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Harvard Pilgrim’s pragmatic warrior

CEO looks for common ground in health care cost battles

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By Robert Weisman
Globe Staff / August 24, 2010

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WELLESLEY — When an insurance appeals board issued a surprise ruling on June 24 toppling the Patrick administration’s cap on Harvard Pilgrim Health Care’s premium rates, there was little time for gloating in the health insurer’s executive offices off Route 9.

“We believed from the beginning that we did the right thing’’ in challenging the rate cap on small businesses and individuals, said Eric H. Schultz, 51, who took over as chief executive of Harvard Pilgrim on March 1. “But we knew that if we didn’t reach some kind of settlement, we wouldn’t have clarity and our customers wouldn’t have stability.’’

A week letter, Harvard Pilgrim struck a deal with regulators voluntarily limiting its 2010 rate increases to single digits. The company initially had requested average base rate hikes of 8 to 12 percent. As the first large carrier to ink a settlement, it helped establish a pattern — “a glide path,’’ Schultz called it — that led to a series of other deals, effectively ending the five-month standoff between insurers and the state.

“They were a major carrier, and they set the tone,’’ said Barbara Anthony, undersecretary at the state Office of Consumer Affairs and Business Regulation, which oversees the Division of Insurance. “They didn’t have to settle because they’d won their appeal. But they made it clear to us that they wanted to move on.’’

That decision reflects the pragmatic approach of Schultz, a soft-spoken industry veteran who has found himself at the center of the health insurance storm in recent months and is emerging as a tougher competitor to the larger Blue Cross Blue Shield of Massachusetts.

Stepping into a job long held by the high-profile Charles D. Baker, who resigned last year to run for Massachusetts governor, Schultz has been thrust onto a larger stage than he was accustomed to.

He was put to the test almost immediately after being recruited from Fallon Community Health Plan last winter to lead Harvard Pilgrim, the state’s second-largest health plan. The pressure to contain costs has intensified in recent months, pitting the insurer against the hospitals and doctors with which it negotiates rates.

“They’re looking, like all the insurers, for rate relief from us right now,’’ said John G. O’Brien, chief executive of UMass Memorial Health Care Inc. in Worcester, a five-hospital system serving central Massachusetts. “We’ll battle that out. But the good thing with Eric is it will be a professional dialogue. Eric looks for common ground.’’

Within a month after Harvard Pilgrim cut its deal with state regulators, two other big insurers, Tufts Health Plan of Watertown and Boston-based Blue Cross Blue Shield, reached their own rate-limiting settlements. They were followed by Springfield’s Health New England, a plan serving western Massachusetts. Neighborhood Health Plan, a Boston insurer, previously struck a deal for its commercial lines.

That left Schultz’s former company, Worcester-based Fallon, as the sole holdout. Fallon also prevailed on Aug. 6 in its appeal of the state rate cap. But if it seeks to impose the higher premiums, it could be vulnerable to losing customers to competitors, like Harvard Pilgrim, that are voluntarily limiting their own rates under the settlements.

Harvard Pilgrim already has added 63,000 members over the past year at a time when many employers have been shedding jobs and rivals have lost membership. Blue Cross Blue Shield alone has lost 22,000 members since the start of the year.

Harvard Pilgrim also managed to post net income of $6.5 million, and operating income of $6.7 million, for the three months ending June 30, despite being squeezed by the state’s rate cap. Blue Cross Blue Shield, by contrast, reported a net loss of $14.3 million and an operating loss of $36 million for the same quarter.

James DuCharme, chief financial officer at Harvard Pilgrim, attributed the insurer’s stronger performance to membership gains and tight control of administrative expenses. DuCharme also said some rivals underpriced their policies to pick up market share last year, making it harder for them to earn a profit under the rate caps.

“The fact that we went into this situation with pricing discipline helped up to come out in a more favorable position,’’ DuCharme said.

But even with its disciplined strategy and a new state law clamping down on “jumpers and dumpers’’ who buy health insurance before a procedure and then drop it, Harvard Pilgrim’s leaders expect to continue to grapple with escalating costs.

“The major drivers of health care costs have yet to be tangled with,’’ Schultz said. “Our goal here at Harvard Pilgrim is pretty simple: to use our assets to improve the health of the members we serve, and to work to reduce the medical cost trend. Part of the issue is that some health care providers in the state have too much market power.’’

Schultz said he sent a letter last spring to Harvard Pilgrim’s top 25 providers — hospitals and physician groups — asking if they would be willing to reopen their contracts to cut costs. They were not receptive. “We were able to achieve a zero-dollar reduction,’’ he said in jest . “What we’re focusing on now is changing the way we contract with providers.’’

Toward that end, Schultz said Harvard Pilgrim is prepared to offer providers incentives to better coordinate health care by building up multispecialty practices. It also plans to market more tiered benefits that reward members for choosing lower-cost physicians and penalizing them for going to Boston teaching hospitals rather than community hospitals for routine care.

Some hospitals chiefs who have dealt with him say Schultz will be an important voice at the table as the state’s health care providers, insurance carriers, and policy makers attack rising health costs.

“He’s going to be a strong ally in helping the health care community determine what long-term health reform will look like,’’ said Norm Deschene, chief executive of Lowell General Hospital.

Robert Weisman can be reached at weisman@globe.com.