Editor’s note: This story was originally published in the Observer on June 28, 2010.
Carolinas HealthCare System co-owns the company it uses to administer health benefits to its roughly 30,000 employees.
The Charlotte-based hospital group denies that poses a conflict of interest.
But in a similar arrangement 80 miles to the northeast, some employees at N.C. Baptist Hospital took a different view. They filed a lawsuit against the Winston-Salem hospital, arguing that Baptist didn't look out for the best interests of employees when it chose a subsidiary named MedCost to administer their medical benefits.
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N.C. Baptist admitted no wrongdoing but agreed in 2009 to settle the suit.
CHS and N.C. Baptist jointly own MedCost, a for-profit company that administers health plans and contracts with hospitals and doctors' offices across the Carolinas to provide medical services.
N.C. Baptist employees alleged the hospital chose MedCost as its group health plan because the agreement allowed it to be paid inflated amounts for the medical treatment that Baptist provided to its own employees. As a preferred provider organization, or PPO, MedCost is supposed to negotiate on behalf of employee health plans to get discounts for medical services from hospitals and doctors' offices.
But N.C. Baptist employees contended the hospital selected MedCost, its subsidiary, because it wanted its employees in a PPO that wouldn't drive a hard bargain on treatment costs employees pay at the hospital.
In fact, the lawsuit alleged, Baptist hospital offered other employers cheaper prices for services than it gave to its own employees.
In settling the lawsuit, Baptist Hospital agreed to take steps that resulted in lower medical costs for employees.
An independent fiduciary, meanwhile, has been appointed to determine whether N.C. Baptist can continue to use MedCost through 2014.
U.S. Labor Secretary Hilda Solis also has weighed in on the case. After 2014, Baptist should seek permission from the federal labor department before using MedCost, Solis cautioned.
To protect employees, the federal Employee Retirement Income Security Act, known as ERISA, prohibits most employers from using companies they own to provide health benefits for employees - unless they can show the labor department that they're putting employees' interests first.
But CHS officials contend they're not governed by the federal law because of a provision that excludes governmental employers. CHS, the third-largest public hospital system in the nation, is a quasi-governmental entity known as a "hospital authority." The system receives public funding for the treatment of the uninsured.
Asked what's in place to protect employees, CHS lawyer Brett Denton said the hospital chain has a strong incentive to provide a competitive health plan.
"If you don't, your work force will choose those who do..., " he said. "We can't do what we do without good employees."
But Woody Connette, a Charlotte lawyer with expertise on group health plans, said the MedCost arrangement creates the potential for conflicts of interest.
"The biggest question is whether the hospital authority is putting its own interests ahead of its employees, " Connette said.
CHS officials disagree.
"Healthcare organizations all over the country have interests in health plans, " said Scott White, a spokesman for the system. "There is no conflict of interest. It is the best way we can ensure our employees have access to the best network of providers available."
White pointed to the nonprofit Geisinger Health System, a widely praised system of hospitals in Pennsylvania that owns its own insurance plan.
But one former CHS employee questions whether the MedCost agreement benefits workers.
"It really upset me that if you had an emergency room visit, you had to pay a $150 co-pay up front, even if you were an employee there, " said one former employee who left in 2009. The former employee asked not to be named because she fears publicity could make it harder for her to keep working in the medical profession.
Now employed as a physician's assistant by another company, she says she has medical coverage that requires a co-pay of just $100 for emergency room visits.
The MedCost arrangement creates a conflict of interest, she said. "You worry about where your money's going, " she said.
CHS employees with the most comprehensive family medical coverage now pay about $7,000 a year in premiums, according to an enrollment guide. In exchange, the plan covers 90 percent of charges after a deductible if employees are hospitalized at a CHS facility.
CHS, which owns, manages or leases more than 30 hospitals including Carolinas Medical Center, became a co-owner of MedCost in 1996. Today, CHS and N.C. Baptist each own half of the 26-year-old company. Both have self-funded medical plans. That means the hospitals create a pool of money that pays for medical benefits of their employees.
Denton said he believes the MedCost heath plan offers good benefits at a competitive price. But officials with Carolinas HealthCare declined to discuss what discounts MedCost has negotiated with CHS-owned hospitals.
They also refused to share information about MedCost's finances, saying the information is proprietary.
News and Observer Staff Writer Dan Kane contributed.