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Blue Cross CEO says providers must control costs, or else

Insurer pushes for switch to new payment system

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By Robert Weisman
Globe Staff / January 23, 2011

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The chief executive of Blue Cross Blue Shield of Massachusetts, the state’s largest health insurer, is calling on hospitals and doctors to step up efforts to contain health care costs, warning that those insisting on traditional fee-for-service contracts will face level or reduced payments from his company.

Andrew Dreyfus, who took the helm at Blue Cross Blue Shield in August, last week sent a letter to more than 400 leaders of hospitals and physicians practices, applying pressure on them to switch to a global payment plan. Under such a system, medical care providers are put on an annual budget and given incentives to control costs and improve care instead of being paid for individual doctors visits and procedures.

Dreyfus, who once worked in state government and for the Massachusetts Hospital Association, said Blue Cross Blue Shield will take a hard line in negotiations with hospitals and doctors that don’t agree to accept global payments. “Fee-for-service payment rates cannot continue to rise if we are to meet the community’s goal of affordable care,’’ he wrote. “Ultimately, we must continue our work to identify ways to reduce the level of payments.’’

Blue Cross, which insures nearly 3 million state residents, has an outsized influence on employers and health care providers. Dreyfus’s letter acts as “both a threat and a promise,’’ said Stuart H. Altman, health policy professor at Brandeis University. “He’s saying to the hospitals, you can do better under global payments. But he’s also saying, if you don’t want to do it, if you’re more comfortable with the fee-for-service system, forget it, we’re going to come down on you.’’

Massachusetts employers have long chafed at annual double-digit premium increases, with most blaming Blue Cross and other insurers for the relentless trend that crimps hiring by raising employee costs.

At the same time, nonprofit hospitals are being financially squeezed by cuts in Medicaid and other government payments. Community hospitals and smaller academic medical centers say they can’t command the same reimbursement rates granted by insurers to dominant market players such as Partners HealthCare System and Children’s Hospital Boston.

But officials at hospitals large and small agree that Dreyfus has sent a wake-up call.

“What Blue Cross is basically saying is it’s not going to be about (market power) any more,’’ said Ken Hanover, chief executive of Northeast Hospital Corp., which owns Beverly Hospital and Addison Gilbert Hospital in Gloucester. “It’s going to be about quality and managing the cost of care. This is going to require a significant restructuring of the Massachusetts health care delivery system.’’

Eric Beyer, chief executive of the Tufts Medical Center Physicians Organization, which employs 550 doctors, said a global payment system gives smaller providers an opportunity to succeed, but only if they better assess patient data and more efficiently deploy doctors to manage care.

Partners spokesman Rich Copp said the health care system — which owns Harvard-affiliated Massachusetts General and Brigham and Women’s hospitals in Boston — has begun initiatives to improve care and lower costs by redesigning the way conditions such as strokes and colon cancer are handled. Copp said Partners, the state’s largest hospital chain, has told Blue Cross and other insurers that it is willing to reopen contracts that don’t come up for renewal until next year.

“We want to work with insurers to craft solutions that can reduce health care costs and bring value to patients,’’ he said.

Health care providers and insurers clashed last year over who was responsible for the rising costs that led to the state imposing premium rate caps for plans covering small businesses and individuals. Now, they are jockeying for position as Governor Deval Patrick’s administration readies legislation that is expected to require hospitals and doctors to move toward fixed annual payments. Patrick has made limiting the rise in health care costs a priority for his second term.

While insurers have borne the brunt of criticism from employers and workers over the past year, Dreyfus said he is intent on changing that dynamic. In an interview, he said Blue Cross Blue Shield is preparing to “organize all our goals around the central principle of affordability.’’

Dreyfus also acknowledged there is a public perception that Blue Cross executives have been overcompensated. To counter that, he said, he has asked that his salary be limited to $800,000 this year, in addition to incentive pay if he meets certain corporate goals. His predecessor, Cleve L. Killingsworth, was paid $1.9 million in 2009, and before him, William C. Van Faasen collected more than $16 million in retirement benefits when he stepped down as chief executive in 2005. Van Faasen is now board chairman.

Hospitals, under intensified pressure from insurers and state officials, say they have kept costs below projected levels over the past two years, saving more than $3 billion, according to a report by the state hospital association. “We’re working on costs,’’ said Tim Gens, the group’s executive vice president and general counsel.

Cooperation from hospitals will be critical to the success of any attempt to control expenses, said Nancy C. Turnbull, associate dean and senior lecturer on health policy at the Harvard School of Public Health. “Hospitals account for 30 to 40 percent of health care costs’’ in Massachusetts, said Turnbull.

In his previous role as Blue Cross’ executive vice president for health care services, Dreyfus helped pioneer its “alternative quality contract,’’ a global payment model that rewards providers based on cost control and medical care outcomes rather than the number of visits and procedures they process. Blue Cross has moved about 40 percent of its health maintenance organization members to the so-called AQC, one of the nation’s biggest private-sector pilot projects for global payments.

Last week, Blue Cross officials said their alternative quality contract, launched in 2009, already is succeeding in improving care and lowering price trends. They said that 6,300 doctors paid under the new system in 2009 registered improvements in the quality of care faster than the 14,200 other doctors in the Blue Cross HMO network. The assessment relied on criteria such as the percentage of diabetics whose glucose, blood pressure, and cholesterol levels were under control.

While he objected to Patrick’s rate caps last year, Dreyfus conceded they trained a spotlight on an issue that has become vital to municipalities, businesses, and the state’s economy.

He said the need to temper rising costs became clear to him during a fall visit to a long-time customer, the chief executive of a high-tech company. Blue Cross had just proposed an 11 percent premium increase for the company based on predicted medical costs for the coming year.

“I was summoned there so that the CEO could take our renewal notice and throw it on the table and say, ‘This is completely unacceptable,’ ’’ Dreyfus recalled. “And he said, ‘Our wages are going up 1 or 2 percent, our supplies are going up 1 or 2 percent, our other costs are going up 1 or 2 percent. How can it be that my Blue Cross insurance costs are going up 11 percent?’ ’’

Ultimately, the contract was restructured to boost copays and include other adjustments, and Blue Cross limited the increase to less than 10 percent.

But Dreyfus said he knows controlling costs will be difficult. On the same day he visited the technology company, a hospital executive told Dreyfus his medical center would have to raise its prices by 4 to 5 percent.

“It just so struck me that I’m hearing from the customer that a 10 to 11 percent premium increase is absolutely unacceptable in this economy,’’ Dreyfus said. “And then within an hour or two I’m hearing from the hospital that they required a price increase.’’

Robert Weisman can be reached at weisman@globe.com.