Tuesday, July 31, 2012

Well done, Partners!

John McArthur must be smiling.  But even the former Dean of Harvard Business School--the brains behind the concept of creating a provider network "too big to exclude" from any insurance company's product line-- could not have anticipated the degree to which the state's body politic would stand by and watch the aggrandizement of economic power that has occurred since the Partners Healthcare System was created in the early 1990s.  Indeed, beyond watching, the state is now poised to assist in a continuation of that trend.

The ability of Partners to demand and receive above-market payment rates from insurers has been well documented.  There is the apocryphal-sounding story of CEO Sam Thier saying to the head of Blue Cross Blue Shield, when the latter balked at a PHS rate request, "Bill, this is what good health care costs."  Bill paid it.  Then there was the attempt of Tufts Health Plan, a second tier insurer (in terms of size), to pay less.  Partners started a million-dollar marketing campaign to inform Tufts subscribers that they would no longer be able to go to Massachusetts General Hospital or Brigham and Women's Hospital.  Those subscribers threatened to leave the insurer in droves.  "Tufts surrendered in little more than a week."

But that is just a well-executed business strategy.  The real accomplishment of Partners has been its ability to persist in the exercise of such market power even after the disparity in payment rates was clearly documented--even after business leaders (i.e., subscribers) and government officials (i.e., protectors of the public interest) were led to understand that the Partners rates were, in effect, a tax on the state economy in the range of $200 million per year.  The body politic was told, in simple direct sentences:

Price increases, not increases in utilization, caused most of the increases in health care costs during the past few years in Massachusetts. Higher priced hospitals are gaining market share at the expense of lower priced hospitals, which are losing volume. The commercial health care marketplace has been distorted by contracting practices that reinforce and perpetuate disparities in pricing.

The latest evidence of the degree to which the company's political strategy has been effective is in the passage of legislation by the House and Senate this week.  The bill, now on the Governor's desk, has been erroneously described by one news report as "setting the stage for Massachusetts to become the first state to ­establish a target limiting how much providers and insurers spend on medical care."

Of course, it does no such thing because the horse has already left the barn.  Recall that just a few months ago, the state's largest insurer awarded Partners a rate increase larger than the statewide average, on a base that was already substantially above that of other provider networks. The goal was to ink this deal before legislation might pass that would limit such increases, as I noted several months before the contract was signed.

The figment of cost control in the new legislation has no effect on this result.  Why?  The bill, says the same news report:

would allow health spending to grow no faster than the state economy overall through 2017. For the five years after that, spending would slow further, to half a percentage point below the growth of the state’s economy, although leaders would have the power under certain circumstances to soften that target.

Providers and insurers that do not meet the spending targets would have to submit “performance improvement plans’’ to a new state commission. Failure to implement their plans could lead to a fine of up to $500,000.

The problem, of course, is that a provider network like Partners with costs well above the state average will find it easier to meet the governmental targets than those with lower costs.  Why?  Because each hospital or network will be judged on its percentage increases.  If you have a higher base, you can increase the absolute number of dollars being spent to a much greater extent than those with a lower base and still meet the percentage target.  Ironically, again, the state is acting to increase the disparity in costs between the have's and the have-not's.  It is enhancing Partners' market power.

Some will point to the fact that a new commission "would be required to conduct a 'cost and market impact review' of certain providers, including those that want to expand or do not meet the state’s spending benchmarks."  You can be sure that Partners will handle its accounts in such a way as to never be the target of such a review.  On the expansion front, in a strategy of burying the money, it has already invested heavily in new facilities.  This provides a twofer, avoiding future constraints on its ability to expand without state review while further increasing the cost basis against which future percentage increases will be measured.

The ability of Partners to succeed in the political domain has allowed it to get state authorization for mechanisms that will guarantee its market dominance for decades to come.  This all represents a superb execution of its business strategy.  Staying on message--persistent advertisements and press releases and speeches setting forth the assertions of a concern with cost control--wears people down.  In any event, such messages receive no rebuttal or rigorous analysis by the media.  Sprinkling money in support of worthy causes buys complacence or acquiescence by advocacy groups.

The overall context in the state makes this easier.  The local business community fails to be organized around these issues even though the current situation has a huge impact on their bottom line.  Indeed, one business group strongly opposed even the limited amount of government intervention contained in the bill.  Further, a one-party state offers no chance for loyal opposition in the halls of the legislature.

Well done, Partners.


Anonymous said...

You are my hero for being one of the only people to tell the truth publicly about the bill: it will do little, if anything, to control costs. And the major reason is because of the dominant hospital systems, who have neutered the legislators, bought off the consumer advocates, and made captives of the employer groups (whose boards they dominate). My only criticism of your analysis is that you let the insurers off the hook entirely, and they have also been powerful agents for protecting the status quo, and improving their own lot. They are no doubt happy that medical loss ratios were weakened, their large reserves are untouched, and the public health funding increases will be easily passed along to consumers, despite the prohibitions on doing so. All in all, a tremendous victory for dominant hospitals and insurers. Get ready for further cuts in education, public safety, infrastructure and all the services that will be diminished to feed the health care beast. And start saving for your higher copayments and deductibles.

Barry Carol said...

If employers are interested in mitigating healthcare cost growth, they can show and have already shown more interest in tiered insurance networks than in years past. Also, I read that there is something in the bill intended to reduce malpractice suits and, presumably, related defensive medicine. Is that effort substantive or did the tort lawyers neuter it too? Finally, if costs continue to grow faster than expected, there doesn’t seem to be any meaningful enforcement mechanisms to deal with them. Overall, it looks like another government failure or healthcare lobbyist victory depending on your perspective.

Anonymous said...

Like many physicians throughout the country, I thought Mass General was great (even if I had only a vague idea of all the hospital consolidations in Boston over the past couple decades) - until I started reading this blog 5 years ago. Boy, have my eyes been opened. Excellent at business it clearly is. The rest appears to be by reputation only. Will it stand up? Only time will tell, but I think Bostonians need a more critical eye.

nonlocal MD

twaza (@wassabeee on twitter) said...

Paul, thanks for a wonderful counter-example to the economic dogma that competition drives prices down and increases efficiency.

Rich said...

Thanks for calling Beacon Hill and Partners out on their usual deal!

Matthew Holt said...

Shocked, shocked to find out that monopoly suppliers both work to screw everyone else and also exercise political power. Partners = Lockheed Martin building a bomber with cost over runs and (other than you Paul) apparently no one cares! Having said that I think Sutter in N. California might have an even higher pricing advantage.

Attorney John Roberts said...

Massachusetts Moves Toward Health-Care Price Controls. Is America Next?


But the law does promote the medical homes model which is said to allow physicians to focus on practicing medicine.

Michael said...

Thanks for this post. How about the new Spaulding Hospital nearing completion as a prime example? Outrageous cost per square foot of construction compared to some of the other projects with community value being built around the city.

Dennis Byron said...

It's interesting, assuming the soundness of your estimate that Partners is getting $200 million too much annually according to the legislature's own new rules (and I do accept your data), that $200 million is only about 5% of what would have had to be "cut" this year if the law had already been in effect. What a farce this law is.

I had been looking since May at the silliness of these Massachusetts Legislature $200 billion "savings" estimates from three perspetives:

1. payment method (already in an ACO vs. FFS)
2. type of insurer (true insurance vs self insured vs. Medicare vs. Masshealth)
3. cost of health care services to consumer (hospital spending vs. nursing home spending vs. MD spending vs. drugs vs. dental, etc.)

There was no way to get to $200 billion cumulative in 2022 (supposedly a Harvard estimate) by these three points of view. You have given me a fourth perspective that proves how ridiculous this whole kabuki dance really is.