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'An earthquake': The deal that changed Montana's insurance market

Blue Cross Blue Shield of Montana building

The Blue Cross Blue Shield of Montana building in Helena

Two decades ago, four Montana hospitals tried something new. They bankrolled a company to compete with the most powerful insurer in the state.

The hospitals wanted to challenge what they described as Blue Cross Blue Shield of Montana’s “dominating presence.” So they founded insurer New West Health Services in 1998 to cover hospital employees and whoever else they could pick up.

It worked.

The hospitals built the second-largest player in Montana’s commercial insurance market. Blue Cross remained the lead by far, but those watching the industry said New West lowered prices for Montanans as insurers’ competition intensified.

If the company sounds unfamiliar, it’s because it no longer exists.

By 2011, the hospitals’ leadership wanted out of the insurance business. To do that, they made a deal that deflated New West and boosted the insurer it was formed to compete against.

The hospitals agreed that their combined 11,000 employees would carry Blue Cross plans. In exchange, Blue Cross would give each hospital a portion of $26 million over six years. The hospitals would also get two seats on the insurer’s board of directors — as long as they didn’t own or belong to an entity that competed with Blue Cross.

“Instead of saying Blue Cross was the enemy, they became allied with Blue Cross,” said David Kibbe, who was the New West CEO at the time of the deal.

New West disappeared from commercial insurance and other insurers picked up those plans.

“It was an earthquake for the insurance market in Montana,” said Ge Bai, a health care price expert with Johns Hopkins University.

After the deal went through, Blue Cross went from selling 64% of commercial health plans in Montana to more than 72% in 2012, according to Kaiser Family Foundation data.

And today, the overwhelming majority of people with work-based coverage have insurance cards with “Blue Cross” across the top.

That matters because it can play into the price people pay for insurance, Bai said.

Last month, five hospitals settled a lawsuit in which their employees claimed the hospitals agreed to inflated Blue Cross fees — in some cases by as much as 200% — for a kickback. The hospitals maintain they did nothing wrong. Blue Cross declined to comment about the lawsuit, saying it wasn’t a party in the case.

Hospitals say the agreement was in the best interest of their employees. Insurers say there’s still healthy competition in Montana.

Bai said what the deal meant for Montanans is hard to know.

Meanwhile, the cost of care has continued to rise. And Montanans buying commercial insurance have historically faced premium increases each year, often by double-digits.

“We cannot even be surprised by these interesting deals, these quite outlandish deals, because the health-care sector has become enormously complex,” Bai said. “There’s conflict of interests and secret deals, and commercial consumers are not benefitting.”

NEW WEST’S EXIT

New West’s founding owners included Billings Clinic, Community Medical Center in Missoula, Northern Montana Health Care in Havre and St. Peter’s in Helena. In 2006, two more hospitals bought in, Bozeman Health and Benefis Health System in Great Falls.

When they wanted out of insurance, hospital officials didn’t say a lot about why.

After a request for an interview, Jason Smith, the chief advancement officer for Bozeman Health, said in an emailed statement that hospital leaders involved in the switch aren’t with the organization anymore and he “can’t speak to their intentions at the time.”

“However, we do believe the decision to move away from New West and into an agreement with BSBC was in the best interest of our employees,” Smith said.

Hospital spokesperson Lauren Brendel said Bozeman Health hasn’t increased employee premiums for four years. She later said Bozeman Health can’t speak to whether New West offered lower premiums.

“Blue Cross Blue Shield has access to a larger provider network that goes national,” Brendel said. “... Our employees benefit (from) increased coverage with virtually no increased out-of-pocket costs for the employees, in terms of what their contribution to their health coverage might look like.”

Luke Kobold, a spokesperson for Billings Clinic, the state’s largest health system, said leaving New West came down to practicality.

“We went into it with good intentions, trying to do something unique in Montana and really ran into population struggles with how low the population is in our state,” Kobold said.

It’s not unusual for hospitals to build provider-based insurance plans, especially in denser states than Montana.

When it works, hospitals say there’s more freedom to tailor care that keeps people healthy — which is important to a system covering the tab for a hospitalization rather than just collecting money from it.

It also gives hospitals an edge in typically intense negotiations in which insurers try to get providers to drop rates.

“It unfortunately was a model that was not sustainable,” said Kobold, adding at least not for Montana.

RISKY BUSINESS

The initial years for New West’s effort to make money weren’t easy. Neither was the relationship between the insurer and its owners, Kibbe said.

When Kibbe was brought in to lead the company in 2006, he understood his task was to “turn things around.” After a few years he said the company was making money, but not by a lot.

Insurance is a risk business. The positive and breakeven years could easily be followed by bad years.

Kibbe said while hospital leadership knew care delivery, there seemed to be a disconnect in understanding how complicated the insurance business would be.

“Since we were trying to compete with Blue Cross, that created a lot of tension between hospital CFOs and New West CEOs. They often viewed our explanations as inadequate,” Kibbe said. “I think I was the longest-tenured CEO and I managed to survive almost six years.”

He said as that tension continued, Blue Cross’ tone changed from “antagonist” to a company willing to work with the hospitals. Kibbe said something he felt but never heard from hospitals leaders was that as the main providers in their towns, they gained confidence Blue Cross had to play nice.

“Blue Cross was savvy, and I think the hospitals were asking ‘is the risk of ownership worth it when we have a different way of dealing with Blue Cross today than 14 years ago,’” Kibbe said.

Kibbe said he doesn’t fault the hospitals for getting out of insurance. Plenty of others across the country were scraping their provider-based insurance plans.

But Kibbe said the Montana hospitals’ exit could have been done better, without handing more than 11,000 customers to Blue Cross.

“It really strengthened Blue Cross’ position in the market, and that made me uncomfortable,” he said.

He wasn’t alone.

BALANCING THE PLAYING FIELD

The agreement caught the attention of the Montana Attorney General’s Office and the U.S. Department of Justice. The offices filed an antitrust lawsuit in November 2011.

The lawsuit said New West was one of only two significant competitors to Blue Cross in Bozeman, Billings, Helena and Missoula. The attorneys also argued the deal would hurt competition by effectively eliminating New West, “likely resulting in higher insurance premiums and lower-quality service for Montana consumers.”

The lawsuit pointed out once the intended deal went public, there was a wave of people and businesses that stopped buying from New West — expecting it wouldn’t be around much longer — and switched to Blue Cross.

The two sides settled.

That let Blue Cross take over the hospital employee plans in 2012. But another company would get first dibs to insure the additional 9,000-plus people New West covered.

That brought in PacificSource.

The Oregon company only covered 1,500 Montanans at the time. But the hope was PacificSource, supported by the settlement’s caveats, could fill New West’s spot.

To make sure Blue Cross and the hospitals didn’t form another deal that hurt PacificSource’s chances, the settlement required the hospitals to form agreements with the incoming insurer similar to what they had with New West.

The governments said all that would “eliminate” the deal’s anticompetitive effects.

One of the plaintiffs in the case was then state Attorney General Steve Bullock — Montana’s now Democratic governor.

After multiple requests over a week, Bullock’s office declined to make him available for an interview. In a statement, Bullock said the case protected Montanans, who still have options for coverage.

“A competitive health insurance marketplace is critical to maintaining consumer choice and protecting Montanans from skyrocketing costs,” Bullock said.

New West sold Medicare Advantage plans until the company, unable to make money in the market for seniors, shuttered a few years ago.

Blue Cross remains the biggest insurer in Montana. As of 2018 it held 59% of the market.

Its top competitor, PacificSource, had nearly 23% of the market.

Blue Cross declined to talk about the deal or its effects for the business. Instead, spokesperson John Doran said Blue Cross has been in Montana for 80 years.

“And we’re going to be a constant moving forward,” he said.

AFTER THE GROUND SETTLED

Some say the antitrust action did its job. Government isn’t supposed to pick favorites but instead preserve players in the market. From there, it’s up to companies to compete.

The same year the deal went through, Blue Cross saw its biggest gain where Montana has the most commercial buyers: large group plans.

The company went from selling 66% to more than 80% of the plans that large businesses offer employees. Blue Cross has maintained or surpassed that majority every year since.

That doesn’t include self-funded plans that major businesses — including most hospitals — offer their employees. That’s when businesses take on the plans’ risks and rewards, but an insurer manages the plans for a price. And it’s a big market in Montana.

Blue Cross manages health benefits for 88,400 Montanans on those type of plans, according to the National Association of Insurance Commissioners’ database.

The next closest competition is national insurer Cigna, which manages self-funded plans for 32,900 Montanans.

Health experts like Bai say Blue Cross’ numbers translate to power.

Covering that many people means the insurer has more power to negotiate prices with hospitals — savings that don’t necessarily get passed down to patients, Bai said. It’s also easier to convince companies with employee benefits they’re the best insurer to go with because they have the largest provider base.

These talks lead to the plans people get through their jobs.

“If it’s a bad deal, it’s a bad deal and they can’t do anything about it,” Bai said.

She said the other option is risk a worse deal on the individual market or go uninsured, hoping never to meet exorbitant medical bills.

Doran, with Blue Cross, said a lot has happened since 2011 to impact the insurance business, from national to state health reformation. He the commercial data validates “the market is very competitive in Montana.”

“Our value remains very strong, and demand is high for our products across all lines of business,” Doran said.

There are areas where Blue Cross either has close competition and one place where it has fallen behind.

The company has just more than half of Montana’s small-group market with PacificSource close behind. It ranks second to Montana Health Co-Op on selling individual plans.

Hospitals say there were limited options before New West. There still are limited options, but there are companies besides Blue Cross.

PacificSource president and CEO Ken Provencher said his company did what regulators had hoped.

“The deal helped establish us a presence in Montana and helped us become probably a stronger player than New West was,” Provencher said.

He said the company would like a bigger piece of the large group market, but that can come with time.

Katheryn Houghton can be reached at khoughton@dailychronicle.com or at 582-2628.

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