Aurora’s reunion with United will have major impact

Last updated on May 13th, 2019 at 02:33 pm

Recently, UnitedHealthcare and Aurora Health Care signed an agreement in which Aurora would provide health care to people insured by United. The agreement ended a nine-year separation between the two organizations and created the foundation for a new 15-year relationship.
Is the reunion of United and Aurora a good deal? Depends on your position.
The purchase of health care is like a balloon. Imagine a long oval balloon. If you put your hands side by side on the surface of the balloon and press down on one side the other side goes up. Now imagine many hands along the surface of a hospital’s financial balloon. If one organization gets a deep discount there is pressure on one part of the balloon and the remaining parts go up.
There are four major groupings of "hands" on the health provider’s financial balloon.
First, and largest, is the federal government through Medicare. This "hand" covers about half the balloon.
Next are preferred provider organizations (PPOs). PPOs represent about 35 percent of the total balloon.
In third place are health maintenance organizations (HMOs). HMOs represent about 10 percent of the total purchases of health care. Many HMOs offer PPO-type plans, and I have added those plans to the PPO count.
The remaining 5 percent of the total is represented by auto insurance, workers compensation and uninsured purchases of health care.
With the Medicare segment being 50 percent, the impact of Medicare discounts is significant. Today, Medicare rates are very low, representing 40 percent to 60 percent discounts from billed charges. In many cases, the reimbursement is below costs. Therefore, hospitals shift revenue needs to the private sector to compensate for the shortfall in the Medicare payments.
One estimate has concluded that as much as 30 percent of the premium paid by the private sector is due to this cost shift. As the population ages, this problem will get worse.
So, the Medicare program is putting tremendous pressure on prices, pushing down on its half of the balloon. The other parts of the balloon go up.
In order to counter this cost shift, the private sector, primarily through HMOs and PPOs, negotiate discounts with hospitals, physicians and other health care professionals. The HMO or PPO that does the best job of negotiating is able to offer its plan at the lowest cost.
In the Milwaukee market, discounts off billed charges range from 10 percent to 30 percent. In some cases, a fixed rate has been negotiated for specific services similar to the Medicare DRGs. These fixed pricing arrangements can, on occasion, result in much larger discounts.
In the early and mid-1990s, most of the contracts were fixed price case rates, or per diems that reimburse a hospital a set dollar amount for each day of stay regardless of the services provided. These arrangements were only possible because HMOs and PPOs contracted with a limited number of hospitals and doctors. In fact, if more than 50 percent of the providers in a given area were under contract, attorneys for the plans became nervous, fearing restraint of trade problems.
In the mid-1990s, tight labor markets forced corporations to insist on broader networks. They did not want to risk losing an employee because his or her doctor was not in the network. Those networks with the longest list of providers generally won the business.
Providers saw their "preferred" position erode and became unwilling to continue the aggressive fixed pricing arrangements. As one hospital administrator said, "If you include all hospitals in the plan, you cannot differentiate my hospital from the rest. Without differentiation, you cannot drive additional patients to my hospital. Hence, I will not continue fixed pricing but will only offer a percentage off billed charges."
With this change, the payer community lost control of pricing and placed the providers in control. With a percentage off billed charge arrangement, providers have the ability to raise the billed charges to compensate for discounts they extend or to raise money for building or other purchases.
From 1989 to 1995, the annual increase in health plan costs went down each year. This is the same time period of fixed pricing and limited networks. In 1995 and 1996 there was virtually no change in the cost. From 1997 to the present, the cost has increased. For most years, the annual increase has been at a higher rate than the preceding year. This is the time period of broad networks and percentage off billed charges.
How do UnitedHealthcare and Aurora fit into this picture?
In the late 1980s, United bought the financially troubled Samaritan Health Plan. Along with that purchase came very deep discounts from St. Luke’s. In 1996, Aurora and United severed their relationship because Aurora would not continue to extend deep discounts to United.
As a result of the breakup, United lost significant parts of its business. Some employers simply insisted on having Aurora in the network. United has, however, continued to grow.
United recently purchased the Fox Valley HMO Touchpoint, which has added additional incentives to contract with Aurora. Aurora also has incentives to expand its business, and United was the one major player with whom Aurora does not contract. With incentives on both sides, a deal was struck.
Though details are not available, it is reasonable to assume that the discounts are relatively deep, and United has agreed to include Aurora in its various plans. Aurora typically insists that all Aurora facilities and doctors be included in all plans offered by the HMO or PPO.
This relationship places additional pressure on the United part of the health care balloon. Medicare will be unaffected by this contract, but other HMOs and PPOs will realize additional upward pressure on prices. The magnitude of this pressure will be determined by the degree the 15-year agreement contains discounts that are greater than those generally offered.
The arrangement will make both Aurora and United more competitive. It is unclear if the arrangement is only applying pressure to the United part of the balloon at the expense of the other HMOs and PPOs, or if the arrangement will actually result in a lowering of the already excessively high cost of health care in the Milwaukee and Wisconsin markets.
Two key questions need to be asked:
1. Will the arrangement result in unleashing the tremendous power of consumerism by involving patients in the purchase of their health care?
2. Will the arrangement result in price transparency so consumers can identify expensive providers?
To date, HMOs, PPOs, insurance companies and hospitals have all resisted efforts to disclose discounted costs of services. Without price transparency, consumerism will not work. Medical spending and saving accounts will not fully function. It is essential that the market know the true cost of health care services.
Today, the cost of health care is having a disastrous impact on corporate finances and the growth of business. Jobs are in jeopardy, and personal finances are threatened. Health care debt has replaced credit card debt as the No. 1 one cause for personal bankruptcy.
We have the ability to have a world-class health care delivery system with the cost of services being reasonable. The health care delivery system can be one of our greatest assets.

Editor’s note: Small Business Times extended invitations to Aurora Health Care and United Healthcare to comment on their new agreement, but they declined.

Richard Blomquist
is the president of the Independent Business Association of Wisconsin. He is also the president of Milwaukee-based Blomquist Benefits LLC. He is the former owner
of Associates for Health Care Inc., a Brookfield-based PPO that he sold in 2001.

July 8, 2005, Small Business Times, Milwaukee, WI

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