The story in Pittsburgh, which actually began more than a decade ago, involves three central players — Highmark Blue Cross Blue Shield, the largest insurer in Allegheny County, and two hospital systems, one of which is the University of Pittsburgh Medical Center. UPMC has about 55 percent of the regional market and operates 20 hospitals. The other hospital system is UPMC’s closest competitor, West Penn Allegheny Health System, which has been financially failing for years.
The saga has its roots in an effort in which the institutions attempted to sort out a financial imbroglio that, initially, involved a hospital and several providers whose difficulties threatened to rob many local residents of needed care. As time went on, the story became convoluted as the players struck differing bargains, changed alliances, and jockeyed for advantages that often pitted one against the other in hopes of dominating the market.
“The Pittsburgh market is unique because of the demographics, but it’s become a tremendous battle because no party has been able to get the upper hand,” says F. Randy Vogenberg, RPh, PhD, principal at the Institute for Integrated Healthcare in Sharon, Mass. “The battle is over bodies and keeping patients in the beds as well as getting the lives under contract. It’s like Republicans and Democrats — it’s one of the more ruthless markets in the country right now.
“In general, employers are not happy with any of the players because it’s been very disruptive to the market,” Vogenberg adds. “Despite the animosity and all the changes and proposed changes, the cost of care in that region isn’t going down. So it’s really [been] a lose-lose proposition for employers. But it’s an important case study, because the concept around vertical integration can play out in similar ways for insurers or hospitals in most any market.”
In 2000, West Penn merged with several financially distressed providers with $125 million in funding from Highmark, which wanted to preserve competition for hospital services. Over the years, Highmark has controlled between 60 percent and 80 percent of the greater Pittsburgh market. The insurer bank-rolled West Penn for a simple reason — if West Penn failed, UPMC would become the dominant hospital system and could demand higher rates.
As time went on, Highmark and West Penn continued to enjoy a close relationship; the insurer even provided a $42 million grant to upgrade facilities. UPMC did not stand silently by as these developments took place. The medical center filed a lawsuit challenging the earlier deal between West Penn and the smaller providers, and it attempted to discourage investors from purchasing West Penn bonds. UPMC also took aim at Highmark with an effort to hike reimbursement rates.
Highmark responded by forming a low-cost insurance plan. To participate, a hospital had to agree to accept lower payments in exchange for higher volume. West Penn participated but UPMC refused, saying reimbursement was too low. So UPMC formed its own health insurer, which became Highmark’s main competitor.
As ugly as this appeared, there was more. In a bid to lower the heat, Highmark and UPMC took a series of mutually beneficial steps that eventually prompted West Penn to charge that a conspiracy was under way. Highmark paid UPMC unusually high reimbursement rates and provided $230 million for a new facility. The insurer also supported UPMC’s acquisition of a hospital that, other than West Penn, was its only tertiary care competition.
The battle intensified when Highmark allegedly leaked confidential information about West Penn to UPMC, refused to refinance a loan to West Penn, and maintained artificially depressed reimbursement rates for West Penn, according to court documents from the litigation that ensued. Highmark also eliminated its own low-cost insurance plan, which had benefited West Penn by excluding UPMC. Though none of the institutions would comment for this article, West Penn essentially claimed that Highmark was trying to strangle its ability to compete.
In Pittsburgh, “you had a dominant insurer and a dominant provider discussing an exclusive agreement that would keep their competitors out of the market,” says Axel Bernabe, partner at Constantine Cannon.