The UPMC – Highmark Dispute: The Beginning of the End of Medical Practices Using Hospitals’ Managed Care Contract Rates?

Recent trends across the country have health systems buying out private physician practices and reclassifying them as hospital-outpatient departments.  There are a number of motivations behind these transactions, the greatest being managed care contracting.  Typically, the physician practice will reassign its Medicare NPI Number to the Hospital and the Hospital will then bill exclusively under that NPI number.  The Hospital will also submit claims to the third party payor and receive payments based on the hospital’s negotiated contract rates and fee schedule.

Critics, including a number of insurers, have claimed that this practice allows the hospital to bill higher rates for the same service at the same location.  For this reason, on February 26, 2014, Highmark, a  Blue Cross Blue Shield company based in Pittsburgh, stated that it would stop reimbursing health systems at higher hospital-outpatient rates for cancer treatment performed in physician offices.  Highmark explained that this move would save patients’ money by reducing out-of-pocket costs for deductibles and co-insurance.

Highmark is the area’s leading health insurer, and University of Pittsburgh Medical Center (“UPMC”), which runs the largest network of cancer centers in Western Pennsylvania, is the area’s largest health and hospital network.  UPMC’s contract with Highmark, which provides Highmark members with in-network access to UPMC physicians and facilities, is in its final year.  UPMC has now stated that it will not renew the contract when it expires at the end of 2014.  If a new contract isn’t signed before then, by 2015 many Highmark members won’t have access to the majority of UPMC hospitals and specialists at in-network prices.

UPMC commented that it “would be an egregious contract violation for Highmark to attempt to unilaterally change fee schedules specifically in place for nearly 20 years and recently affirmed in the 2012 Mediated Agreement,” which allowed Highmark members to continue receiving in-network care at UPMC through 2014.  A UPMC spokesperson explained that “UPMC’s contracts with Highmark, Medicare regulations and Pennsylvania Department of Health regulations all contemplate and establish requirements for hospital-based outpatient services. . . UPMC is fully compliant with these requirements, which Highmark executives have publicly acknowledged. . . Highmark has chosen to willfully violate provisions of that contract . . .It is our expectation that we will be reimbursed for our services provided per the contractual arrangements until [the contract] expires at the end of this year.”

To add to the troubled mix, Highmark became a direct competitor to UPMC with its purchase of the West Penn Allegheny Health System, the region’s second largest hospital group after UPMC, and it then set up the Allegheny Health Network.  For this reason, UPMC has stated that it will not renew its contract with Highmark when it expires at the end of the year.

Legislators may now get involved to prevent this breakup.  One bill, which is sponsored by state Rep. Tony DeLuca, D-Penn Hills, would give the state Department of Insurance and its commissioner greater power to force the two sides to negotiate and, if necessary, order the parties to participate in mediation. If mediation fails, the Insurance Commissioner with the Secretary of Health, could force both parties to submit to binding arbitration, according to the bill.  Western Pennsylvania legislators are also considering a so-called “any willing insurer” bill that would effectively require hospitals that are part of an “integrated delivery network,” such as UPMC, to contract with any willing insurer.

At the end of the day, regardless of how this dispute is resolved, the turn of events may reflect the beginning of the end of benefits from medical practice affiliations with hospitals to include the hospitals’ negotiated contract rates with managed care.

In fact, this practice has also come under the scrutiny of Medicare and Medicaid.  In a March 2012 report by the Medicare Payment Advisory Commission, the Commission advised Congress that Medicare paid 80% more for an office visit in an outpatient department than in a freestanding physician office.  The Commission further claimed that “This payment difference creates a financial incentive for hospitals to purchase freestanding physician offices and convert them to [Outpatient Departments] without changing their location or patient mix.”  The Commission recommended that Congress direct the Secretary of Health and Human Services to reduce payment rates for office visits provided in outpatient departments so that the payment rates for these visits are the same whether the service is provided in an outpatient department or a physician office.  The Commission further stated that it “plan[s] to examine payment differentials between [Outpatient Departments] and physician offices for other services and among the sectors providing post-acute care services.”

It is therefore critical for medical practices and hospitals to strongly consider provisions about unwinding and termination even as they continue exploring mutually beneficial relationships.

For more information on managed care contracting, medical practice and hospital integration and unwinding, or related issues, please feel free to contact Daniel Meier or any member of our health care practice group for a further discussion.

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