end up contracting with fewer than the 400 hospitals it now does business with statewide. Similarly, Foundation Health, a Sacramento-area HMO that also has operations in Southern California, recently said it would cut several hundred specialists from its network because they aren’t needed to serve Foundation’s members.

For providers and patients, that sort of narrowing of choice is one of the more harrowing parts of health-care consolidation.

Barbara Arnold, a private-practice ophthalmologist in Sacramento, has lost about half of her patients over the past few years to such moves.

“This is devastating to the doctor-patient relationship,” she said. “The knowledge that a patient and physician have about each other and their history is not replaceable by photocopying a medical chart and handing it to another doctor.”

Health-industry mergers only add to the turmoil.

Susan Hogeland, executive director of the California Academy of Family Physicians, notes that Health Net--the HMO serving her eight-employee organization--has had three different owners in four years. If the WellPoint deal is completed, it will have a fourth.

After last year’s merger of Health Net and QualMed, a Colorado HMO, “everybody on the staff was notified that they had a new physician--even though we had previous arrangements with our old physicians,” Hogeland said. “It’s very confusing and it feels disruptive, like you’re just a little cog in this great big machine.”

Times staff writer Martha Groves contributed to this story.