What Scott and Martha got wrong

In the John Adams 1779 version of the Massachusetts constitution, the Attorney General was appointed by the Governor. In 1855, the document was amended to provide for direct election of the AG by the public, to be the chief lawyer and law enforcement officer of the state.  Beyond judicial review by the courts, the AG is not accountable to any other elected officials. In essence, only the voters can hold the person accountable for his or her legal and policy actions.

The decision by former AG Scott Harshbarger to permit Partners Healthcare System to be created by a merger of MGH and Brigham and Women's Hospital (along with the addition of many community-based doctors and hospitals) has had unfortunate consequences that were predicted by a number of observers.  In one article, for example, Alan Sager, Deborah Socolar, and Peter Hiam noted:

This is largely a formal merger to reduce price competition, one that does little to reduce costly duplication or to increase efficiency.

The merged hospital would have great ability to resist payers' demands for discounts.  

These three people were not just casual observers.  They were experts, deeply seeped in matters related to health care, rate setting, and market power. Scott ignored those views, adopting the rationale that:

The merger of the hospitals reflects the great economic and political pressures on such academic health centers to cut costs in caring for patients and in educating young doctors.

As recently reviewed by the New York Times editorial board:

In retrospect, it looks as if Massachusetts made a serious mistake in 1994 when it let its two most prestigious (and costly) hospitals — Massachusetts General Hospital and Brigham and Women’s Hospital, both affiliated with Harvard — merge into a single system known as Partners HealthCare. Investigations by the state attorney general’s office have documented that the merger gave the hospitals enormous market leverage to drive up health care costs in the Boston area by demanding high reimbursements from insurers that were unrelated to the quality or complexity of care delivered. 

Those investigations by the Attorney General have also been confirmed by a newly created state agency, CHIA:

What surprises me most is the difference between Partners and their next biggest competitor,’’ said Áron Boros, executive director of the Center for Health Information and Analysis, which compiled the report. He said Partners has been able to negotiate high prices with all insurers, unlike other systems. “None of them has the consistent success of Partners in driving prices up,’’ he said.

None of this has been news to the state's insurers, who have been beat up or have acceded to Partners' market dominance over the years, creating a huge disparity in the rates paid compared to other hospitals and doctors in the state.  A senior executive at Blue Cross Blue Shield said at a 2010 public hearing that his company, which has more subscribers than all the other insurers in the state combined, did not "[have] the market power to eliminate disparities in the way doctors and hospitals are paid for their services."

The then-CEO of BCBS came to me and said that the rapidly expanding utilization of services for patients in the Partners system, compounded by the higher rates being paid to that system, was "murdering" Blue Cross' bottom line.

Back then, too, the Attorney General found that these disparities had led to and would lead to greater market concentration by this dominant provider. Such concentration would, she concluded, cause a continuing impetus for higher rates of medical cost inflation.

In 2007, also, in one of the oddest conversations I had as CEO of Beth Israel Deaconess Medical Center, the CEO of one of the Partners hospitals urged me to stop complaining about the disparities.  He suggested that we should just be content with PHS getting high rates and thereby establishing a ceiling under which we could operate at lower rates. He asserted that we would do worse if PHS were not there jacking up its own prices.  (I now regret not reporting this conversation to the AG and DOJ as a veiled attempt at price-fixing.)

But let's turn to the current circumstances, in which Martha Coakley, the AG who did all those studies documenting PHS market power and rate disparities and their adverse impact of overall health care costs in the state, has signed a deal that, in the words of the New York Times editorial:

[W]ould let Partners acquire two more community hospitals in addition to South Shore, in exchange for temporary restrictions on raising its prices and on further expansion. There would be limits, for example, on the number of community physicians it could add to its networks over the next five years and cost increases would be held to the rate of general inflation, which is typically less than medical inflation, for 10 years.

This could be a dubious bargain. Such short-term restrictions have been abandoned as a tactic by the Federal Trade Commission because, an agency official said last month, they are “an inferior substitute” for letting market competition among separately owned providers determine prices and quality. Large-scale mergers almost always lead to higher prices, reputable research shows.

For several weeks, I have been making the point that the deal simply would lock in or exacerbate existing rate disparities, permit Partners to grow, and ignores the very substance of the AG's own studies.

But I have now received some useful comments from around the country that have pointed out that I was wrong to emphasize these points. After all, current federal policy is driving industry consolidation--to deal with taking more risk from insurers, to provide more comprehensive care management across the spectrum of care, and to control costs. In light of this policy direction, what's wrong with Martha's deal?

A thoughtful colleague, Budd Shenkin, explains what's wrong:

As to your graphs, they assume continuity. That should not be the case.  The past has been marked by a lack of competition and a lack of regulation; hence, price inflation as well as cost inflation.  Policy now needs to emphasize price reduction via the introduction of competition, since regulation is really so hard.  So, the New York Times is on the right track when they suggest functional divestiture. You need to be more emphatic on the need to introduce competition.  The price figures are compelling--see here.

Alan Sager, looking at my charts, put it another way in a note to me:

If other hospitals were able to obtain price rises one and one-half times or two times as great as Partners, they would be leveling themselves up to a very high set of prices. Because total spending on Massachusetts hospitals is so high overall, leveling up to Partners' prices is expensive. In one simple comparison, assuming the dollar results of a 2% annual rise for Partners and 4% for all others, Partners’ share of the statewide health budget does drop from 29%  to 25.5%, but statewide spending on hospitals is up by over $7.6B—by more than one-third. 

In summary, where Martha goes wrong is precisely where Scott went wrong, in assuming that market dominance will lead to price reductions to the consumer.  Indeed, she expressly anticipates that Partners' rates will not go down and instead builds in increases.  This result is inconsistent with the federal goals of health care policy, which can only be met if competition is forced upon the marketplace.  Price reductions to consumers must be our goal.  The only way to achieve that is to use the method that has been employed against other market dominant firms in other industries: Divestiture or dismemberment of key strategic assets to permit a contestable market to emerge.  Here, that must mean a split between MGH and Brigham and Women's hospitals, with each being permitted to keep their associated physician groups and community hospital feeders.

Such a solution would not interrupt the goal of care management.  Just ask anyone at the two hospitals: MGH and BWH remain clinically distinct institutions, even after 20 years of being part of the same system.  (Here's where The Times is wrong on that point when they say, "The Affordable Care Act has incentives that encourage hospitals and doctors to integrate their operations and collaborate to control costs and improve care, and Partners has been a leader in doing that." As we've seen, costs have not gone down, and in terms of safety and quality, there is no quantitative support for the premise that PHS does better than others in the region or nationally.)

With a break-up of PHS, we can imagine a contestable health care market in Massachusetts--Brigham, MGH, BIDMC, Lahey, Steward, Tufts, Tenet--but only if one other condition is imposed.  That must be complete interoperability of electronic medical records. Absent this ability to send personal data from one hospital to another, consumers will not have the freedom to leave one network to search out higher quality and lower cost in another.

Unless these two critical components are adopted, Martha will join Scott in creating the state's largest unregulated monopoly.  Unfortunately, as she is leaving the AG's office, there will be no way to hold her accountable for what will be one of the largest public policy mistakes in the history of the Commonwealth.