Thursday, June 19, 2014

Two heists

There are two major unsolved robberies in Boston.  The one that has received the most press attention is the 1990 theft of thirteen masterpieces, including this piece by Rembrandt, from the Isabella Stewart Gardner Museum.  That theft remains unsolved to this day, notwithstanding thousands of hours of detective work.

Wikipedia makes an error in its summary of the case: "Altogether, the stolen pieces are estimated to be a loss of $500 million, making the robbery the largest private property theft ever."

No, a much larger robbery began just a few years later, when the Partners Healthcare System was established.  The business concept was elegant: Establish a network, bookended by the two largest Harvard teaching hospitals and comprising a number of important community hospitals and thousands of primary care doctors and specialists.  Too big to be left out of any insurer's network, it was able to use its leverage to demand payment rates far in excess of those received by any of the other hospitals and physicians in the region.

My conservative estimate of the excess revenues annually received by this system is $200 million.  (I'm pleased to be corrected on this.)  In just 2.5 years, PHS extracted more value from the Massachusetts economy than the value of the Gardner's paintings.  Now, celebrating its 20th year, the total is in the billions.  The difference, though, is that this heist has been in the form of cash paid by the businesses, governments, and individuals in the region.  Why has nobody noticed?

More specifically, the major media in the state and the Attorney General, who supervises the so-called "public charity" represented by PHS, have failed to apply their analystic skills to ask the question:  If, as everyone knows, PHS collects excessive amounts of revenue, how can it be that its reported results are in the range of others who do not? 

Let me provide the quick and dirty answer: The true mastermind of this monetary transfer is the person who has been able to hide these funds.  The corporation's CFO has been the artist who has painted the picture year after year that the overall margin earned by PHS is within the range of other healthcare systems.

How?  There are several ways to increase the expense lines in an income statement.  Let me mention just two.

The first is to bury the money, literally.  Build new buildings that have little inherent value to society, excessive architectural features, low occupancy, and that have expected rates of return that are so low (or negative) that they would be derided in other industries. Why have no reporters questioned the business case for these structures? Each year, the operating costs of these buildings and depreciation offset the revenue line of the corporation, lowering net income.

The second is to establish reserve accounts that are excessive relative to what would be required.  Additions to reserves are debits against income in the year they are booked.  When a year's receipts are looking "too good," all you have to do is invent a need for some new or expanded reserve accounts before the fiscal year closes and park the cash there.  Here's a little secret:  No accounting firm that wants to keep such a major client will raise substantial objections to a healthcare system that chooses to adopt conservative standards for reserves.

It's time for an enterprising reporter to dive into these matters.  Ask the question:  Where did the cash go?  We all know it was collected.  If we look in the right places, we'll find out where it went, hopefully even before we recover the Rembrandt.


An afterthought: If I am shown to be wrong about the use of such accounting devices, we face an even more distressing conclusion, that the high rates received by PHS for two decades have been absorbed simply by the operating costs of the system.  Why is that thought distressing? Because it would signify that that the system is incredibly less efficient than others in the state, requiring an extraordinary level of revenues to treat essentially the same types of patients as seen by other academic medical centers, community hospitals, and physicians.  And, as evident from published data, at no higher levels of quality.


Gene Lindsey said...

This posting is an important contribution. It is brilliant.The question that you raise is chilling. Why do we as a community allow it?

Anonymous said...

I am grateful for their first class medical care. You shouldn't put a price on a life.

Paul Levy said...

We are all grateful for that, from Partners as well as from the other hospitals and doctors in the region. Those folks are well intentioned and highly trained and committed.

This post isn't about that. It is about the business enterprise that used its market power to extract too many dollars from our people and employers.

It's all right to believe in both the dedication of the individual staff members while also understanding that the corporation abused its market power.

Anonymous said...

It is an unfriendly system with unfriendly people in high and mid level positions that have forgotten what it means to be human and to treat its community with respect, despite the great medical care it offers. This culture is both condoned and perpetuated within its elitist walls. Perhaps the money it collected on the backs of us all, has clouded its leaders vision.

nonlocal MD said...

The evidence that Partners offers 'great' medical care, at least compared to its high-class local competitors, is lacking. They should be ashamed that with all their extra money and resources, their care is not 3 times better than anyone else's,instead of par or below.

Anon 10:05, no one is putting a price on a life - but if your own money in MA is going indirectly to Partners to spend 3x as much money to save your life as BID or others, as Paul has demonstrated, then you are not seeing your hard earned money used wisely.

That is, if you do not work for Partners yourself, as reason for your comment.

Alex said...

Sad indeed. The H in healthcare = heist. One of the arguments for socializing healthcare socialized, like they have in Europe. The big money comes out of it. So, it is less of a profit making enterprise. And, innovation can still exist. The problem is that most people in this country have their blinkers on and are not willing to pay the necessary taxes to make this happen.

Does some of what you write about explain why, when I go to some of the big research hospitals in the country, that they are over the top beautiful. Large vast buildings of stone, wood, and marble?

Tell me it isn't so.

Thomas said...

I'd say you solved the second heist right there. Your analysis fits right in -exactly- with the ideas expressed by David Stockman (The Great Deformation) and Joseph Stiglitz (The Price of Inequality) among others... I'm sure Partners gives great care, but they do it at an inflated price earned not in real market competition, but through proficient rent-seeking.

Anonymous said...

Thanks for sharing this information.

Anonymous said...

Maybe PHS execs have the stolen Rembrandts?

Gregg Masters said...

Tip of the 'non-profit' (aka tax exempt) hospital industry writ large? These 'roll-ups' rationalized by at times marginal (at best) 990 community benefit/return reporting & essential positioning under the the 'new normal' of the ACA incentives represent a much deeper and widespread heist. Yet the consolidated (for price leveraging purposes vs. the use talking points) continues unabated (with a few DOJ/FTC exceptions).