Health Insurers Quit Covering Hospitals' Medical Screw-Ups

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You’ve no doubt had the experience of paying for car repairs that were done wrong. Not only did you pay for the faulty repair, you also paid to fix the error.

Health insurers have faced the same problem, paying for medical mistakes and the consequences of those mistakes.

Led by the federal government, they’re putting an end to the practice, refusing to pay for a range of medical errors.

The initiative came from the Centers for Medicare & Medicaid Services (CMS), the agency that runs Medicare and Medicaid.

As of Oct. 1, Medicare will no longer pay for events that shouldn’t happen. These include operating on the wrong patient or wrong body part, performing the wrong procedure and leaving items inside the body.

Medicare also will not pay for blood-type errors and several kinds of hospital-acquired infections, especially those associated with catheter placement.

Hospitals and insurers are not cozy. A recent study for PR firm Davies Public Affairs found that major insurers, including UnitedHealth Group (UNH), Cigna (CI) and WellPoint (WLP), got more negative than positive marks from hospital executives.

Yet you won’t find many folks in health care publicly opposed to the CMS plan — not even the hospitals.

Hospital industry response has been low-key, says Dijuana Lewis, president and chief executive of insurer WellPoint’s Comprehensive Health Solutions Business Unit.

“Nobody would be proud of errors or want them publicized,” Lewis said.

And there’s no shortage of errors. A study released in early April by research firm HealthGrades says 1.12 million Medicare patients suffered “safety incidents” in 41 million hospitalizations between 2004 and 2006. Those incidents cost taxpayers nearly $9 billion.

Until CMS acted, everybody talked about medical errors but nobody did anything about them, says Les Funtleyder, analyst with Miller Tabak and author of a forthcoming book, “Rx Money: Investing in Health Care Reform.”

Private insurers are happy that CMS took the lead, he says. With no profit motive, “CMS is seen as a rational judge.”

Making Nice

The campaign against errors has even made allies of hospitals and insurers. Tenet Healthcare (THC) recently signed contracts with UnitedHealth and Wellpoint 15 get bonus payments for better patient outcomes.

Insurers will save money on better results and hospitals could get more business, says Dr. Stephen Newman, Tenet’s chief operating officer. “We want payers to steer patients to our hospitals and doctors.”

It’s too soon to know how much the bonus will be, Newman says. He wants patients to get discounts on co-pays and deductibles for using providers who deliver top care.

Like CMS, WellPoint will begin implementing its nonpayment policy on Oct. 1, phasing in the program for 6,000 hospitals in 14 states. With 35 million subscribers, Wellpoint 19 the nation’s biggest health insurer.

WellPoint wants its members to rate providers the way hotels and restaurants are rated. Nurses employed by WellPoint will monitor outcomes.

“For a claim to be paid, it must match medical management code that’s entered by our nurses,” Lewis said.

WellPoint has no data on its anticipated savings. Lewis says it’s about quality of care — not dollars.

Too bad. Wellpoint 19hares could use a boost. They touched 90 in January and now trade near 46, mainly due to a disappointing outlook.

Cigna, with 10 million members, will follow Medicare on both the list of errors and the Oct. 1 start for the no-pay policy, says Dr. Douglas Hadley, Cigna’s medical officer.

“We’ll adopt Medicare’s policy to avoid confusion,” he said.

Like WellPoint, Cigna expects the cost savings won’t be enough to impact the bottom line. Cigna’s shares trade near 43, well off their 52-week high of 57.61.

UnitedHealth, No. 2 among insurers with 28 million subscribers, has not decided whether to sign on to the CMS plan, says spokesman Tyler Mason.

“CMS is ahead of us,” he said.

UnitedHealth is promoting information sharing. It wants members to use online data to identify the best hospitals and physicians.

The company has contracts with 89% of hospitals.

“We want to help them (eliminate errors) rather than come at them with a monetary stick,” Mason said.

Like its peers, United Health has seen its stock sag. Shares trade near 37, down from a 52-week high of 59.46 in late December.

Seeking An Edge

Insurers could use pay bans for mistakes as marketing tools, Funtleyder says. There are few other ways to differentiate an insurance company.

“One way is to say, ‘We’re tougher on errors,'” Funtleyder said.

Meanwhile, hospital stocks will have to spend money on new procedures and technology. They prefer to spend money on new cardiac wings or new MRIs that produce revenue, says Ann Hynes, analyst with Leerink Swann.

“But hospitals, too, can make quality a differentiator,” she said.

One potential benefit to hospitals is that malpractice costs will likely fall.

At Tenet, malpractice costs fell to $39 million in the 2007 fourth quarter from $52 million a year earlier. That’s not a huge amount for a company that reported $8.8 billion in 2007 revenue, but it doesn’t hurt either.

There’s a larger issue at play as well.

“We’re reaching the point 15f serious cost constraints in health care,” Funtleyder. “It’s self-evident that medical errors cost the system unnecessarily. I never understood why anybody paid for them.”

Newstex ID: IBD-0001-24448885Originally published in the April 14, 2008 version of Investor’s Business Daily.

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