Officials look into Avera’s pricing option

South Dakota officials are checking the legality of an arrangement in which Avera Health is covering out-of-pocket expenses of state employees for some medical services.

“Yes, we are looking at that,” said Laurie Gill, commissioner for the South Dakota Bureau of Human Resources.

Avera has offered to assist state workers with their medical bills if they seek the care they need from Avera rather than two competitors that secured state contracts after competitive bidding.

Avera, which owns St. Mary’s Hospital in Pierre, says the arrangement spares many employees a drive from the state capital to Sioux Falls for medical care.

“Care should be delivered close to home,” said Rob Bates, senior vice president of managed care services for Avera Health.

But the two competitors — Sanford Health and Sioux Falls Specialty Hospital — say Avera is subverting the bidding process in a way that ends up costing South Dakota more on its employee health insurance.

“I think it’s illegal. There’s state statute, as a matter of regulation, you can’t waive someone’s copay and deductible to gain their business,” said Dr. Blake Curd, a surgeon and part owner of Sioux Falls Specialty Hospital. “If Avera says ‘we’ll do it,’ what was the point of Sanford making a bid and Sioux Falls Specialty Hospital making a bid?”

Curd, who also is a Republican state senator, said the situation is a result of an administrative decision, not an act of the Legislature. He thinks the practice breaks state code concerning health insurance.

“I’m in the process of trying to look into that,” he said late Friday.

Avera notified the state of its proposal six weeks in advance this spring and sent letters to 10,000 patients who potentially would use the option, spokeswoman Lindsey Meyers said.

Preferred providers

A change in the state’s health insurance plan this summer identifies preferred providers to give medical care to state employees and their families in five major, or Tier 1, categories. Sanford won the bidding to be preferred provider in three of the five categories, for cardiac, orthopedic and bariatric services. Sioux Falls Specialty Hospital won the bid for services in a fourth category, gastroenterology. Avera secured the contract for the other category in kidney care.

Putting those Tier 1 services out for bid was part of a wider effort to save money for the health plan, which, until recently, has been operating in the red.

The change concerned only a few major procedures in those five categories — such as heart bypass or dialysis after kidney failure — and even then did not require that those specific services come from the preferred provider.

“Employees can choose whether or not they want to travel to a Tier 1 facility. It’s not a mandate,” Gill said Friday.

But one result is that employees who choose services from a facility other than the preferred provider would pay more out of pocket for their care.

Avera has offered to cover that difference in cost.

Bates said it was common sense.

“Many times you would have to drive hundreds of miles to reach a Tier 1 provider,” he said. “If you’re in Rapid City, you have to go a long way to get to Aberdeen or Sioux Falls to access Tier 1 service.”

Of particular concern is Hughes County, which, with the capital in Pierre, is home to 2,670, or 21 percent, of the state’s 12,708 employees, he said.

Costing state more

Ruth Krystopolski, executive vice president of care innovation for Sanford Health, said Avera’s offer might appear to help employees. But it ends up costing the state more through higher reimbursements to providers that did not win the bid.

She said a $10,000 procedure set at that price through competitive bidding might cost the employee $1,000 out of pocket and the state $9,000 to reimburse the provider.

“Under the Avera model, perhaps their cost was $20,000 and the employee portion is $2,000. The underlying cost to the state just went from $9,000 to $18,000,” she said.

Under that example, Avera would absorb the difference in cost for the employee, keeping it at $1,000.

“While Avera agrees to keep the employee whole, it undermines the value for the state and the state pays more. I think for that reason it’s objectionable,” Krystopolski said. “Reimbursement for all services outside Tier 1 ... would be paid what they were before, which is significantly higher. This negatively impacts the state and the taxpayers of the state.”

She said she has raised this point with Gill.

“Yes, I believe she has the same concern. The reason for doing this was to address the rising cost of the health care plan. If they don’t have this tool, it limits their ability to control health care costs,” Krystopolski said.

Easier for patient

Bates offered a different example. A Pierre resident who needed a diagnostic colonoscopy would face an odd and uncomfortable situation if required to follow the liquid regimen to prepare for an appointment with the Tier 1 provider in Sioux Falls, he said.

“Do you prepare for the colonoscopy, then drive three hours, or drive, get a hotel room, prepare and get it done the next day?” he said.

Bates said absorbing the difference in employee costs does not result in Avera taking a loss.

“We receive less reimbursement this way. I would not look at it as a loss. It’s less reimbursement,” he said.

He said Avera’s approach is not a maneuver around the bidding process.

“It doesn’t violate anything. Both sides bid. The winning bidder we can safely assume has a lower price. This isn’t about price access. It’s about convenience and quality of care for patients,” Bates said. “I think Avera ... this business model is conducive to providing the highest quality of care. We don’t think that’s being done when we make them drive three hours for care they could be getting close to home.”

The state health insurance plan is self-funded, meaning the employee group, ideally, is large enough for premiums coming in to cover medical claims and administration. It operates at about $120 million a year, Gill said. The state pays the entire premium for its employees, but dependents and retirees must pay for coverage. Premiums are based on estimated expenses.

‘Financial crisis’

“The state health plan has been in financial crisis for several years,” Gill said. “Last session the Legislature was faced with a backfill of $21.3 million for fiscal 2012 and ’13.”

Fiscal 2014, which ended June 30, showed a surplus in the fund.

The bidding process for the five Tier 1 categories is one part of a wider effort to lower costs, she said. The process specified bundled care to cover not only the cost of a procedure itself, but related costs from three days before the procedure to 30 days afterward.

“Bids were examined for cost and quality. There are certain quality indicators that can be tracked,” she said.

Those indicators include complications following a procedure and readmission to a hospital.

Gill said late Friday that she had talked with Krystopolski about her objections.