Wednesday, July 09, 2014

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.


Barry Carol said...

One positive is that the long term trend in the demand for inpatient hospital care is declining as more care can be safely shifted to outpatient facilities including ambulatory surgical centers. Shortly after World War II, we had about 10 hospital beds per 1,000 of population nationally. Now the number is around three and continues to decline.

Separately, how close are we to interoperable electronic medical records?

Paul Levy said...

Barry, on your first point, that doesn't matter in this case, as PHS also has dominance in the outpatient arena in the Eastern Massachusetts region. In fact, it used those excess revenues to build some massive outpatient facilities.

On the second point, it is technically possible, but PHS has signed a master contract (for close to $1 billion) with Epic, which has chosen to keep its technology closed with regard to interoperability.

nonlocal MD said...

You can definitely hold Martha accountable, by not electing her governor of your fine state. Do you really want Partners' puppet in the governor's mansion?
As for divestiture, PHS has successfully fended that off by having their puppet call off the feds' antitrust investigation.
The bottom line is that Partners will do what it wants because the public supports them. This may be their ultimate achievement; subverting the hearts and minds of the patients. Until, of course, we inevitably all have to pay more out of pocket for our health care, when they will start complaining - too late.

Neville Sarkari MD, FACP said...

Great posting Paul. It has always mystified me that the costs in medicine continue to rise (driven by technology, new procedures, new medications, and now consolidation) while the costs of everything else in society (computers, communications, consumer electronics,travel, even labor when adjusted for inflation) seem to continually fall.

Barry Carol said...


To the extent that there are procedures that used to require an inpatient stay and can now be done on an outpatient basis for significantly less cost, the system is net better off even if that care is still delivered by a high cost PHS facility. However, I understand that system wide costs would be lower if PHS weren’t able to extract significantly higher prices from insurers.

Second, I presume that PHS can NOT extract significantly higher prices from Medicare and Medicaid and those two systems combined serve about one-third of the population nationally and probably account for close to half of medical spending including long term care and home healthcare.

Finally, most of the newer health insurance plans purchased through the exchange are excluding PHS from their network in order to offer the lowest possible premium. These plans are attractive to the lower middle income segment of the population that might otherwise not be able to afford health insurance at all even with subsidies.

As nonlocal noted, the public so far unfortunately seems to support PHS and its market power. Until they come to better understand that most of PHS’ care is no better that what competitors provide and they face more out-of-pocket exposure through tiered networks, the status quo will likely persist.

Anonymous said...

Note sure that splitting up Partners will result in lower prices for consumers either.

MGH will end up with most of the current Partners community hospitals beds and outpatient centers....

MGH outpatient centers


North Shore
Cooley Dickson
Newton Wellsley

and has the closest connections to

Southern New Hampshire Medical
(But in New Hampshire so not regulated by Mass)

Brigham and Womens would get:


Foxboro outpatient center

already has close links to

Care New England in Rhode Island (not regulated by Mass) eg
Kent Hospital
Memorial Hospital

that means Brigham and Womens would want to add to its network in Massachusetts

Which means what was Partners has an even larger community network that its current one........

Potential new Brigham and Womens sites

Milford Regional
(where it has a cancer center with Dana Farber)

Cape Cod Hospital - which has long standing close links to Brigham and Womens

Southcoast which is developing links to Brigham and Womens

Might it develop links to Steward?

Dana Farber a close Brigham parters is now providing care at St. Elizabeths and has taken over commonwealth hematology and oncology.

Be careful what you wish for.....

Paul Levy said...

So perhaps a different split is better. The basic idea remains.

Anonymous said...

A different split would be nice but I would guess it depends which hospital has the closest connections to the community hospitals

The Brigham could also try to take back Harvard Vanguard from BID

I think the most important think to force Partners to divest is

Neighborhood Health Plan
(which it took over last year)

NHP has a low cost structure even though it still refers to Partners for its plans....the though it is the only Health Plan that refers to MGH and B&W for its low cost products.

As long as NHP is owned controlled by MGH and B& will be difficult for other

Limited Network Health Plans to draw patients from the Partners hospitals........

Parnters control of NHP is one of the things preventing real price competition from developing in Massachusetts (Partners is subsidizing its own health plan)

Real Price competition with Limited Network plans could hurt MGH and Brigham and Womens as referral sites, but owning NHP limits that damage......

Anonymous said...

Except Epic does allow for shared information across providers using Epic - and a significant number of other hospitals in the Eastern Mass / Boston area are also implementing Epic clicnal systems.

Anonymous said...

Anon 8:26AM

Epic does "ALLOW" shared information, but will Partners allow the software to share with other academic medical centers?

for that matter eclinicalworks has some capability to interoperate with epic. And many Mass doctors groups use eclinical works, which is based locally.

Now if the state mandated open access to that data if patients request it, that changes the ballgame.

Require open access to EMR records if patients request it. That would enhance healthcare competition and begin to create a real market.

Paul Levy said...

Users from Epic across the country will tell you that they cannot share information with other Epic users.

Anonymous said...

Paul, Steward will implode after the November election. Cerberus has collected enough in dividends to make up for all the money that it spent on GSH ER, SEMC ICU etc. They have sold their labs, they have sold the Medical Office Building on Nevins street and on Washington street and now they are leasing them back. That's how Steward is paying Cerberus. No one will buy Steward as a Health Care system because it is losing money by the buckets. Cerberus has made what they wanted to make and are thinking of how to unload it. De La Torre is not running the show any more - they have brought folks from NYC who are stationed in 500 Boylston. They are just waiting for the election, since slicing Steward in pieces and selling it over the summer would cause an uproar in Boston (where will the indigent Carney patients go, where will all the unemployed SEIU members go - under Coakley's watch...). She has asked them to hold off until the fall - and that's exactly what is going to happen. Go to St. Elizabeth's at 11AM and see how empty it is. Then go to the cafeteria for lunch and you will notice that everyone having lunch is wearing scrubs, white coats and/or has a St. Elizabeth's ID badge on them. In the weekend it looks like an Arizona ghost town. The party is over...

Anonymous said...

anon 9:52PM

There is not full year data yet for Steward (their fiscal year ends Dec 31), but through the first three quarters, the mass agency collecting this data has released this.

Carney (4.5)
Good sam 4.2
Holy Family 7.5
Merrimac (7.5)
Morton (3.7)
Nashoba 0.1
Norwood 0.1
Qunicy (13.8)
St Anns 13.8
St Eliz 9.5

Total 5.7 M in the black

That is through three quarters of Stewards fiscal year for 2013.

Unlike every other hospital in mass Steward's data for Q4 of last year and Q1 of this year hasn't been released yet.

Note: all data from Mass CHIA