Weighing the impact: as the '800-pound gorilla of health care in North Carolina,' Blue Cross has the heft to crush rivals but hold down costs.

• Author: Martin, Edward

The old oak trees that buffer its brick-and-glass campus from the rest of Winston-Salem "wear the green flush of spring, but there's little cheer in the executive suites of the state's third-largest hospital. In a year when North Carolina Baptist will admit more than 30,000 patients, a struggle affecting thousands of them and those who visit its doctors and clinics has been unwinding for months. Outsiders, wearing grim countenances and business suits, come and go.

They're from Blue Cross and Blue Shield of North Carolina, the Chapel Hill-based company that insures more than a third of Baptist's patients, accounting for much of the medical center's nearly $800 million annual budget. Its three-year contract expired two years earlier, but Baptist operates under an extension--at rates almost five years old. We're losing money when we treat your members, the hospital argues, accusing the insurer of postponing meetings and stalling. A Blue Cross negotiator replies with a shrug: "We're fine with what we're paying you now." The offer on the table, Baptist officials are told, would make it Blue Cross' best-paid hospital in the state. Other hospitals, they would discover, had been told that, too.

On June 4, talks collapse. Blue Cross agrees to pay Baptist's patients directly. When they ask what to do with their checks, the insurer replies: Cash them. Some ignore the hospital, using the money for other purposes, in one case, buying a car. Baptist executives fume as unpaid bills mount. "It was another way to put pressure on us," one recalls. The stalemate ends that October when the hospital, citing concern for its patients, signs a new contract.

That confrontation five years ago--reconstructed from sources on both sides--is a rare look into what Kevin Schulman describes as "brass-knuckles" health-care negotiations. "The gentleman's-agreement world that existed until the late '80s has disappeared," says the physician, who has an MBA and teaches in Duke University's medical and business schools. Blue Cross and Baptist, now Wake Forest University Baptist Medical Center, have buried the hatchet--for the time being. Brad Wilson, who succeeded Robert Greczyn as the insurer's president and CEO earlier this year, dismisses what happened as routine bargaining--"sparks fly and reasonable people will disagree"--but promises what he calls a new era of transparency in dealing with providers. Edward Chadwick, who joined the medical center last year as chief financial officer, adds, "There's a new dimension on quality now, not just cost. I'm optimistic." Talks on a contract for 2011 will begin soon.

The standoff scenario is more than a glimpse at the secret side of the medical business: It shows one reason--audacity and hardball tactics--why 77-year-old Blue Cross dominates health care in North Carolina. Its clout is second only to that of federal Medicare and Medicaid programs for the elderly and the poor, which provide more than 60% of many hospitals' and doctors' revenue. With contracts covering 92% of the state's doctors and 99% of its hospitals, Blue Cross can sway what patients pay for care, how good it is and when and where they have access to it. It directly insures more than 3.7 million of North Carolina's 9.4 million residents. What Blue Cross does touches every Tar Heel, member or not.

When, for example, the insurer squeezes reimbursements to doctors and hospitals, it holds down premiums, saving members money. But it leaves doctors and hospitals facing hard choices--scale back their compensation or charge more to members of other insurance plans, patients who pay their own bills or local taxpayers who subsidize charity care. "Blue Cross and Blue Shield is the 800-pound gorilla of health care in North Carolina," says Chuck Stone, director of North Carolinians for Affordable Health Care, a lobbying arm of the 55,000-member State Employees Association. Blue Cross administers the health plan for state employees, dependents and retirees, covering about 660,000 people.

The appellation brings a smile to the face of Wilson, 57, who has heard it before. It's difficult to compute accurately Blue Cross' market share, but analysts estimate that it exceeds 90% in selected segments, such as policies sold to individuals. In September, the company and the N.C. Department of Insurance announced that Blue Cross would refund more than $155 million to 215,000 individual policyholders. These aren't overcharges, Wilson says, but due to health-care reform provisions that permit them. What goes...