Group Health Learns Lessons Of Free Market

Health care has become a bloody business and not just in surgery.

The competitive marketplace has become the new arena for incurring nasty bumps, painful bruises and bad breaks.

A few days ago, Group Health Northwest, the health-care provider that serves 192,000 members in Washington, took a nasty hit on the chin. Group Health announced it would cut off 40,000 of its members and reduce its staff by up to 10 percent.

Very simply, the marketplace had pounded a realization into Group Health’s hide: Despite its good intentions and mission, some people now simply are too expensive to serve.

“The marketplace for health care is tumultuous right now,’ said a somber Henry Berman, president of Group Health Northwest. “It used to be you were born and you died in the same hospital with the children of the same doctors. Today, health care is being shaped by the same market forces that consumers might think of for other products, like computers.”

In some ways, this is healthy. The cost of getting health care has moderated in the last five years. Better management practices have emerged in health-care companies. Doctors have become much less likely to prescribe unneeded procedures, because insurance won’t pay for them.

But an open market doesn’t necessarily have a conscience. The open market tends to divide the world into winners and losers, and the retrenchment at Group Health points out who those losers tend to be. They are the people who have the least money, the poorest jobs, and more often go to the hospital. They also are people who subscribed to Group Health’s budget Healthy Options plan or who Group Health covered under the state of Washington’s Basic Health Plan.

Here is one example of why Group Health decided these 40,000 customers simply cost too much to serve.

For Group Health, sending a customer to the hospital costs about $1,500 a day. To keep its premiums competitive Group Health tries to manage its membership to an average of 170 to 180 hospital bed stays per 1,000 members each year.

In central Washington, however, the rate of hospitalization for those on the budget health plans is much higher.

“We were running at the rate of 250 bed days per 1,000 per year,” Group Health President Berman explained.

The extra days spent in the hospital by the 40,000 members in central Washington were costing Group Health about $4.2 million a year.

In a market environment where profits, losses, efficiency and cost control rule, such losses weren’t acceptable.

In the open marketplace, other health-care companies likely will rush in to try to make a go of it where Group Health couldn’t. Berman isn’t optimistic about their chances. “Honestly, we don’t think our competition is going to be able to do something magical that we couldn’t do.”

One reason is that the state Legislature, in its desire to hold down health-care costs, doesn’t fund the basic health plan at a level that Berman and others think is adequate to support any company that takes a swing at providing service.

And, the marketplace will make it difficult for any health-care provider to raise premiums to cover the high cost of its central Washington customers and still be competitive with other companies, now including Group Health, that don’t have those high-cost members in the fold.

For Spokane, there is one other worry.

Group Health Northwest directed many of its central Washington members to Spokane hospitals. The hospitals have no guarantee new providers will do the same.

If a Seattle-area health-care company goes into the Tri-Cities, Yakima, or Moses Lake to pick up the members dropped by Group Health, some of those members might end up traveling west to Seattle or southwest to Portland for hospital care.

About 30 percent of the patients in Spokane hospitals come from somewhere other than Spokane County. Those outlying patients are critical to maintaining the high level of care and high level of employment in health care around Spokane.

“Will Spokane lose referrals from the outlying areas as a result of this change? It’s hard to tell,” said Sacred Heart Hospital Chief Operating Officer Mike Wilson. “We do know that continuing to ensure that Spokane has a network of referrals from the outlying areas is very important to our system.”

So important that Wilson spends much of his time working as president of Inland Northwest Health Services, a joint venture of Sacred Heart, Deaconess, Valley General and Holy Family hospitals to strengthen Spokane’s reach to outlying counties. Already, 15 rural and smaller town hospitals are linked into a Spokane-based computer health network where files and medical records can be sent back and forth.

That’s the marketplace at work. Competition is fierce. And in the end, there will be more winners and losers. , DataTimes MEMO: Chris Peck is the editor of The Spokesman-Review. His column appears each Sunday on Perspective.