Blue Cross Has Lost Its Way, Rhode Island Hospital Charges

A nonprofit hospital and its court-appointed special master have sued Blue Cross Blue Shield of Rhode Island, asking that it "limit its accumulation of wealth" and its "excessive compensation and benefits" to executives, "in accordance with its statutory and charitable mission."

Joseph N. Savage, the court-appointed special master for Landmark Medical Center, accuses Blue Cross of failing to meet its obligation to “fulfill its charitable, nonprofit mission” by not properly reimbursing Landmark for the costs of caring for Blue Cross-insured patients.

The suit seeks a court order compelling the Blues to begin making “reasonable reimbursement rates” and to reimburse Landmark for past underpayments to Landmark, a nonprofit hospital in Woonsocket.

The Woonsocket area has one of the highest poverty rates in Rhode Island and is home to an older, more isolated and more disabled population than other parts of the state, according to the complaint. Landmark is the only acute-care hospital serving the area.

Savage was appointed in 2008 by the Providence County Superior Court to act as the hospital's special master, an arrangement similar to bankruptcy.

The lawsuit traces the history of Blue Cross in Rhode Island, noting that under legislation enacted in 1939, Blue Cross is not an insurance company. Instead, it is a nonprofit hospital service corporation and is granted special privileges not available to traditional insurance companies.

Despite that, the suit claims that Blue Cross has taken advantage of Landmark's status as a standalone hospital, not affiliated with other healthcare providers in the region and has paid it at a lower reimbursement rate than hospitals with more negotiation leverage. It quotes a state report which found that in 2008, Landmark was paid on average only 97% of the Medicare reimbursement rate while hospitals affiliated with groups such as Care New England and Lifespan were paid 149% and 117%, respectively.

Since 2001, the suit argues, Blue Cross payments to Landmark have been inadequate to cover the rising costs of doing business. It says that in 2002, Blue Cross paid Landmark $3 million less than the cost of providing care to Blue Cross subscribers, $3.7 million less in 2003 and in 2004, $3.6 million less – for a deficit of $10 million over three years.

While Blue Cross eventually agreed to pay $6.1 million of the shortfall, that payment did nothing to solve the problem going forward, the suit notes, leading to the hospital's becoming insolvent in 2008 and entering into the special master arrangement.

While forcing Landmark into insolvency, Blue Cross continued making large payments that had nothing to do with its nonprofit, charitable mission, the complaint argues, listing these examples, among others:

• $7.8 million in refunds to the state of Rhode Island to settle disputes involving overcharging state employees;

• $400,000 “for the benefit of the President of the Rhode Island Senate;”

• $175,000 “for the benefit of a Rhode Island State Representative;”

• $75,000 to a state senator and corporations commission chairman.

All of these payments were illegal and were made to influence pending legislation, the suit charges. It alleges that Blue Cross avoided criminal prosecution only by agreeing to pay a $20 million penalty as part of a plea bargain with the U.S. Justice Department.

The suit also recites a long list of generous salary and pension benefits to Blue Cross officers and directors and notes that in 2005, Blue Cross paid $17.5 million to settle a class action lawsuit accusing it of failing to pass along prescription drug discounts, billing patients at the full rate and pocketing the difference.

“Blue Cross executives, past and present, have effectively converted a non-profit, charitable organization into a powerful monopoly designed primarily to accumulate wealth in order to fund hundreds of millions of dollars to executives and employees” while raising rates to subscribers and cutting reimbursements to doctors, hospitals and other healthcare provides, the suit charges.