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UPMC Insurance Arm is Wrestling Costs Down

UPMC Health System is the 800-pound gorilla on the local hospital scene, but it's the 97-pound weakling when it comes to insurance.

Yet this feisty upstart is doing an impressive job of kicking sand in the face of its near-monopolistic competitor, Highmark Blue Cross Blue Shield. And the employers and employees of Western Pennsylvania are reaping the rewards.

The most recent contract with the Pittsburgh Board of Public Education offers a textbook case study of the economic value of competition. The board, based on proposals submitted by Highmark, expected that its three-year insurance cost would rise to $114 million. UPMC countered with a $94 million bid for a slightly different, but relatively comparable package of benefits.

Lo and behold, Highmark realized that, with some rejiggering, it could really insure the district's 5,000 employees for $99 million. The deal was done, teachers got 3.7 percent annual raises and a strike was averted. To put the savings in perspective, the district swallowed a 17 percent health insurance increase last year, but under the new contract, its first-year increase will be 1 percent and it will cap at 7 percent for the next two years.

Allegheny County Chief Executive Jim Roddey reports that the county contract negotiations are moving toward conclusion with lower health costs than expected, for exactly the same reason. With UPMC bidding, Highmark is coming in lower than anticipated and promising a cap for the life of the contract.

As small as it is in comparison with its mammoth competitor, UPMC is a serious player and has made a substantial investment to start an insurance business from scratch.

Its motivation was largely self-preservation. UPMC felt it was being squeezed by Highmark's reimbursement rates, but recognized that there was virtually no alternative. It decided to provide one.

Despite its size, UPMC has the built-in advantage of an enormous network of hospitals and doctors, which makes its insurance attractive and of high quality. While its insurance division has yet to realize an annual profit because of overhead and start-up costs, it insists that it has entered the realm of profitability and that its bids are designed to make money.

Which begs the question: Why is it able to underbid Highmark by such a significant margin? It is especially puzzling in light of the savings that were supposed to have been achieved by the merger of Blue Cross and Blue Shield, savings that have failed to materialize.

Whatever the reason, the appearance on the scene of UPMC insurance should motivate Highmark to get its house in order quickly and efficiently. However, the value of competitive pressure will last only as long as UPMC is around to apply it. In the past, Highmark has successfully dispatched threats to its dominance by bidding low, winning the contract and reverting to old ways once the challenger was defanged.

UPMC may prove to have more staying power than that, given its powerful institutional connection to the region and the equally powerful need for a counterbalance to Highmark. After a very brief respite in spiraling health-care costs, the trend is back up again, with a vengeance.

Hospital and doctor costs are part of the problem; drug costs are a much bigger culprit. But as the bidding between Highmark and UPMC indicates, there is more involved in the price of health than the doctor bill.

Highmark has gone along without any serious competition for years, and it shows on the bottom line. To the extent that UPMC is able to offer a viable alternative - and actually close deals - the entire community will benefit.

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