Monday, March 08, 2010

What happens next in MA?

What happens next in Massachusetts with insurance reimbursement rates now that many of the facts and figures have been made public?

Here's what I see. The dominant parties in the state on whose watch the disparities in the marketplace have taken place -- Blue Cross Blue Shield and Partners Healthcare System -- face financial and political problems, respectively. The PHS rates that are so much higher than others' cause a major financial drain for BCBS. They do so in the short run just by the degree of current utilization. The effect is compounded over the long run, though, as PHS has a competitive advantage vis-à-vis other systems in recruiting community-based doctors and thereby brings more and more referrals into its hospitals. That these differentials have now been made public by the state creates a political embarrassment for PHS, which has often asserted that its creation brought about substantial economies of scale through integration of care.

I suspect that these factors will lead to a negotiated agreement between BCBS and PHS, where PHS takes a bit of a haircut in its current reimbursement contracts. Not so much that it dramatically affects the PHS bottom line, but enough so that both parties can say that they have cooperatively acted to slow down the rate of health care spending in the state. Will the new rates be anywhere near the statewide average? No way. Will they do anything to offset the competitive advantage that PHS has had or will continue to have? No.

Then, BCBS will come to the rest of us (including BIDMC and our physician group) whose rates are next in line and ask for a "comparable" rate reduction. Citing the PHS deal, we will be publicly and privately pressured to make similar concessions for the good of the Commonwealth. Of course, any such rate reduction would then serve to maintain PHS' market dominance.

Here's my proposal instead. Let us, in the presence of the state's Attorney General, so there are no concerns about antitrust violations, all agree to rate schedules equal to the current statewide average reimbursement rates for hospitals and doctors.* Let's create two major categories -- one for academic medical centers and their doctors to reflect the societally important teaching role -- and one for community hospitals and community-based physicians.**

In other words, let us recognize that the health care reimbursement system in Massachusetts is broken. It is time to get rid of the idea that rates should reflect market power. Have them instead reflect the health status of the population, with appropriate adders for medical education or other specific programs of societal value as directed by the state. Further, if the state and federal government insist on underpaying for Medicaid and Medicare patients, let us acknowledge that amount explicitly in the approved rates for the private insurers.

I know I don't fully understand the insurance business, but I cannot figure out why BCBS and the other insurers in the state would object to this approach. I can't see why it is to their advantage to conduct numerous negotiations for reimbursement rates or to have different rates in place for exactly the same services.

What about quality, you might ask? Well, it would certainly be great to adjust reimbursement rates for meaningful measurements of quality of care. But let's start first by equalizing the base rates, and then we can work on quality metrics in the next step.

*Or if would make more sense, perhaps a different average would be employed for the Eastern and Western parts of the state, or urban versus rural areas, to reflect regional differences in the cost of living.
** While I make this point with regard to fee-for-service payments, it is certainly a prerequisite for a move towards the kind of global, or capitated payment recommended by the state's Massachusetts Special Commission on the Health Care Payment System. As I have noted in an earlier post: If a capitated rate were established for PHS providers today based on this differential, it would perpetually reward this health care system for its market dominance.


Barry Carol said...


To clarify, are you advocating an all payer system similar to what Maryland has in place? If not, how does your approach differ?

Anonymous said...


I don't know the details of the MD system. Please tell more.

Steven Horvitz, D.O. said...

Are you advocating for state price controls?
If so how anti-free market can you get before the quality of care starts to go down?

Anonymous said...


I'm sure Barry will explain it but check out this WSJ article also; it gives a reasonable overview.

I worked under this system and, as with most things, there are issues that arise which you only know about if you are inside the system. (I tried to get my former CEO to comment on it recently and he would only say, "it is what it is". Probably fear of the HSCRC, the rate setting commission.) For instance, if the state decides a hospital has made too much money one or more years, it can force the hospital to "pay it back" over the next few years by specially reducing its rates. Also, the rate setting system skews business decisions within the hospital - e.g., I never knew whether buying a cheaper chemistry analyzer was going to save the hospital money or not because the rate was set based on other factors. Very confusing.
More on your post below...


Anonymous said...

The details of your post are out of my league to comment on, but it does remind me of a commenter on another blog who said, to paraphrase, the Cleveland Clinic will cure your complex heart surgery problem but its costs to fix a hernia will kill you. In other words, probably too many people are going to your high cost tertiary care hospitals for routine care which should be pushed to the community hospitals. I would imagine this should be implemented by the insurers, who would refuse to pay for routine care at an academic hospital. But that wouldn't help the hospitals, would it?


Barry Carol said...

Paul – My understanding of Maryland’s approach, which has been in place since 1977, is that hospital rates are set by a state commission and reflect whether a particular hospital is a teaching hospital or a community hospital, its case mix including the proportion of low income people served, differences in wages and other medical input costs within the state, etc. All insurers pay a given hospital the same rate for the same work while Medicare and Medicaid pay those rates as well so there is no need for cost shifting. The uninsured cannot be charged more either. Average hospital margins are in the 2% range. There are different opinions regarding how effectively the system controls costs vs. other states and, through gaming, certain services like imaging have, to some extent, been moved to “unregulated space” even when the separate building is on the same campus. For some additional information, I found this blog post:

Farmer Bob said...

This is gonna get really interesting, in the manner of the Chinese curse about living in interesting times.

I am always amused by the idea that the cost of living is much cheaper outside of 128 than inside. Groceries cost about the same, as does gas, oil and electricity. The cable and phone cost the same. The only difference I can clearly see is the cost of rent. It doesn't seem to be any cheaper to own a home, and as a matter of fact property taxes are often higher. So how do we come to this oft-quoted lower cost-of living? The only things I see that is routinely lower are the salaries and fees paid outside of 128, and that is a self-perpetuating cycle that creates an illusion of a lower cost-of-living. I find it ludicrous to reward cities for their inflated overhead and pricing, and I think that tiered payments contribute to the loss of services in outlying communities, and discourage young doctors from setting up practices outside of the belt. While I understand that a large teaching facility like BIDMC has more overhead and provides stellar value, I do not think that the large differences I see in reimbursement are truly reflective of costs.

That said, should I get sick, in the words of my father, "Get me the hell to Boston!"

Anonymous said...

Thanks to all. As a former regulator, I know well the dangers of regulation and how it can be applied in an arbitrary fashion. I also know, though, that deregulation does not work in a market that is not properly contestable. If there is a dominant player, the result is uneconomic pricing and a skewing of market share, irrespective of underlying quality or value of service. Such is clearly the case here. Read the comments submitted by Harvard Pilgrim Health Care and Tufts Health Plan if you have any doubt about that.

To nonlocal's point about site of care, the academic centers in Boston are also the community hospitals for the urban area, so many patients will always go to BIDMC, Tufts Medical Center, and Brigham & Women's for what amounts to secondary care that in other situations would occur at community hospitals. But as is pointed out in the Tufts Medical Center comments, that hospital faces a huge price discount relative to the Partner's hospitals -- and a somewhat lesser discount relative to BIDMC -- for doing exactly the same type and quality of work as the rest of us.

While your point is a good one, it is that price discrimination that was found by the Attorney General to be a cause of high medical costs in MA. The same type of differential, btw, exists between the PHS community hospitals and non-PHS community hospitals -- and perhaps more importantly, in the professional fees collected by PHS doctors versus those of other networks, both in community settings and hospital settings.

Anonymous said...

On target. But the reason this will not fly is that the two largest parties (BCBS and PHS) are making more money than anyone else, and they do not want to give up the advantage that their market dominance gives them. They will pressure, lobby, and otherwise buy enough influence to kill any proposal that levels the playing field.

Anonymous said...

I agree with your proposed solution. I do worry however about whether the state or the Blues will do anything to PHS. I was a Tufts patient when MGH refused to take Tufts insurance and Tufts was forced to cave. They are very clever and know how to fly just below the public and legal radar. They know where the "line" is and how to stay just below it.

Maybe this time they will have to change their ways, but I have my doubts. I'll believe it when I see it. And you are right - if they do have to give up some rates, they will still likely manage to keep their price differential even though there is no rationale for it...other than they are the MGH/BWH.

I hope I am wrong.

Keith said...

Perhaps I'm naive, but doesn't your 'plan' simply save the insurance companies money while the hospitals, in general, may get a small increase or in your case a decrease, but essentially no change. The only thing it does is try to topple the gorilla in the room, PHS.
I'm not sure what that accomplishes, because simply, the cost of healthcare is not coming down anytime soon whether Partners is the dominant player or not. If Partners market share decreases, simply your's/Atrius or someone else's will increase but the overall result for the patient will be the same. Supplies cost too much, infrastructure costs too much, medical testing and surgical equipment costs too much, personnel and their benefits (still including health care under your plan) costs too much, etc etc.

Anonymous said...

I'm glad that you footnoted the dimension of quality. Reputational advantages of the quality of care of MGH/BWH are often just that - urban myth. PHS has been a weak or nonexistent participant in disclosure of adverse events and solution sets. They do not take a public role in quality improvement, even while BCBS encourages other institutions to increase safety performance. The close hand of PHS-BCBS walls off quality and payment rates from public disclosure. The media eventually learns of the most dramatic cases of patient harm, but life-saving improvements remain opaque to others who could learn from them. BCBS don't ask, PHS don't tell.

Engineer on Medicare said...

You need to get the press and the "Tea Party" people involved. The politicians and the insurance people have to be embarassed by an investigative reporting series in the Boston Globe and the local TV stations.

The governor is running for reelection. The legislators are all running for reelection. They must be pressured to do something about the unbalanced payment system.

Real competition is the only way to drive costs down. The state has become a large payer in the medical system. If the state and public agencies refuse to pay more than BIDMC is willing to negotiate for services, then the other providers will have to follow or lose share. The state has the means to make that happen.

health economist said...

The pervasive political role of some Partners' leadership--in raising money for state pols--surely helps explain the state's total unwillingness to confront these people.It is an example of the worst features of the influence of money on politics--and on behalf of a supposed "non-profit" that make $500 milliuon in profits each year!

Anonymous said...

Transferred from Facebook:

Tod: Transparency of pricing is a great first step towards better informed consumerism in healthcare - price and quality should go together, and this kind of basic data is a critical place to start. It brings discussions like the one your raise here Paul out in the open, where market forces can begin to play in what has been a sector with serious market failures.

Anonymous said...

From Facebook:

Brenda: Paul, I agree with you completely. Get the rates equal, and then adjust based on quality from there. There needs to be an incentive to provide high quality care, but there shouldn't be different reimbursement rates just because on group has more market power.

Barry Carol said...

Rather than government rate setting for hospitals, I think disclosure of contract rates and clinical outcomes could go a long way toward enabling both payers and patients to create countervailing power vs. the brand name providers and those community hospitals and large physician groups that enjoy significant market shares in certain areas.

Paul endorsed transparency in BIDMC’s comments to the MA Division of Health Care Finance and Quality, and I also note that both Harvard-Pilgrim and BCBSMA also seem to support disclosure of contract rates by payer and provider. The insurers suggested that there appears to be increasing interest among employers in both limited network products and tiered products though some cooperation from regulators will also be required to allow these approaches to achieve their potential impact. If tiered products are offered by employers, it is critical that the employee capture all or most of the savings vs. the broad network products with no co-pay differentials among providers. Alternatively, employees who want the more expensive insurance product should be required to pay the entire incremental cost vs. the tiered and/or limited network products themselves.

There is no reason for most patients to go to a hospital based imaging center when a stand alone center can do the same test for 33%-50% less and the quality is comparable. Common, simple and routine procedures, including many surgeries that can be done perfectly well in a local community hospital for much less than they would cost at a teaching hospital should be done in the more cost-effective facility. With the right incentives, both patients and referring doctors should not find it difficult to make more cost-effective choices than they do now. It’s not rocket science.

Anonymous said...


Thanks as always for your thoughtful comment. I don't think it is either-or. We agree on the value of transparency, but to date there is little evidence that it would influence consumer behavior in a world in which most referrals to hospitals are driven by network-affiliated primary care doctors and specialists. Perhaps the financial mechanisms you suggest would cause those referring MDs to suggest lower cost options to their patients, but I doubt it would do so in a pervasive way (especially in emergent cases). Perhaps consumers, on their own, would make different choices, but I think that, too, would be slow to occur. Nonetheless, directionally, it is certainly the way to go, and we have to start somewhere.

Anonymous said...

So maybe answering all those questions from the "govmint" was worthwhile after all. (:


Anonymous said...

First Atrius, now this. I wish BIDMC were traded so I could sell the stock short.
My logic is that the poster, who evidently is in charge, seems to believe he (and the entire system) has no differentiation, just price and regulation, and the implication that Partners and the Blues are colluding. Not very encouraging.

Anonymous said...

Huh? Can you please explain what you mean a bit more clearly?

Engineer on Medicare said...

Rates and quality measures should be published. There should be incentives for patients to pick their provider based on their perception of value.

The scary part for providers is the risk that marginal providers will suffer a deserved loss of share.

If I need a heart procedure, and the outcome in a community hospital with fewer than 100 procedures per year is 4% mortality while the outcome in a major Boston hospital that does 500per year is 2% mortality, why would I ever pick the community hospital? And why should my insurer be able to require me to have the procedure done at a place with double the probability that I will go out in a bag?

The patient should have the absolute right to receive the highest standard of care and the insurer should not be able to compel the patient to be subjected to a higher risk option.

76 Degrees in San Diego said...

Paul, I liked your paragraphs about medical education. Our collegial community hospital/not-for-profit system developed a family medicine residency in the early 1990s in anticipation of healthcare reform. Having residents elevated our collegiality as the wave of managed care swept our area. Unfortunately, our system decided that graduate medical education was not part of its "mission" and ended the residency in 2000. Since then, the hospital has become less collegial and primary care physicians(other than a few) no longer come to the hospital. Also, the hospital discovered how expensive it is to NOT have graduate medical education in providing emergency room backup services. I personally think that nonteaching hospitals in an AHEC area should pay a GME tax to support at least primary care,if not more, residencies in their area because they are the beneficiaries of well trained physicians who graduate from area programs. Us "old guys" miss the residents. We have seen our graduates really contribute to our profession locally.

Anonymous said...

In regards "huh,". I think BIDMC is running on fear. If this were a stock I'd sell short.
Asking AG to sit in on pricing implies no other way to avoid loss.