Tuesday, January 14, 2014

These bonds are a sure thing!

Note:  I am not offering investment advice.  I am not qualified or registered to do so.

The Boston Globe's Robert Weisman offers a summary of a presentation made by Partners Healthcare System at the annual J.P. Morgan Healthcare Conference.  This is an audience of investment people who are trying to keep up with trends in the health care industry and who advise clients on whether or not they should buy bonds. Weisman notes, "The Partners presentation in San Francisco came days after the massive hospital and doctors system disclosed it will sell $425 million worth of bonds to finance new construction and other expansion initiatives."

As you would expect, the PHS made optimistic projections about its future, and I have to agree:  There is little on the horizon that would interfere with Partners' ability to service its debt.

First of all, the company was able to persuade the governor and legislature that it should not be subject to rate regulation and that it should be allowed to keep all the excess revenues it has received over the years. Indeed, the revenue advantage that PHS has in its current contracts, relative to other provider organizations, is guaranteed by the new legislation.

Secondly, even though the Health Policy Commission has raised doubts about the wisdom of PHS acquiring new provider organizations, like South Shore Hospital and Harbor Medical Associates, it does not really matter if the formal merger takes place.

As I have noted:

We need to understand that South Shore has been a vassal of Partners for years, with extremely close clinical relationships and referral patterns. The Patriot Ledger reported

"Sarah Darcy, spokeswoman for South Shore Hospital, said the two hospitals have worked together since 2004 on providing a wide range of medical and surgical care. Among them are the Dana-Farber/Brigham and Women’s Cancer Center, the Breast Care Center, and a Harvard Medical School-affiliated surgical residency program at South Shore Hospital."

Merger or not, those relationships will persist.  The doctors trust one another.  Patients and families are used to the referral patterns that have been established. Such relationships are not torn asunder by a failure to create a larger corporation with a common bottom line.

Thirdly, the likelihood that a competing force will arise in the region is small, in that there are a multitude of obstacles standing in the way.  Even if mergers occur that create a "book-end" to Partners, it will be years before that entity will be an effective competitor, given the many cultural and logistical challenges.  And, if it becomes an effective competitor, the state is highly likely to move into a duopoly situation, protecting the revenue streams of both entities.

Finally, for those who think and hope that transparency and tiered markets and consumer-driven health care will dramatically change market share, look at this insightful comment I received on my blog yesterday:

My impression is that health care leaders in the state government are afraid of hurting the golden goose called Partners (as was said by others an important part of the local economy), so they have deliberately limited how big a price incentive that insurers could give to lower priced hospitals in tiered and limited networks to prevent to large a loss of market share too quickly.

But the reverse has happened.

Over the last few years state healthcare leaders have gradually allowed the financial incentives to increase with little noticeable effect on market share - in fact the market share of the highest cost hospitals like those of Partners and Childrens has increased at the same time as tiered and limited networks were introduced. 

Whom do I call to get some of those bonds?


Anonymous said...

Paul - You make a good point about the South Shore system already tied in to Partners and that the doctors already feed patients into the Partners system (they also are tied in with Children's for Pediatrics). The Health Policy Commission thinks if they can keep Partners from merging with South Shore, somehow the patients from this market area will flow into (and keep alive) the other hospital systems like BI/Atrius and Steward. They don't get it that South Shore is already part of the Partners system and these other systems are in serious trouble.... especially a system like Steward with old, empty hospitals and a CEO who recently publicly stated they "need to cut thousands of jobs". It is very dangerous when the state protects a monopoly because they think it is their "golden goose". Now they try and protect the other systems for political purposes..... loss of jobs if volume drops at the other systems which is what is actively happening. I think BI will survive as a very minor competitor to the 800 pound gorilla of Partners and systems like Steward and NEMC will see their Primary Care Physicians tie into one of these two systems and bring their patients with them, leaving the future of Steward and NEMC as very bleak. The state waited too long to deal with Partners and is about to feel the consequences.

Anonymous said...

Hi Anonymous 3:44 PM.

I have found it is hard to predict the future, or I would have done better in the stock market. I do what most do, look at the past and then forecast new constraints or accelerators on past performance.

So in that spirit:

Tufts Medical Center had no physicians except those in its own medical center, approximately 500 in 2005. Since then it has grown "new england quality care alliance" to a high quality physician network of over 1700 physicians including approximately 500 primary care physicians, more than adequate for a hospitals of about 400 beds.

Steward has added many primary care physicians, "the drivers who direct additional care for patients" in just the last few years including:

Compass 38 PCP's
Hawthorne 31 PCP's
Primacare 25 PCP's
Manet health center 13 PCP's
Whittier 42 PCP's
Cape Cod Healthcare 79 PCP's

Total 228 new PCP's

Bringing the total to approximately 550

Again a very respectable total when considering St Elizabeths, an important referral hospital for Steward, has only 272 beds.

Guess I am more hopeful for both Steward and Tufts Med Center than you.

Anonymous said...

Cape Cod Healthcare PCPs being added to Steward? Please, the ONLY reason they joined Steward was to gain access to the BCBS AQC contract and the fee schedule increase that went with it. That fee schedule bump alone was a 20% increase in fees not to mention the quality dollars that can be earned under the AQC. That has nothing to do with filling beds at St. Elizabeth's in Brighton.... in fact, Cape Cod has clinical tie ins with Brigham and Women's which brings us right back to the Partners monopoly. Steward has added new lobbys and Emergency Rooms to give a face lift to very old infrastructure... it's almost like they plan on giving a sales tour to sell their network by walking prospective buyers through brand new entrance areas and ERs as if they have state of the art buildings. The fact remains that Steward PCPs keep LESS than 50% of their medical spend in their network so they may have patients with their PCPs but those patients do not want to go to Steward Hospitals or Steward specialists. Jordan going with BI is another big blow to NEMC in terms of referrals in town. I just don't see these two being able to survive the arms race of healthcare as it is very expensive to keep up in terms of facilities and technology so the gap keeps growing... not to mention Partners and BI will be able to outspend the laggards for physician practices. Back to the buying of bonds.... would you rather own Partners bonds or Steward bonds? I'm with Paul on this one.

Anonymous said...

Hi Anonymous 11:00 AM

When the affiliation between BID and Jordan was announced a Tufts Med spokesman said fewer than 1.5% of Tufts Med's referrals came from Jordan. So while I am sure they would have preferred to maintain the relationship with Jordan, I don't think it is a "major blow".

As to aging facilities, I lived in Japan and have read more recently about facilities there. They don't invest huge amounts in facilities, yet have excellent health outcomes. There was actually pealing paint on walls. New buildings are attractive, but in most cases aren't necessary as long as cost effective, high quality equipment is installed in even older buildings that are maintained.

Tufts Med and Steward among others are not competing "at the high end of the market", so they don't need all the newest facilities. They are competing based on high quality of care at low cost.

So they will attract, price conscious health consumers once the correct financial incentives are in place. I think those incentives will be there eventually, much too slowly in my view. Minuteman Health is part of that, since they will return any "surplus" back to health care consumers and only include high quality low cost providers in their network.

I can not speak to why cape cod joined steward, you could be right, but steward must benefit somewhat or they wouldn't go to the trouble having cape cod physicians in their network.

One way to measure the success of a tertiary care facilities physician network is number of PCP's per bed in the tertiary facility. Tufts Med has about 1.25 per Bed, Steward is much higher, at almost 2 per bed. I think if the Atrius "adult" PCP's are included, BID has a ratio similar to Tufts Med about 1.25

I do not think any other major teaching hospital is above a ratio of 1 and many are far below it. Which means they could have more difficulty maintaining high case mix indices. As more and more patients are managed by ACO's and things like tiered and limited networks become more prevalent, the number of PCP's referring will be important.

As it is St Elizabeth's doesn't need all of the referrals to still have a good referral ratio since there are about 2 PCP's per bed.

Barry Carol said...

Anonymous 11:46 PM –

I agree that hospitals and, I think, doctors’ offices in most other developed countries are quite spartan by modern American standards but that doesn’t affect the medical outcomes achieved. What is does affect in the U.S., though, is patient satisfaction which is often influenced by such factors as a nice room, flat screen televisions, good food, availability of valet parking for visitors, marble entrances, waterfalls, piano players, an attractive art collection and the like, all of which have little or nothing to do with patients’ medical outcome. Modern amenities help drive up both market share, especially for well insured patients, and operating costs.

What I wonder about is if some of those older hospitals in the Steward system closed reducing the number of inpatient beds in the Boston area, would there be less healthcare provided in the Boston region or not? If overall utilization declined, in theory, total healthcare spending in the market could also decline even if PHS’ market share rose. At some point, one would think the PHS market share should attract the attention of the anti-trust folks at the Department of Justice. No?

Anonymous said...

With the movement to a more holistic form of care - ACO's and the like - there will be a reduction in the need for inpatient beds.

All ACO's are trying to do more preventively and on outpatient basis and in the community when care is needed.

However if many community hospitals closed that would not be a good thing in my view for several reasons.

1) many community hospitals have already closed. You can go to the Mass Hospital Assoc. web site and see all the closures for the last 30 plus years.

2) in massachusetts too much care is done in major teaching hospitals. In too many cases that means expensive. According to the analysis of the Health Policy Commision about double the care is done in expensive teaching hospitals as compared to the rest of the country. If more community hospitals closed that could worsen.

3)If many community hospitals closed the reduced competition could lead to more leverage by the community hospitals that survive and higher rates.

I think we should be working to ensure our community hospitals survive and thrive and most important of all take market share from expensive teaching hospitals in places like Boston.

Steward has been good in that regard.

I agree that Taj Mahal hospitals like Taj Mahal universities are attractive when they are subsidized.

But if patients are maying more of the additional cost out of pocket that will change.

Not everyone drives a BMW, Lexus, Cadillac etc. So just want inexpensive reliable transportation. I think they will also want high quality low cost health care.

Taj Mahals are not low cost.

Barry Carol said...

Anonymous 10:21 PM,

I agree with everything in your last comment. However, doesn’t the Partners’ system include community hospitals too? Do they command the same prices at their community hospitals as at MFH and B&W? It would be even better for the overall healthcare system from a cost standpoint if market share could be shifted away from the PHS but fewer inpatient hospital beds in the market is still a good thing on balance as long as total system capacity remains adequate. Going back even further to 1945, there were roughly 10 hospital beds per 1,000 people in the U.S. Now the number is just over 3 and the long term trend is down.

Patients need to be forced to pay enough more out-of-pocket to get their attention if they want to go to expensive academic medical centers for routine care. I think the most practical way to make that happen is through reference pricing for services that lend themselves to the concept like surgical procedures, imaging, and the like. Insurance plans with tiered networks and narrow networks should be attractive to budget conscious patients if they cost 25%-30% less than a broad network insurance plan as many do. Insurers should also be able to contract with some hospitals in a system but not others and for some services, like the most sophisticated treatments, within an academic medical center but not the routine services, tests and procedures. We also need special rules that limit how much can be charged for care that must be delivered under emergency conditions as opposed to care that can be scheduled well in advance.

Regulators need to ensure that powerful hospital systems like Partners can’t simply refuse to sign contracts that take these approaches. I’m not sure what to do about patients with standard Medicare and standard Medicaid who either pay no deductible at all or the same deductible no matter which hospital they go to. Unmanaged care is a recipe for out-of-control costs.

Anonymous said...

Barry Carroll

I agree with much or most of what you say. But not all...

Partners does have community hospitals, and their new plan is to shift some care done in its academic medical centers downtown to those community hospitals.

But Partners community hospitals are in most cases significantly more expensive than their regional community hospital competitors.

That is one of the concerns about Partners buying additional community hospitals. They make them into "Taj Mahal" community hospitals with associated higher prices.

You mention fewer inpatients beds is a good thing. But not if the only ones that survive are the most expensive ones. Or if in eliminating some lower cost community hospitals you empower their competitors to increase prices.

The most expensive hospitals have been taking market share. If you followed the local press, many of the expensive teaching hospital like those of Partners, Childrens, Dana Farber (affiliated with Brigham and Womans) have been expanding, adding beds.

Paul is always complaining in this blog about some teaching hospitals taking their large surpuses and building "taj mahals".

I do agree that more should be done with reference pricing, as a supplement to tiered and limited networks.

You are correct 20 to 30% should be enough of a spread between limited networks and "mainline" insurance that includes all providers, but Mass state regulators have not allowed that type of discount by major insurance companies. The state started at a 10% discount, then a 15% discount, then larger discounts for "limited networks" that included too few of the low cost high quality providers to be attractive.

As was said in another blog post, I surmise state regulators were and are afraid of injuring "the golden goose" called Partners as well as others like Childrens, Dana Farber etc.

Barry Carol said...

As noted previously, the long term trend in the number of inpatient hospital beds is down as more care can be performed on an outpatient basis or outside the hospital entirely. It seems that it should be easier to move outpatient procedures away from high cost hospitals through reference pricing as well as tiered and narrow networks than inpatient care. I’m guessing that there would be more pushback, especially from unions, to maintain access to the high cost hospitals for inpatient care. If we could ever get special rules that limit how much could be charged for care delivered under emergency conditions, including inpatient admissions that come through the emergency room, it would neutralize the market power issue for that portion of healthcare.

I also think employees might think differently about where they would be willing to go for care if they knew that the most expensive hospitals charged, say, 175%-200% of Medicare for most services, tests and procedures while the less expensive facilities charged 110%-125% and there was no discernible difference in quality. It would also be helpful if they clearly understood that employees are paying the full cost of their health insurance premiums, including the large share nominally paid by the employer, in the form of lower wages that they would otherwise be paid.

Annual statements from employers that list each employee’s salary along with the cost of all benefits including the employer share of FICA taxes, health insurance, 401-K or 403-B matching contributions, disability insurance and all other benefits for which the employer paid cash would greatly enhance the understanding of how much of total compensation is being consumed by health insurance and that excessive healthcare prices driven by market power crowds out or at least severely limits employers’ ability to raise wages. A little sunlight here could be a powerful disinfectant.

Anonymous said...

Barry Carol,

Again, I agree with much of what you say -- the more sunlight in all aspects of healthcare the better, but one things I am not sure about....

I am no expert on the billing process in healthcare.

But isn't the rate Medicare allows providers to charge changeable depending on factors like

Teaching vs Non-teaching
percentage of care in hospital that is disproportionate share and other pertinent factors.
...and a number of others...

If that is the case and the medicare rate isn't standardized, it is hard to compare hospitals rates with Medicare rates as the "yardstick".

But again, I agree with the major thrust of what you are saying...

Anonymous said...


Love your comments as always. If only the politicians listened to you! I just wanted to point out a small wrinkle in the outpatient arena and that is the ridiculous facility fees that are spreading to there and even, I hear, to doctors' offices if they are captives to the ACA's. It just points up how small quirks in rules are rapidly exploited for profit in the current system.


Anonymous said...

Sorry, I meant AMC's instead of ACA's in my comment. Got ACA on the brain.


Barry Carol said...

Anonymous 8:25 AM and non-local,

I’m no expert on Medicare billing either. My understanding, though, is that both GME and DSH payments come from separate Medicare payment buckets as opposed to being baked into the actual reimbursement rate for each service, test and procedure paid to an academic medical center or safety net hospital. If they are part of each reimbursement, they may be readily identifiable as payments on top of the normal Medicare rate that a local community hospital would be paid. If that’s the case, then any identified percentage of Medicare amount could be based on the regular reimbursement rate and not the total payment including the GME and DSH allowances. Perhaps Paul can shed some light on this issue.

As for facility fees, I think they’re appropriate for inpatient care but not for any care that can be safely provided outside of the hospital setting including a doctor’s office or independent imaging center, lab, rehab facility, etc. A key reason why hospitals are expensive places to provide care is that they need to be staffed 24 hours per day, seven days a week. The overhead in facilities that are open only 10-12 hours per day and may be closed at least one day a week is far less. They presumably operated profitably without facility fees before they were acquired by a hospital. They should continue to operate without one afterward as well.

Anonymous said...

Facility fees are simply another way to increase the revenue stream. Once the outpatient site comes under the hospital's billing system, the service costs much more and insurance plans simply pay. The WSJ wrote abut this in 12/12 I believe---I can only paraphrase the title of the article, but "Same Test, Same Office, Same Doctor, Twice the Price." Patients are now supposed to be informed that they are in a site which may have increased costs for them. New high deductible plans which incur large copays make these inflated fees obvious to patients. Patients are supposed to be informed of these higher costs due to facility fees so that they could choose a site which is truly outpatient and will cost them less.