Wednesday, January 17, 2007

The Inside Story on Market Power in MA Health Care

I received this query, submitted last night as a comment on my initial posting. I thought I would reprint it up here, as it is worth some commentary on the questions raised:

Just saw you on Emily Rooney show. Congratulations on the Blackberry! Why don't all hospitals offer the same discounts to all insurers to create a level playing field for competition? Are you worried that BC/BS is leveraging its power to become the only real player in MA healthcare?

The answer goes to the heart of the market power question in the Massachusetts health care environment. There are currently two dominant players in Eastern Massachusetts. On the provider side, Partners Healthcare System has built a very strong base of tertiary hospitals, community hospitals, and physician groups. PHS' ability to demand the highest rates from the insurance companies has been documented over the years. Here is a excerpt from the battle between PHS and Tufts Health Plan in the year 2000, where PHS threatened to withdraw from the Tufts network in the face of a rate offer PHS found inadequate. Tufts soon gave in because it could not afford to have insurance plans that did not include the PHS network. I don't think anyone can disagree that a sign of market power is the ability to engage in this kind of brinkmanship and win.

I am waiting for an enterprising reporter to document the extent of PHS' power by preparing a simple chart that compares the percentage market share of PHS versus other hospitals against the percentage of revenues collected by PHS versus other hospitals from the three major Massachusetts insurers. It is no secret that PHS gets higher rates for its doctors and its hospital procedures. Certainly the insurance companies know this, and perhaps there is enough public information available to document it.

Please note that I am not suggesting that this fact means there is an illegal level of market power or price discrimination. As far as I know, no such conclusion has been reached by a state or federal attorney general. I am just suggesting that size matters in the health care marketplace. PHS was created in part to enable its participants to be strong financial performers. The managers of the system have executed their business strategy well. Also, as noted below in my posting on the Harvard Medical System, the PHS hospitals are national leaders in clinical care, research, and teaching -- so I am not in any way suggesting that they have used funds unwisely. It is just that PHS' public modesty about its market influence does not reflect its true success as a business enterprise.

So, to answer the query received above, the other hospitals are fighting for whatever rate increases they can get from the insurers in the face of PHS' dominance in the marketplace. There is no way they would volunteer to offer preferred rates to an insurer while they are fighting for their lives to get rates comparable to those received by Partners.

On the insurer side, Blue Cross/Blue Shield has an even more dominant position, with more subscribers than all of the rest of the market put together. I can't speak for Harvard Pilgrim Health Care and Tufts, but I am guessing they feel the strength of this competitor every day when they seek to sign up companies as subscribers. BC/BS has the balance sheet to focus on market segments it cares about and to design rate plans that are attractive to those potential customers.

BC/BS is also part of a national network of the Blues, which gives them the ability to sign on national accounts: And if you haven't noticed, corporations with multi-state locations are a growing segment of the Massachusetts economy. HPHC has created an alliance with UnitedHealth Group to offer a similar national product line. This is a wise decision, although integrating a local company like HPHC with a huge national firm is sure to be a lot of work. Meanwhile, Tufts appears to be going on its own, an uphill battle for sure, although there is a chance that local loyalties will be an effective marketing approach.

To its credit, BC/BS has used its strong market position to push important aspects of the health care agenda. The company's focus on transforming the health care system to eliminate overuse, underuse, misuse, and waste is exemplary. Its stated goal -- to pay according to the quality of patient outcomes and efficiency in the delivery of medical services -- is the right thing for society and, by the way, is the only effective way to counterbalance the market power of a dominant provider system. When each hospital is paid for the results it achieves in patient care, rather than its market share, everybody wins. Ultimately, it is the only way to control the growth in health care costs because it stimulates the right kind of competition -- competition measured by results and efficiency -- among all providers. BC/BS' dominance in the marketplace gives it a unique ability to lead the way and achieve this result.


Anonymous said...

I wonder what might happen if BIDMC decided to strategically shut out one of the major insurers in MA? Are there other more generous payers with smaller market share vying for a stronger position within MA?

Anonymous said...

Simple answer: No. The national firms are not interested in the MA market or do not have sufficient local subscriber scale to be an alternative to BC/BS, HCHP, or even Tufts.

Anonymous said...

The national insurers are interested in the Mass. market, but cannot effectively compete with the strength of the Blues, HPHC and Tufts. With nearly 2 million combined HMO members in the Boston MSA alone and thousands of physicians in their networks, consumers would be the ultimate losers if a health system tried to omit an insurer from their network. On the plus side, we're fortunate to be in a predominately nonprofit market (similar to Minneapolis-St. Paul) where earnings/resources (we hope) are used for community good. It's no coincidence that HPHC, Tufts and the Blues were ranked as the country's top 4 health plans in 2006 by NCQA, consistently getting top marks for quality measures and patient satisfaction. However, in the case of the Blues and Partners market domination, the hope is that they don't stifle competition to the extreme. Community hospitals bleeding red ink is in no one's best interest.

Paul-I would also like to see a chart like the one you reference for PHS versus other local health systems. As the area's third largest system, based on 2004 inpatient discharges, do you have any data that BIDMC would like to share? Do you see an end to the annual 10% health plan premium rate increase in 2008?

Anonymous said...

Tufts and Harvard Pilgrim may very well need to merge to survive and compete against BCBS. Having two small plans like Tufts and HPHC both with 11% administrative overhead and little ability to stand up to Partners is not doing anybody any good. Use the United Health network to compete in the national PPO accounts and have Charlie Baker lead the combined entity. On the provider side, if Partners can get away with a loosely affiliated (i.e. NOT clinically integrated) network why would the leaders of BIDMC, Caritas, NEMC... get together to largely negotiate contracts with the plans? Form a low overhead management group to negotiate big ticket purchasing items and insurance contracts for the hospitals and physicians. Partners isn't much more than that. Just like Tufts folded against Partners demands, no local plan could offer a product without a combined group like BIDMC, Caritas and NEMC. The fact is BCBS and Partners are both doing very well and are not going to change the status quo so the second tier plans and providers need to match what they bring to the table.

Anonymous said...

What is the status of BC/BS' effort to define results and efficiency in a way that insurers can measure, providers can accept as relevant and appropriate and patients can understand and use? Is there any detail that you can provide at this point as to what the criteria might look like, and when might such information be available to patients?

Anonymous said...


I am prohibited from publicly sharing data on our negotiations with insurers. Sorry.

As far as the 2008 premium increase, that is not determined by us. It is determined by the insurers. You need to ask them that question.

To anonymous,

BIDMC, NEMC, and Caritas are not permitted to negotiate a joint deal -- or even disclose to one another the rates we negotiate spearately -- because we are not part of an integrated enterprise. and, the chance of a corporate merger is zero.

Anonymous said...


That is best answered by BC/BS directly. In the meantime, you can look at their website and see what they have offered to date.

Roy M. Poses MD said...

As Paul Levy said, whether or not the concentration of power in the Massachusetts health care market (both on the hospital and the insurance sides) is illegal cannot be determined.

But is it good, for patients, for health care professionals, and for the public at large? I think not, and that it drives up prices and drives down access.
That quality is so good in at least the metropolitan Boston area is a product of the area's very long, proud tradition of quality health care and academic medicine, a tradition that may begin to erode as health care is dominated by a few very wealthy and powerful players. Concentration of power does tend to lead to its abuse.
"Power tends to corrupt; absolute power corrupts absolutely." - Lord Acton

Anonymous said...

While most of us would like to think that we are, as individuals, the consumers of health care, the fact is that that third-party insurers are partnered with us as "co-consumers" if we are lucky enough to have access to such a plan. It strikes me as both resonable and desirable that my co-consumer use its market power to demand reimbursement to be based upon outcomes. In so doing, that co-consumer drives a benefit that all accrues to all consumers - me as co-consumer and premium payer, the providers are incented to become more efficient and the overall economy benefits from eliminating waste. A problem arises when the "market mover" is very powerful and there are enough smaller competitors to whom the cost of inefficiency can be shifted. Isn't this what medicare does when it sets reimbursement rates so low that other payors artificially subsidize care delivered under the medicare reimbursement scheme.

Anonymous said...

Good points all. Also, check John McDonough's interesting comments on the Health Care For All blog. Link above.

Anonymous said...

I think doctors are the real consumers of healthcare. They drive virtually all healthcare spending through hospital admissions, referrals to specialists, writing prescriptions, performing tests (or referring to a lab or imaging center), consulting with patients and doing procedures themselves. Robust price and quality transparency would be enormously valuable to doctors who could then know how they compare to their peers within their specialty, know who the most cost-effective providers (including hospitals) are, know which labs and imaging centers can perform standard tests most economically, and know which drugs are least costly if there are several within a category that will work for a given patient. Doctors are in the dark with respect to most of this now, and there is no good reason why they should be. If they had the price and quality tools at their disposal, costs should be lowered as patients are steered to the most cost-effective providers while the less efficient either improve, suffer a loss of market share or go out of business altogether. This is the way most normal markets work. Why not healthcare?

Ranworth said...

Paul, The simple table you want an enterprising journalist to produce must also include the number and percent of physicians participating with/controlled by the different hospital systems. Since physicians determine demand, and are the source of hospital referrals and admissions, one of the keys to market dominance is to dominate the physician/patient distribution system. A table that shows only the percent of overall hospital admissions and total hospital payments will not tell the full story of market power.