04/03/2010 05:12 am ET | Updated May 25, 2011

Insurers v. Hospitals: Another Reason We Need Reform

The New York Times ran a story last week about negotiations between a health insurer and hospital group that deserves comment. First, some familiar context.

The U. S. has the most expensive health care system in the world by far. There are lots of reasons: inefficiencies, waste, high incomes for some doctors and insurance executives -- but mostly utilization decisions that respond to the dysfunctional incentives everyone faces. The cost of care is only one of the causes.

In addition, the quality of care is unreliable. Some is terrific, but there are too many errors, too many in-hospital infections, too many readmissions because of premature discharges and inadequate follow-up care.

The Times reported on a dispute between one of the largest insurers, UnitedHealthcare, and a consortium of 5 New York hospitals, Continuum Health Partners. The hospitals wanted a large fee increase; the insurer wanted to cut their payment rates. Nothing new there.

What attracted attention was another provision. The insurer was insisting that the hospitals inform it within 24 hours after a patient is hospitalized. On its face, that does not sound unreasonable -- although a hospital chain in Oklahoma trying to comply with a similar requirement claimed to be "frustrated by the administrative burden, even using electronic notification." But what got everyone's attention was that UnitedHealthcare wanted to impose a penalty for noncompliance: a 50-percent reduction in its payment to the hospitals. So, if a patient's hospital stay resulted in $50,000 in charges, the insurer would pay only $25,000. Its stated justification: to allow "insurance case managers to jump in right away" to help improve the quality of care and cut costs.

Not only that, but during the negotiations, UnitedHealthcare upped the ante still more by taking the additional step of sending letters to "tens of thousands of patients, warning that they could be cut off from coverage at Continuum hospitals and affiliated doctors, and advising them to start shopping for new ones."

Now, it is reasonable for insurers to want to keep down their spending and to be concerned about the quality of care they pay for. But given what we know about how the health system operates, it is hard to believe that UnitedHealthcare's primary concern was really to improve quality and cut costs. The fact is that changing a complex organization like a hospital is hard -- especially when the focus of the change, inpatient hospital care, is itself a complex process. And even if the insurer's case managers could succeed where hospital managers had failed, the payoff in greater efficiency and more reliable quality may not result in lower costs and lower insurance payments. But even if it did, that result would not be seen for some time, maybe years.

Nonetheless, this kind of dance is typical. The primary concern of both parties is money -- the hospitals ask for more than they need or expect and the insurer offers less than it will settle for. If they succeed in reaching an agreement, chances are it will be somewhere in the middle.

Unfortunately, while this game makes for good theater, it is hard to see the benefit. Hospitals under financial pressure will try to cut costs, but will those cuts improve efficiency, reduce infection rates, develop after-care arrangements that prevent rehospitalization? Doing those things is hard, and cutting staff is a more certain way to reduce a deficit.

If UnitedHealthcare were really serious about improving health care, it would try to engage the hospitals and their doctors in a process of changing the way they deliver care. Inviting a partnership, together they would work to figure out what needs to be fixed in a particular institution, set priorities, decide on specific actions to be taken, and implement them. In the process, they would set measurable goals and agree to share the gains if, by meeting those shared goals, the insurer were able to reduce its payouts. Moreover, the focus would be not just on what goes on inside the hospital, but on the entire continuum of care. They would encourage early use of primary care so as to avoid more costly services and hospitalization; and they would develop coordinated after-care so that patients with chronic conditions could both avoid being rehospitalized and manage their ongoing condition.

Only that kind of effort can turn around the American health care system, and insurers can play a constructive role in bringing it about. Instead, they do what they have always done - focus on short-term profits for the benefit of shareholders and negotiate to keep their payment rates as low as the hospitals will accept. What is the result? Increasing millions continue to have either no coverage or inadequate coverage. Quality remains unreliable. The delivery system continues to deteriorate. And spending continues to grow. The only dimension on which the U.S. will remain #1 is spending. Don't we deserve better?