Organizational ethics case study: The Bon Secours Richmond contract renewal

Health Progress, Sep/Oct 2001 by Gerardo, Edward F

The personnel of an organization make scores of decisions daily, often in direct response to the needs of a customer or to make operational improvements. Virtually all decisions have financial consequences for the organization and, on careful examination, reflect the values of that organization and staff. Most of these decisions take place in the context of a situation with discrete parameters, recognizable consequences, and frequently a well-established culture and value system that suggests the appropriate course of action. These "habits" guide the routine of the organization. Occasionally, however, significant events call for a decision that may profoundly affect relationships among those served, the culture of the organization, and the very nature and mission of the organization. Mergers, layoffs, and legal actions are examples of situations with significant consequences that suggest a more complex and structured discernment process.

For Catholic health care providers today, the challenge of discerning the proper course of action is all the more exacting because of the nature of the activity and the values inherent in a religious organization. In the fall of 1999, Bon Secours Richmond Health System* faced a vexing decision regarding its contract with the local Aetna health plan. The situation described here is not intended to be a model for complex ethical decision-making in a Catholic health care organization, but rather to invite discussion of the values and structures needed to ensure a comprehensive discernment.

THE CASE

In the 1990s, Bon Secours Richmond Health System had established contractual relationships with every health care insurer in central Virginia. The system's St. Mary's Hospital had sought, in addition to an excellent reputation for compassionate and high-quality services, to be one of the lower-cost providers for central Virginia. Although insurers early in the decade contracted with all area hospitals for their indemnity and PPO products, many tried to control costs by limiting their HMO enrollees to selected hospitals. Providers accepted lower reimbursement terms in exchange for an increased volume of patients to their facilities. The financial risks associated with indemnity and PPO products are borne, in large part, by individuals or self-insured businesses. The insurer under an HMO product assumes financial risk and reward.

Bon Secours facilities maintained a charge structure 25 to 40 percent lower than that of other area hospitals, for two reasons: concern for the cost of health care in the community, particularly for the out-of-pocket expenses of patients, and because such a business strategy enabled the organization to capture greater market share. This allowed for a lower per-unit expense and an acceptable bottom line. Bon Secours was, in fact, the preferred provider of health plans for their HMO product. The "win-win" was more business directed to Bon Secours hospitals for a lower cost to insurers.

The dilemma for health plans in the mid to late 1990s was how to increase their business. The choices were fairly simple: either merge with or buy out competing plans, or "open" their limited HMO networks to resemble their PPO product that gave consumers a greater choice of providers. Several plans did both.

The merger of US Healthcare and Aetna led to significant changes in the Richmond market. When Aetna subsequently acquired the central Virginia business of Prudential and NYLCare, further efforts to reduce payments, in line with Prudential's capitated contract, became matters for negotiation. The "new Aetna" proceeded to allow patients to use previously excluded hospitals-but it continued to pay Bon Secours rates predicated on the basis of a limited network arrangement, even though the contract specifically called for higher payments in the event network changes were implemented. Initially, Aetna did not disclose to Bon Secours changes in its network of providers and afterwards declined to make payment adjustments. Failure to adjust payments over the preceding 18 months and routine claim denials resulted in a several million-dollar payment shortfall to Bon Secours.

The local Bon Secours chief executive established an internal strategy team consisting of managed care, finance, hospital administration, and sponsorship senior team members. The responsibility of this group was to produce data enabling the team to understand the impact of various potential scenarios, establish negotiating parameters, and evaluate from several perspectives the responsibilities and consequences to Bon Secours for this contract. The local system also worked with corporate staff to establish the approach and acceptance of any final decision.

The management team determined that whether Bon Secours lost the contract or agreed to a new pricing structure, significant risks were apparent. If Bon Secours failed to retain its Aetna business, which represented 8 percent of revenue, the loss of income would place both capital improvement needs and wage increases in jeopardy. But to agree to such a significant discount in the current business to the point required by Aetna would adversely affect the stewardship of resources for the local system. Within a year, Bon Secours could expect other major health plans to pursue a similar rate structure. In addition to foregoing employee raises and equipment replacement, Bon Secours could likely face decisions about the level and quality of care delivered to its patients.