This is the question the new owners of Bayonne Medical Center (BMC) faced in 2009 after the hospital under previous management had gone bankrupt, partly because insurance companies offered deplorably low payments that often did not cover the costs of providing services.
One answer the owners of BMC came up with was to cancel contracts with providers as they expired, and begin negotiating new contracts with the hope of getting a higher rate for services—making BMC the first hospital in the nation to challenge the insurance industry.
Rather than coming back to the bargaining table, the insurance companies filed suit and issued letters to their membership not to do business with BMC or risk being hit with out- of-network costs. For thousands of local residents—many of whom were retirees or employees of the Bayonne school district—this meant they could not use the hospital many had fought to keep open in the years prior to new ownership taking over. Or they could use it, but just pay out of pocket instead of through their insurance companies.
The hospital was “bleeding money” at the rate of $1.5 million a month in losses before it filed for bankruptcy in 2007. Four years later, under new private ownership, the hospital showed an operating income of just under $10 million.
Purchased by a group that has since also purchased Hoboken University Medical Center in Hoboken and Christ Hospital in Jersey City, the hospital changed business strategies, especially in regard to its dealings with insurance carriers that hospital owners claim contributed to the hospital’s demise.
Prior to the sale of the hospital in 2009, BMC covered the cost of poor reimbursement rates by tapping its endowment, and when that expired, the hospital sought a series of short-term financing including receiving $6 million from the city of Bayonne to keep the doors open until new buyers could be found.
Although BMC came to an agreement with Horizon several years ago to be included as an in-network provider, the hospital remained an outcast with other insurance providers, who continued to steer patients away.
One loophole in the law governing inpatient or outpatient charges revolved around admissions that came through the emergency room. Under federal law, insurance companies had to charge inpatient fees to their clients for such services.
In what hospital officials claim is a kind of carrot-and-stick approach, BMC bumped up its charges in an effort to nudge insurance companies to negotiate better rates, figuring that if the companies continued to get hit with high sticker prices for services, the companies would eventually come to a better settlement.
“Once we get a contract with them,” said BMC Executive Director and CEO Dr. Mark Spektor, “the cost of services is what we contracted for, not the sticker price.”
Under state law, insurance companies must charge their clients in-network costs for services provided through the Emergency Room, and because of the elevated sticker price, insurance companies get hit with significantly higher costs.
The true impact became evident with the release of federal data in May that listed all the BMC fees. Officials at BMC said that almost nobody actually pays these elevated fees, except a small percentage, and even then, the cost is borne by the insurance companies.
Insurance companies, when stuck with the increased costs, pass them on to their clients. This happened four years ago to the Bayonne School District when staff continued to use the hospital. Insurance carriers rate group plans by costs over the previous year, and since the costs are inflated by raised fees, others suffer.
Hospitals are allowed to set their own rates for procedures. Rates for reimbursement are negotiated with insurance carriers and federal providers.
"The insurance carriers have all the power with the way the system works right now," said former Assemblyman Louis Manzo, who also operated an insurance brokerage in Hudson County for a number of years. “I proposed legislation that would take the power out of their hands by having the state hold the money from insurance premiums and setting up a board that would determine if a claim is legitimate."
Payment rates vary around the state
Manzo pointed out that, currently, many insurance companies routinely reject even legitimate claims from hospitals, forcing hospitals to seek professionals to dispute the claims.
This legislation would have helped restore some of the stability that hospitals knew prior to a federal change in the law 20 years ago that had once regulated the reimbursement rate.
Insurance companies currently negotiate payment rates that vary from hospital to hospital around the state.
Currently rates of reimbursement are set by negotiation. Insurance companies agree to steer their clients to hospitals for agreed-upon discounts for various procedures. But these rates often barely cover the costs of the procedures, and hospitals agree to them hoping to make up for the low rates with increased volumes.
Because doctors and staff costs are not discounted, and basic costs of supplies are fixed, hospitals generally just make up for the costs.
Insurance companies often challenge even legitimate claims and require hospitals to go through legal hurdles to prove their claims, raising hospital costs in administration and legal fees. At some point, insurance companies offer to settle these claims for a fraction of their worth, and hospitals, desperate for cash, grab them.
“Insurance companies put profits before patients,” said Spencer Baretz, official spokesperson for Bayonne Medical Center. “An urban hospital’s charges are its only tool for negotiating with commercial payers in the health-insurance industry, particularly hospitals that service a predominantly Medicaid and uninsured population. The ability to set charges is the only leverage they have to bring insurance companies to the negotiating table in order to obtain fair contracted rates. In the past 20 years, 40 hospitals in New Jersey have been forced to close; the vast majority of those closures were of hospitals in urban communities due to extremely low commercial contracted rates. Unfortunately, the majority of New Jersey hospitals continue to suffer from annual operating losses, at the same time that insurers have large profits. The success of Bayonne Medical Center proves it is possible to take a failed, bankrupt hospital, revitalize it, and make it thrive—and that requires difficult negotiations with large, powerful insurers.”
While BMC has shown a profit since coming out of bankruptcy, some of this has come as a result of specialized services, cooperative agreements with other entities, and reduced costs of administration for settling claims.
The sticker price for service affects a very small number of cases that come to BMC, said Dr. Spektor – approximately 7 percent. Those who do pay the sticker price are generally insurance companies, or people reimbursed by insurance companies. Those companies won’t negotiate what the hospital considers a fair reimbursement rate, he says, so they do not have a contract with the hospital, with agreed-upon rates.
“The vast majority of BMC’s patients are Medicare, Medicaid, [state funded] Charity Care, and contracted third-party payers for whom the charges have no relevance,” said Baretz. “Bayonne Medical Center’s payments from Medicare are not high, but in the 60th percentile. Individuals are screened for Charity Care and, if eligible, pay nothing. If they are not eligible, state law in New Jersey limits their obligation to 115 percent of Medicare rates. These are important facts to note rather than focusing solely on the stated charges.”
“Why do we have high prices?” Dr. Spektor said. “There are a number of insurance companies that refuse to negotiate in good faith, and we would go bankrupt if we continued to do business on their terms.”
Insurance companies also play favorites, giving better reimbursement rates to some hospitals than to others.
“Suburban hospitals get two to three times better rates than urban hospitals,” Spektor said. “They have no desire to keep these hospitals open. Raising our sticker price is the only tool we have to bring them to the bargaining table.”
Hospitals can’t afford to stay open
While the insurance industry is marking up $15 billion a year in profits, hospitals are closing, he said. Urban hospitals often have fewer patients covered by commercial insurance and a greater percentage covered by Charity Care, which is paid for at only 1 or 2 percent above the cost of Medicare.
“Twenty years ago, reimbursement rates were regulated, insurance companies fought to get them deregulated, and then fought to be exempt from anti-trust laws,” said Spektor. “As a result, hospitals have closed and emergency care has increased. We’re the hospital that is standing up to them, saying we will not accept unreasonable rates.”
The hospital, he said, is a huge part of the local economy as well, and its closing would have an impact in loss of jobs and lack of local medical care.
“Look at our track record,” Spektor said. “We have saved the hospital and improved the quality of service.” He dismissed claims that the hospital services were average, noting that the hospital recently received one of the highest ratings from Leap Frog, a medical evaluation group.
Baretz called BMC not just a critical lifeline for the people of Hudson County but the quintessential urban hospital—situated in the fourth most densely populated county in the United States with one of the highest rates of uninsured and Medicaid patients in the country.
“This hospital was in bankruptcy in 2007 and about to shut its doors due to the annual losses of over $30 million,” Baretz said. “Now, with more than 900 jobs saved, over $30 million in capital invested for improvements, including renovated facilities, state-of- the- art equipment, and new and enhanced services, Bayonne Medical Center is now the fifth rated hospital in New Jersey and is the top-rated one in Hudson County [according to Castle Connolly]. It has achieved substantial improvements in its core quality measures, most of which are at or near the 100th percentile. Bottom line: we could not have done all this without the ability to renegotiate and set higher reimbursement rates with insurance companies.”
Al Sullivan may be reached at firstname.lastname@example.org.