Federal antitrust regulators tried six years ago to block Jefferson’s acquisition of Einstein Healthcare Network, arguing that a colossus regional health system would have too much market power and lead to higher healthcare prices.
A federal judge in Philadelphia didn’t buy the government’s argument that Jefferson would gain enough leverage to “squeeze insurers.” He viewed the University of Pennsylvania Health System as a competitive restraint that would keep a Jefferson demand for higher prices in check.
That conviction is being tested now as Jefferson, a nonprofit that kept growing to become the region’s largest health system, and Independence Blue Cross, long the area’s largest health insurer, trade jabs over contract talks.
Both sides have provided early warnings to patients that Jefferson may no longer be in Independence’s network after Dec. 31, when their current contract expires. Experts say they expect a last-minute deal, as happened over the summer with Main Line Health and UnitedHealthcare.
Neither side will say how many people — with insurance through their employer, individual Affordable Care Act plans, or Medicare Advantage — would be affected by disrupted care or higher prices. Years of research suggest that hospital consolidation leads to higher prices without noticeable improvements in quality, according to the KFF, a nonprofit that researches health policy.
Jefferson argues that all healthcare providers in Southeastern Pennsylvania are significantly underpaid by private insurers, compared to national averages. Jefferson says it needs higher rates to keep up with inflation and sustain care in the communities it serves.
Independence says it already pays Jefferson competitive rates and has offered a significant increase. The rates demanded by Jefferson would force people to pay more for services at Jefferson than at other health systems providing the same care, says Independence, often called IBC or IBX.
The dispute comes as employers and consumers increasingly worry about healthcare affordability. Employers have seen healthcare costs grow even faster than forecast in recent years, and healthcare is a top affordability concern for voters, according to a new KFF survey.
The backdrop: Jefferson’s growth and financial difficulties
Former Jefferson CEO Stephen K. Klasko built the system from three hospitals to 18, envisioning a behemoth that every insurer in the Philadelphia market would have to deal with.
“Nobody can enter Philadelphia without going through us,” Klasko said in a January 2018 interview, following the acquisition of a Magee Rehabilitation Hospital in Center City.
A government attorney later quoted a Klasko email from 2018 on Einstein’s strategic importance:
“As to IBC, if we complete the Einstein transaction and actually do the things we need to do around cost, access, patient experience, and quality, we will beat those [expletive].”
Yet during the 2020 trial, Klasko downplayed the significance of the Einstein acquisition, which added three hospitals and Moss Rehab. He departed as CEO at the end of 2021. He declined to comment through a spokesman, who said Klasko does not comment on previous employers.
Now the biggest local health system with 33 hospitals from South Jersey to Scranton, Jefferson is increasingly playing hardball with Independence.
Earlier this year, Jefferson sued over changes in payment polices imposed by the insurer, which is also now a direct competitor. Jefferson expanded into the insurance business when it acquired Health Partners Plans five years ago.
Historically, local healthcare executives have criticized Independence for offering take-it-or-leave deals.
“The reality is that Jefferson was unable historically to negotiate more favorable contracts with IBC,” said Dan Grauman, who recently retired after a 40-year career in healthcare consulting.
Given Jefferson’s recent financial losses, it’s important for the system to get better rates from Independence, Grauman said.
The private insurance business at the core of the contract talks with Independence accounts for as much as 30% of Jefferson’s business, according to an Inquirer analysis of hospital admissions and billing data.
The health system has posted operating losses for seven straight years, excluding investment income that other health systems don’t include in revenue.
Those losses in the last two years alone topped $900 million, a third of it from its insurance subsidiary, Jefferson Health Plans. Most of that business involves Medicaid patients.
Are national averages relevant?
In advertisements and communication with patients, Jefferson has claimed that health systems in Southeastern Pennsylvania receive dramatically lower private insurance rates than the national average.
The dispute isn’t about Jefferson getting significantly less than the University of Pennsylvania Health System or other competitors, according to those communications.
“Hospitals in southeastern Pennsylvania are reimbursed at nearly 40% below the national average, and IBX pays Jefferson roughly 40% less than that benchmark,” Michael Harrington, Jefferson’s chief financial officer, said in an email.
“That funding gap makes it increasingly difficult to keep pace with inflation and sustain the care our communities depend on. We’re simply asking IBX to prioritize patient care through fairer reimbursement rates,” he said.
Other analyses have reached different conclusions on prices in the Philadelphia region.
“There is nothing out of the ordinary about the Philadelphia metro area vis-a-vis costs or spending,” said Katie Martin, CEO of the Health Care Cost Institute, a Washington nonprofit that researches healthcare spending based on claims for millions of people who get insurance through their employer.
Martin and other experts said the biggest factor in healthcare price levels is the balance of power between a region’s hospitals and insurers.
The Philadelphia region remains a competitive hospital market, but is highly concentrated on the insurer side, according to Trilliant Health, a Tennessee data analysis firm.
Last year, Independence covered nearly 40% of patients with commercial insurance who were admitted to hospitals in Southeastern Pennsylvania, according to an Inquirer analysis of Pennsylvania Health Care Cost Containment Council data.
Jefferson’s focus on national comparisons is unusual, KFF researcher Zachary Levinson found.
“Hospital prices are considered to be high nationally, in part due to the large amount of concentration in hospital markets, so national benchmarks don’t seem to be the most useful benchmark,” said Levinson, project director of the KFF Project on Hospital Costs.
The impact of higher rates on employers and the economy
More than 70% of people covered by Independence commercial plans receive benefits through employers who pay healthcare claims directly, according to the insurer. Independence provides administrative services and facilitates insurance coverage for large claims.
The city of Philadelphia is among the large self-insured employers that use Independence for administrative services. The city has “met with our partners and we are monitoring the situation closely,” Candi Jones, the city’s chief human resources officer, said in an email.
The potential impact extends to any employer in the United States that has Blue Cross insurance and employees in Southeastern Pennsylvania who use Jefferson doctors. Those Blue Cross insurers pay the same prices as Independence.
“We have a responsibility to protect families and employers from unreasonable rate increases that pressure local economies and make healthcare less accessible across the region, for members and non-members alike,” Independence said in an email.
The outcome of the contract negotiations will likely ripple across the economy, said Zack Cooper, a professor of public health and economics at Yale University.
“When health spending goes up, it raises the cost for companies to retain workers. And so what happens is companies either don’t hire or they let workers go,” said Cooper, coauthor of a widely cited paper showing that $1 increase in healthcare prices takes $1.34 from the broader economy.
In the broader region, people receiving notices from Jefferson and Independence are nervous, Thomas Cox, principal at iSolutions Insurance Advisors in Audubon, Montgomery County, said of his clients’ reactions.
“We don’t want to see them get caught in the middle of this and have their care interrupted. Nor do we want to see their costs go up even higher because of unreasonable reimbursement rates,” he said.