In a move that could prove disastrous for Duke University Health System, the State Employees Health Plan is planning to terminate its existing contract with DUHS in reaction to stalled negotiations over a proposed rate reduction.
Unless negotiations are successful, the long-standing partnership between the two health care giants will end, effective April 30, sending thousands of state employees and retirees to new health care providers.
The discord centers on a move by the state plan to reduce the amount it compensates hospitals for three services: inpatient mental health, rehabilitation and chemical dependency. Duke is the only one of 40 hospitals in the state-including University of North Carolina Hospitals-that has not agreed to the rate reduction, said Paul Sebo, director of operations for the state plan.
As Duke is the largest supplier of health care for the state and the state is in turn one of Duke's biggest clients, the difficult path of negotiations so far has surprised and angered those on both sides.
"When it comes to those services, [Duke administrators] feel they are 'without peer,'" Sebo said. "If that's the case, they may think they don't have to follow the same rules as other hospitals."
As he estimates the three services represent only a small fraction of the state's total business with DUHS, Sebo expressed disbelief that Duke would be willing to allow the rift to end their affiliation.
"We send [Duke] around $50 million of business every year. I think we're their biggest client.... I cannot believe that it is in Duke's best interest to give up all that business," Sebo said. "At the same time, they're important to us, too. There's no reason on our part to not want to do business with them.... But if you're the boss and change the rules for one guy, then what about the other 39?"
The state health plan, which spends about $1.2 billion annually to insure 530,000 state employees, retirees and their dependents, is reducing payments for the three services to shave $2 million in spending, partly in reaction to the state's impending budget crisis. Duke accounts for 13 percent of the state plan's charges for those particular services.
State health plan executives' perception that Duke was unwilling to negotiate led Jack Walker, the executive administrator of the state plan, to send a letter dated Dec. 31 notifying Duke of its termination of their contract.
Kenneth Morris, vice president and chief financial officer of DUHS, responded with a Jan. 8 letter expressing "disappointment" at the state's decision. "As the largest provider of services to your members, we do not take this termination lightly. We believe that many of our services are unique, and we are concerned that your decision could result in your members being unduly penalized," Morris wrote in the letter.
He added that DUHS had been prepared to negotiate as part of routine contract discussions in the spring. "If the purpose of your letter of termination is to initiate a full discussion earlier than would normally occur, let me assure you that Duke is prepared to do so," Morris wrote.
Sebo said the letter did not satisfy him and that he felt Duke needs to be more constructive. "The letter left me a little bit confused," Sebo said. "If you got a problem, you call us and get the problem resolved. That's kind of why we're in this situation now. I even consider exchanging e-mails a bit of a cop-out."
In response, SEHP sent a letter to state employees Tuesday with the headline "Duke University Health System and State Health Plan Terminate Hospital Contract For All Patient Care Services."
"At this time, DUHS has declined to negotiate new rates with the Plan," the letter read, adding, "The Plan is committed to working with DUHS to avoid any disruption in care to its members."
The next step occurred Wednesday, when Morris sent a memorandum to DUHS executive leaders explaining the situation and responding to what he called "factual errors and misleading statements" in the SEHP letter. "We were prepared to begin negotiations for contract renewal this spring, so you can imagine our surprise earlier this month when we received a letter from SEHP notifying us that our contract to provide hospital services was being canceled prematurely," Morris wrote. "It is regrettable that SEHP has taken an action that is likely to cause concern and confusion for their members."
Morris' memo indicated Duke had always been willing to negotiate new rates, and that state employees would still be able to access Duke facilities on an out-of-network basis.
If coverage with DUHS ends in April, the several thousands of state employees who rely on Duke for health care would still be able to use Duke hospitals, but would need to pay an additional 20 percent out-of-pocket for services, up to an additional $5,000, Sebo explained. The N.C. Health Choice for Children program, which covers 92,000 uninsured North Carolinian children, would also be affected, he added.
Sebo indicated that the situation, as it currently stands, does not bode well for further negotiations that may be conducted later this year.
"The state is in a real financial crisis and this was just these three services," Sebo said. "Big negotiations will be coming later this year. What in the world are we going to face later this year if we have to negotiate all services?"
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