Hospital chief 'shocked' at disparity in payments

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Jerry Fedele is never shy about criticizing his No. 1 rival, the University of Pittsburgh Medical Center. But now the West Penn Allegheny Health System president also is going after Highmark Inc., the region's dominant insurer.

Citing a ground-breaking report released last Thursday by the Pennsylvania Health Care Cost Containment Council that found wide disparities exist in the amounts paid for local cardiac surgeries despite no dramatic difference in outcomes, Mr. Fedele said Highmark is paying UPMC hospitals substantially more than West Penn for the same services -- something he already suspected.

The report showed that during 2005, UPMC Presbyterian and UPMC Shadyside received an average of $34,803 for coronary artery bypass graft surgery -- used on patients with significant artery blockage. The average payment for the same procedure at West Penn Hospital in Bloomfield was $25,184, while at Allegheny General Hospital (another West Penn Allegheny Health facility) on the North Side, the cost was even lower: $23,715. UPMC and West Penn were equal in terms of outcomes; Allegheny General performed better, with a lower readmission rate than either UPMC or West Penn.

The total differential in heart surgery payments between UPMC and West Penn's hospitals was $17 million, according to Mr. Fedele's math.

"That is just shocking," he said, during an interview Friday.

"If we are looking to have a competitive health care environment in Western Pennsylvania, that is something that ought to be of great concern to every business in this community, every resident in this community and every political leader in this community." Without more balance, he said, "I predict grave consequences for ... businesses and for patients."

Few institutions play a more critical role in the payment of commercial hospital prices than Highmark, the region's largest insurer. And few insurers dominate a regional market in the way that Highmark does Western Pennsylvania -- with about 55 to 60 percent of the commercial health insurance business. UPMC, which controls 48.6 percent of the hospitals beds in Allegheny County, counts on Highmark for 24 percent of its patient revenue.

Before seeing last week's report, Mr. Fedele thought Highmark paid his tertiary care hospitals 12 to 15 percent less for all services, including heart surgeries, than it did UPMC Presbyterian in Oakland and UPMC Shadyside, amounting to a $25 million difference annually. "Clearly Highmark plays a very material role in setting reimbursement rates," said Mr. Fedele, and "I have expressed that concern (about price differences) to Highmark directly."

But now he acknowledges the new information from the cost containment report could change his estimates and affect West Penn's negotiations with Highmark over a contract that expires next June. The new contract comes as the region's second-largest health system finds itself on more solid financial footing after struggling early after the West Penn-Allegheny General merger seven years ago, a merger that Highmark helped pull off by supporting it financially.

"We have been in discussions with Highmark to address the issue of disparity in payments. They have responded to some of our requests, but we have not reached agreement and quite frankly, given where I thought the disparity in payment was, the report raises questions about what the true disparity is."

These are questions that Highmark and other insurers "need to address," he said.

One local small business representative, when asked about Highmark, said he "would be willing to bet a fairly nice chunk of money that Highmark reimburses different hospitals differently." Cliff Shannon, president of SMC Business Councils in Churchill, added: "The basis on which Highmark does that may or may not have anything to do with the quality of care, may or may not have anything to do with the size and stature of a particular hospital system."

Highmark spokesman Mark Weinstein did not dispute the idea that payments are different but argued the nonprofit insurer is committed to "reimbursement levels that are fair and reasonable for the services provided to our members."

He cautioned against drawing conclusions about hospital cost based on one type of medical procedure -- heart surgery -- and referred back an earlier explanation from another Highmark executive that large medical centers such as UPMC are often able to negotiate higher payment rates since the care they provide, along with teaching and research, represents a "unique set of services to the community," said Dr. Carey Vinson, Highmark's vice president for quality and medical performance management. "They parlay that into asking for greater reimbursement."

Even small hospitals try to strengthen their negotiating positions by noting if they are the only medical facility in the area. "All hospitals try to leverage their uniqueness when they can," Dr. Vinson said.

What Mr. Fedele suspects is that UPMC utilized its size to great advantage during 2002 contract negotiations between Highmark and UPMC, perhaps contributing to the price spreads listed in last week's cost containment report. That year, Highmark initially characterized UPMC's demands as "extortion" while UPMC portrayed Highmark's business practices as "ticket scalping."

But the two health-care giants were able to reach an agreement since it was in the interest of both to work it out. Highmark, after all, needed bodies in UPMC beds since the hospital system accounts for nearly half of the Allegheny County market, and it also needed to stall the growth of UPMC's insurance subsidiary, the UPMC Health Plan. UPMC, meanwhile, needed Highmark for its representation of the bulk of local insureds.

As part of the 10-year deal, UPMC received higher payment rates, along with a $163 million loan for a new Children's Hospital and $70 million in grants to UPMC for technology initiatives. Mr. Fedele argues the deal was largely responsible for UPMC's hefty profits in the years since.

"If you look at UPMC's financial performance prior to 2002, it was very modest," he said. "Since that time, their profitability has just skyrocketed. There may be other factors that contributed to that, but revenue sources you have coming from payers is a significant component of what drives the financial performance of your organization."

UPMC spokeswoman Wendy Zellner responded by saying UPMC patients were covered by many different insurers and "our profits are the result of our efficiencies, attractiveness to patients and our investments." Highmark's Mr. Weinstein argued the insurer did not play favorites with UPMC. Under the 2002 agreement, "payment increases to UPMC Health System were similar to what other comparable hospitals received during that time period," he said.

But one local employer noted it would be keeping a closer eye on Highmark's numbers going forward.

Mark Dever, a benefits consultant for Downtown utility Duquesne Light, has known for some time about the difference in payments from hospital to hospital, and he also knows that Highmark will charge him extra if hospitals meet certain quality measures, as determined by Highmark. The quality-and-cost findings from last week's report give him the information to start a new dialogue with Highmark.

"I am happy to pay for quality," he said. "But now I will be asking, 'What am I getting for that quality?' "

Dan Fitzpatrick can be reached at or 412-263-1752.


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