It is time for Massachusetts to lead the nation, once again, on healthcare. An “historic” opportunity to address provider pricing power, in a period of market consolidation, should not be overlooked. The governor-elect and attorney general-elect should take this opportunity to renegotiate the Partners Healthcare deal—and defend the interests of Massachusetts consumers.
The Boston Globe has called the regulatory scrutiny of Partners Healthcare “historic, for the unprecedented level of scrutiny it’s bringing to a proposed merger of hospitals and the focus on long-term cost control.” With all of the ink that has been dedicated to coverage of the proposed Partners Healthcare expansion, and its “potential” to increase healthcare costs in Massachusetts, it is helpful to consult the publicly available data to elucidate the issue and illustrate its importance.
Total healthcare spending in the US was $2.7 trillion in 2011, or 17.9% of GDP. By comparison, US telecommunications industry revenues were $985 billion in 2010 and the US software and IT services industry revenues were $606 billion in 2011. Both are clearly dwarfed by healthcare spending, for which higher national costs have not translated into better national health outcomes. It is worth mentioning that Medicare, alone, constituted $484.486 billion (>12.7%) of the 2012 Federal budget, so controlling healthcare costs has material implications for both consumers and government spending. Whether you are a Conservative deficit hawk or a Liberal consumer advocate, controlling healthcare costs should be a priority.
Unlike single payer systems like the UK, where a single payer is empowered to negotiate provider prices across the industry, US healthcare provider prices are individually negotiated between a multitude of payers and providers. In the single payer scenario, market power clearly rests with the payer, as it has the ability to lock abnormally expensive providers out of the “network” used by most of the country’s patients while the provider’s only alternative to a negotiated agreement is to be “out of network” and be more expensive for patients to access. Only when such a providers’ standard of care is substantially better than single-payer providers would such a provider be attractive to patients who could afford it.
In contrast, the relative market power between payers and providers in the US is less clear and varies by regional market. In regions where the providers have more negotiating leverage, payers (and, by extension, consumers) may be forced to pay more for similar care than they would be in markets where providers have less leverage. That brings us back to Partners Healthcare, and several key questions that need to be answered to understand whether Partners’ market power is detrimental to Massachusetts consumers:
1) Does Partners Healthcare currently have regional market power that allows it to charge more for care than comparable hospitals elsewhere?
2) Is the proposed merger likely to result in higher prices in any of the new hospitals that become part of the Partners Healthcare system?
3) If the answers to (1) and/or (2) are affirmative, what remedies should Massachusetts consumers be availed of?
Massachusetts, through the Center for Health Information and Analysis, provides data on how an individual hospital’s prices compares to its peer hospitals, for each of its top three private payers, in addition to the overall payer mix, for FY2012. The graphs in the appendix clearly show that Partners is charging private payers prices that are materially more than the median of peer hospitals (i.e. academic medical centers compared with other academic medical centers, community hospitals relative to other community hospitals, etc.)–at each of its existing hospitals. Only Tufts Insurance prices at Faulkner were roughly at the median level; all other plans at each of Partners’ hospitals show provider pricing far above the peer median level. Given that its favorable reimbursement rates hold across geography and hospital type (academic medical center vs. community hospital vs community DSP), it would be extremely difficult for Partners to argue that it does not enjoy a greater degree of pricing power relative to other market participants.
While South Shore hospital has been getting most of the attention, its payer prices relative to median peer hospitals are actually similar to that of Partners—materially above peer median for community hospitals across all of the top three payers. The Hallmark Health system that Partners intends to acquire, however, does not seem to enjoy the level of pricing power that Partners does. Its payer profile shows relative price levels for two of its three payers at close to the median for its peer group. It does not take a business genius to recognize that the growth plan for Hallmark Health is likely to include material price hikes—the two payers at close to the median price for the hospital systems’ cohort were responsible for over 65% of its commercial payer payments.
The existing settlement with Partners Healthcare, which limits price increases for the first six years, seems inadequate. It does not address the considerable pricing power that Partners already enjoys (prices ~30% higher than the state average, according to a Boston Globe editorial by former CMS head Don Berwick), and does not inhibit the (obvious!) increases at Hallmark Health (or other Partners Hospitals) beyond the sixth year. Given his successful turnaround of Harvard Pilgrim, Governor-elect Baker’s background is particularly well-suited to understanding how above-market provider reimbursement rates raise the cost for payers and Massachusetts consumers. Meanwhile Attorney General-elect Healey’s tenure in the office of the attorney general should enable her to be an effective advocate for Massachusetts consumers in her new role.
It is time for the state of Massachusetts to once again lead the nation on healthcare, by beginning to bend the cost curve for the benefit of payers and consumers. This “historic” opportunity should not be overlooked.
Here is the relevant payer data for each of Partners’ hospitals in FY2012:
Brigham and Women’s Hospital
Brigham and Women’s Faulkner Hospital
Massachusetts General Hospital
Cooley Dickinson Hospital
Martha’s Vineyard Hospital
Nantucket Cottage Hospital
North Shore Medical Center
South Shore Hospital