Virginia’s largest insurer wants investigation of Sentara for ‘anti-competitive harm’

In early April, Sentara — one of the largest health systems in Virginia with 11 hospitals scattered across five regions — sent a letter to Anthem, the state’s largest insurer. 

Lance Torcom, Sentara’s chief managed care officer, informed Anthem that the system would be terminating its contract with the insurer’s Medicaid and Medicare lines of business. Effective Oct. 12, in other words, any patient who received government-provided health coverage through Anthem would no longer be able to use their insurance at Sentara’s facilities. Those include not only the system’s acute care hospitals, but seven affiliated surgery centers and six physician groups that also fall under its ownership.

“Please understand that it has always been our preference to avoid such action,” Torcom wrote to Andy Randazzo, a regional vice president for Anthem. “In fact, we purposefully provided Anthem with advance verbal and written notice of this potential action in February in an attempt to resolve the matter and avoid escalation.”

The move, which could have affected more than 525,000 of Anthem’s Medicaid patients across Virginia, according to state enrollment figures, never happened. After weeks of negotiation, Sentara rescinded its termination notice on Aug. 16. Anthem’s Medicaid and Medicare patients were never notified about the dispute or told their insurance would no longer be accepted at Sentara facilities, according to Christina Nuckols, a spokesperson for the Virginia Department of Medical Assistance Services, which administers the state’s Medicaid program.

“Health care access and services for our members continued without disruption,” she wrote in an email. But not before Anthem escalated the fight to state regulators. In May, the company sent a letter to Attorney General Mark Herring, asking his office to look into the “anti-competitive harm” posed by Sentara. Even after the hospital system withdrew its termination, Anthem prodded for an inquiry.

“We continue to encourage the Office of the Attorney General to investigate the anticompetitive behavior of Sentara to leverage their monopoly status in their efforts to limit payor competition,” Lindsay Berry Winter, the insurer’s senior director of government relations, wrote in a later email to state officials (the Mercury obtained the documents through a Freedom of Information Act request). 

“While we are thankful that our members were not denied access to the monopoly hospital in the region, we do not think Medicaid and Medicare beneficiaries should be used as pawns by hospitals in contract negotiations,” she added. “Especially those hospitals who have ownership stakes in competitor health plans.”

The conflict speaks to Sentara’s growing market dominance — largely left unchallenged by state regulators — but also a new era of scrutiny into large health systems. Earlier this summer, President Joe Biden cited hospital monopolization as a specific area of concern to competition, signing an executive order that directed federal regulators to focus their enforcement efforts on health care markets. Numerous states, including California and North Carolina, have seen officials crack down on sprawling hospital systems for stifling competition in their regions. 

Virginia’s Office of the Attorney General wouldn’t disclose whether Anthem’s complaints resulted in any action against Sentara. “We generally do not comment on pending investigations, even to confirm whether or not one may be ongoing,” spokesperson Charlotte Gomer wrote in an email to the Mercury. Historically, the office’s involvement in the hospital industry has been confined to “review of mergers or transfers/sales of assets,” chief of staff Michael Kelly said in a follow-up email.

But growing pressure from other large health care players could shine a new spotlight onto Virginia’s increasingly consolidated hospital systems, which have long enjoyed protection under the state’s regulatory laws. Sentara is far from the only player, but it’s also an easy target. 

The system currently commands just over 72 percent of the inpatient market share in the Hampton Roads region, where seven of its 11 hospitals are located, according to a white paper commissioned by a competing health system (Sentara has not disputed the figure). Just a few weeks before its termination letter to Anthem, the system was sued by the same competitor — Chesapeake Regional Medical Center — for aggressively and intentionally crippling the smaller hospital’s cardiology program, according to the lawsuit. 

And in addition to its medical facilities and physician groups, Sentara owns its own health plans — Optima (which it owns in full) and Virginia Premier, of which it holds an 80 percent majority share. It’s those companies, specifically, that have attracted scrutiny for stifling competition.

“Health systems that also own health plans have the ability to limit the number of other health plans its providers contract with,” Anthem spokesperson Colin Manning wrote in an email, “or set financial terms that are unfavorable to competing health plans — effectively limiting consumers’ access and choice and increasing health care costs.”  

‘It’s hard to characterize this as anything more than an awful policy failure’

That kind of consolidation — hospitals that own their own physician practices and, frequently, insurance companies — is often referred to as “vertical integration.” And it’s a practice that’s staunchly defended by the health systems who use it. Sentara spokesperson Danya Bushéy wouldn’t discuss the dispute with Anthem, saying only that Sentara “does not comment on the details of our contractual relationships” but was “glad we reached an agreement … that is in the best interest of our patients and their members.” 

She did, however, extol the benefits of Sentara’s “integrated delivery system” — points repeated by Colin Drozdowski, the senior vice president of provider network management for Sentara Health Plans, at a recent meeting of the state’s Health Insurance Reform Commission. 

“We, as an integrated delivery network, can seamlessly work both with our employed physicians and our contracted partners on behalf of the member, on behalf of the patient, through a health plan that maximizes their opportunities,” he told lawmakers. 

Much of the argument, in other words, is that health plans owned by hospital systems work out better for consumers. In some ways, hospitals have faced real headaches from Anthem and other large insurance companies, which are currently running billions of dollars behind on payments for treatment, according to reporting by Kaiser Health News. Some hospitals — and patients — are also seeing a rise in retroactive claims denials, disrupting care and creating anxiety over who’s responsible for paying large medical bills.

But when hospitals own their own health plans, those disputes tend to disappear. There’s no disagreement over what kinds of treatment are reimbursable — or which providers are covered in-network — when they’re all operating under the same ownership system. Sentara was an early adopter of the model, which has been progressing for at least a decade. And experts say it provides hospitals with some clear benefits, including complete control of premium dollars and more power to steer customers toward their facilities and services.  

“The proven benefits…include lower provider costs, lower premiums, improved quality of care and better outcomes,” Bushéy said. “We operate one of the lowest-cost, highest-quality health care systems in the commonwealth.” It’s an argument that’s been largely accepted by Virginia legislators, as well, who have openly questioned efforts to regulate vertically integrated health systems.

“Is there any third-party data showing huge dissatisfaction with the system as it stands?” asked Del. Wendy Gooditis, D-Loudoun, at the same meeting. “Because I tend to think that hospitals have to be supported.”

Barak Richman, a professor with the Duke University School of Law who specializes in health care policy, says that’s still a common sentiment for officials both in Virginia and across the country. And Virginia, like many other states, offers hospitals an extra degree of protection through its certificate of public need (or COPN) laws — regulations requiring hospitals and other medical facilities to get state approval for everything from adding new beds to purchasing new imaging equipment to establishing new surgical programs. 

Today, the process is increasingly used by neighboring hospital systems to oppose new projects from their competitors. Carilion Clinic, for example, has long blocked efforts by HCA Healthcare to open a new neonatal care unit in the Roanoke region. Chesapeake Regional Medical Center’s lawsuit against Sentara was based partially on the fact that its application for an open-heart surgery program was denied — but only after Sentara spoke out against the proposal.

“It’s hard to characterize this as anything more than an awful policy failure,” Richman said. For decades, mergers and acquisitions by hospital systems have faced little scrutiny from regulators. Sometimes, they’re explicitly approved by them. In Virginia, for example, two southwestern hospitals merged to form Ballad Health, now the sole health system in the region, with the express permission of Virginia and Tennessee health authorities — and over the objections of the Federal Trade Commission.

“They’re basically saying, ‘Look, we know price competition is important, but we think we’ll be able to prevent them from using their monopoly power,’” Richman said. “And that tends to be a pretty high form of arrogance.” Like other economic experts, he says consolidation, combined with regulatory protections like COPN, has increasingly concentrated services in the hands of a few large health systems — allowing them to raise prices with little room for pushback. And that, Anthem argues, is exactly what Sentara is doing.

Cost-saving measures, or a threat to Anthem’s bottom line?

The dispute started with specialty drugs and outpatient surgery. In its termination letter to Anthem, Sentara specifically cited those two policies in its decision to cut off the company’s Medicare and Medicaid plans. 

The first is better known as “white bagging” — requiring hospitals to source specialty medications through insurer-approved pharmacies rather than buying and billing for the drugs themselves. The second is an initiative to direct Anthem’s Medicaid patients to outpatient sites for some procedures, rather than going to the hospital. And while white bagging hasn’t actually been implemented in Virginia, according to Manning, Anthem’s spokesperson, both policies are wildly unpopular with hospitals. 

“It is important that Anthem understands Sentara’s increasing frustration over these unilateral changes which are occurring with little notice, no negotiation and no consultation prior to implementation,” wrote Torcom, the system’s chief managed care officer. The American Hospital Association described them as a “bait-and-switch” for both in-network hospitals and patients, impacting services that should be covered by the insurer. 

But Richman said it’s important to note that both initiatives are intended to lower health care costs, a responsibility that’s increasingly falling on insurance companies. Many surgeries, especially elective procedures, are one of the biggest profit-makers for health systems, even though they can often be done more quickly — and more cheaply — in outpatient settings. Torcom described the outpatient initiative as an issue of “patient and physician choice,” but he also worried it would reduce “the volume of ambulatory surgeries at our hospitals.”

Specialty medication can also be a big money-maker. Reports have found that some hospitals mark up the prices of certain drugs by an average of 250 percent, billing insurance for the same amount. Doug Gray, executive director of the Virginia Association of Health Plans, told the Mercury in May that white bagging was an effort to rein in those payments (though it’s also helpful for the insurers’ bottom line).

“The reason that the hospitals are complaining is because they mark up the drugs and keep the difference,” he said. Richman, too, described the two initiatives as “pretty rudimentary” strategies to keep costs down.

“Hospital monopolies have been the primary cause of health care price inflation over the last 25 years,” he said. “And for the most part, insurers have just tried to go along with the strategy — saying, ‘Okay, look, we’ll just have to stomach whatever price increases there are and have them reflected in our insurance premiums.’”

That’s where Sentara’s market dominance becomes a problem, according to Anthem. Typically, large insurance companies have leverage when they negotiate with hospitals because of the number of customers they can offer them. But in an environment where one health system commands more than 70 percent of the inpatient market — plus physicians’ practices and outpatient offices — that health system has all the power. In other words, if Sentara decides to cut off Anthem’s patients over cost-saving initiatives, those individuals often have nowhere else to go for care.

“Due to Sentara’s market share, denying our Medicaid and Medicare members in-network access to Sentara’s physicians and facilities will disrupt critically important patient-provider relationships for the most vulnerable Virginians,” executives wrote in their letter to the Attorney General. That makes it far more likely the insurer will roll back its initiatives, or exempt the health system, to maintain access. (Manning would not comment on whether Anthem exempted Sentara from the policies to maintain its Medicaid and Medicare contracts with the health system).

Over the years, some large hospital systems have also gotten in trouble for so-called “anti-steerage” provisions — clauses in their contracts with insurance companies that prohibit the carriers from directing members to medical services from competing providers. Since those contracts are considered strictly proprietary, consumers usually don’t know the provisions are in place, Richman said. But health systems can use them to restrict access to lower-cost services, limiting consumer choice and driving up the cost of premiums.

It’s not clear whether any of Sentara’s contracts include the provisions, but objecting to outpatient initiatives accomplishes the same thing, Anthem argued.

“We continue to contend that retaliatory action like terminating a contract over a site-of-service program is no different than forcing that health plan to agree to anti-steerage language in the provider agreement,” Berry Winter, the carrier’s senior director for government relations, wrote in her email. And there’s an added layer of complexity given that Sentara owns its own health plans. Both of them, Optima and Virginia Premier, are managed care organizations for Virginia — health insurance companies contracted by the state to provide coverage to its Medicaid enrollees (many of them also provide plans to individuals on Medicare). 

Anthem is also one of the state’s six contracted MCOs. And while the company is the largest commercial insurer in Virginia, with roughly 40 percent of the market, Sentara’s health plans account for the largest share of government-provided insurance — with nearly 32 percent of the market compared to Anthem’s 25 percent, according to Bushéy, the Sentara spokeswoman. 

That makes Anthem and Sentara health plans direct competitors for some of the same customers. Anthem argued that it gives the health system an added incentive to terminate Anthem’s coverage. When that type of disruption occurs, the Department of Medical Assistance Services allows Medicaid members to switch health plans outside the normal open enrollment period, according to Nuckols, the department’s spokeswoman. And with Anthem cut off from Sentara hospitals, many of those patients might choose to move to Optima or Virginia Premier.

“These actions serve no purpose other than to attempt to force Anthem into keeping costs high for Sentara’s own gain while simultaneously limiting competition for its Medicaid and Medicare health plans,” executives wrote.

A threat to Medicaid spending

Vertical integration isn’t a new issue in Virginia. But it’s one that’s failed to shake loose a legislative solution. Back in 2019, two lawmakers filed bills that would require integrated health systems to allow public hospitals to participate in their insurance networks. The motivation, again, was Sentara — and Optima — which doesn’t cover all the services offered by the nearby Chesapeake Regional Medical Center. Both bills, though, died in House committees, as did similar legislation filed the year before.

Part of the problem is that the health care marketplace is extraordinarily complicated, making it difficult for part-time legislators to absorb the issues over a typical two-month session. “I know there have been conflicts over this situation, but to be honest, I am not an expert on it at all,” said Del. Mark Sickles, D-Fairfax, a senior budget negotiator and chair of the House Health, Welfare and Institutions Committee. 

Often, the debates seem to boil down to competition between large business interests, which the General Assembly has been historically reluctant to wade into, according to many legislators and lobbyists. Both Anthem and the hospital industry have spent millions on lobbying and political contributions over the years, which also muddies the water. But Richman said the end result is usually higher costs for consumers. There’s also concern that vertically integrated health systems may be driving up state Medicaid spending. 

It’s an issue the Joint Legislative Audit & Review Commission, a legislative watchdog group, explored in 2016, as Virginia was debating Medicaid expansion. The analysis found that Virginia had weaker caps on profits made by managed care organizations than other states, and didn’t do enough to disincentivize “inefficient” medical spending like avoidable emergency room visits or excessive prescriptions.

Some of the findings resulted in tighter regulations on the companies. The next year, for example, lawmakers passed budget language reducing payments to managed care organizations based on unnecessary medical treatment. The policy provides an incentive for companies to reduce health care costs in order to keep more of the money they’re paid by the state.

But another potential spending issue, the report found, was “related-party arrangements” — another term for vertical integration. Optima, for instance, may choose to pay Sentara facilities higher reimbursement rates than other hospitals it contracts with. Those agreements are considered strictly confidential, so consumers or competitors might not know. But the Department of Medical Assistance Services could adjust its reimbursement strategy so the state isn’t paying above market value for those services.

While that was one of the recommendations in the report, it’s not one the department has taken up. “There is no language included in the Appropriation Act directing DMAS to take this action,” Nuckols, the Virginia Department of Medical Assistance Services spokeswoman, said in an email. And with little oversight over how the arrangements impact costs, competing insurers, like Anthem, argue there’s little incentive for vertically integrated systems to bring down spending. 

Parsing out the impact of the arrangements is notoriously difficult without fully understanding how much insurers are reimbursing hospitals for their services — and whether vertically integrated systems are getting better rates from their sister plans. But there is some evidence Optima is paying out more for medical care than other carriers. 

Virginia keeps tabs on a metric known as medical cost ratio — the amount that each plan spends on health services and treatments. The state average is 84 percent, in line with federal requirements on how much carriers should spend.

Those targets are designed to ensure insurance companies spend the majority of their revenue on health costs, analysts said, while keeping a certain amount as profit. And in Virginia, managed care organizations are required to start returning some of their profits if they exceed three percent of their revenue.

Optima’s medical cost ratio is 93 percent, indicating the company spends almost all of its profits on medical care. What’s not clear, though, is which facilities are receiving the money. Hospital-owned insurance companies “have an incentive to pay more to related parties,” according to the state’s analysis, because they can share in the profits made by those providers. And paying higher rates to their own facilities could help them avoid returning excess profits.

“I’m not saying this exact thing happens,” one state policy analyst told the Mercury anonymously (legislative analysts are not authorized to speak to the media on the record). “But this is the risk to the state.”