Partners in Power

Harvard Business School Professor Regina Herzlinger has long fought for “consumer-directed health care.” She states: “People can choose from 240 models and makes of cars pretty intelligently . . . .Why do we assume they can’t do the same when it comes to their health?”

A recent Boston Globe series on hospitals in Massachusetts helps answer that question.


The Globe’s fascinating series on the rise of Partners Health in Massachusetts tells a story of market forces inexorably driving up the cost of health care, without commensurate quality improvements. Threatened by declining insurer reimbursements in the 1990’s, Mass General Hospital and the Brigham & Women’s Hospital united to anchor Partners. Now they’re in the driver’s seat, demanding reimbursements up to 30% over what other hospitals receive for identical procedures. Their market share has steadily increased as well, allowing them to stockpile the resources necessary to enter into new markets and threaten the viability of cheaper community hospitals.

Some of those quoted in the series contend that Partners’ anchor hospitals are terrific places to go if one has a rare illness–they pride themselves on cutting edge medicine. But in procedures including coronary bypass, CT-scan of the chest, MRI of the brain, and ultrasound, they appear to offer no quality edge–just far higher prices.
On a simple, market-based model, this should not be happening. Patients should be investigating quality, getting value for their money, and opting for cheaper hospitals when, all things considered, these are bargains. But here’s one account of patient decisionmaking from the article:

[A 31-year old named Dahl] lives less than 2 miles from Mount Auburn Hospital in Cambridge, but when she became pregnant with her first baby last year, she decided to go to a Boston teaching hospital to deliver. “I talked to women in the area who had babies in Boston,” said Dahl, a self-described nervous patient who gave birth to son Henry by Cesarean section at the Brigham last November. “I also looked at the US News rankings for female care. The Brigham was rated very high.”

State health officials have tried to encourage women like Dahl to reconsider their flight to Boston, pointing out in a 2003 study that community hospitals are generally just as reliable as teaching hospitals for normal births. In fact, they had a slightly lower complication rate – and they’re a lot cheaper. Dahl’s care cost $8,282.14 at the Brigham, while the cost at Mount Auburn would have been about $5,700, according to state insurance data.

In other words, brand power has a lot more to do with choices here than objective assessment of outcomes. Admittedly, insured individuals may be so insulated from health care costs that they have little reason to sniff out the best deals. The private health insurance market is supposed to help here, acting as proxy and agent for the insured, but consider how Tufts was treated by its customers when it tried to bargain with Partners:

Partners’ dominance became clear in 2000, when executives of Tufts Health Plan had the temerity to refuse Partners’ demand for a substantial rate increase. Partners countered by declaring it would no longer accept Tufts insurance at its hospitals. Within days, as thousands of Tufts customers threatened to change insurance rather than lose the right to treatment at the two famous hospitals, Tufts gave in to Partners’ demands. Since then, Partners has negotiated one big pay increase after another from insurance companies fearful of a similar humiliation.

Those reimbursement rate increases are not simply windfalls to Partners’ highest-paid employees and shareholders. They are also serve as a warchests for Partners’ expansion into the lucrative niches that now keep many community hospitals afloat. As Marc Roberts, a professor of political economy at the Harvard School of Public Health, says in one Globe piece, “By paying Partners more, you build up their war chest and then they build more and more and then they drive other people out of business . . . . This is a huge slow-motion train wreck for the Massachusetts healthcare system.” I’ve explored the dynamics of specialty hospitals elsewhere; suffice it to say, it’s now become evident that certain procedures in hospitals serve to cross-subsidize other, less-profitable ones. A former chief of a hospital likely to be adversely affected by Partners’ expansion puts it this way:

During an interview earlier this year at Caritas Norwood, Chessare passionately decried Partners’ move into his neighborhood, arguing that the healthcare giant was triggering a medical arms race in which the rich get richer and the poor face extinction. Community hospitals are already doing much of the same work that Partners is offering and doing it more cheaply and, for the most part, just as well, he said. “It’s cherry picking,” Chessare said. “What are they going to do there? They’re going to do high-end imaging. Why? Because you make money at it. And they’re going to do ambulatory surgery. Why? Because you make money.”

Chessare is complaining that the new Partners’ facilities will be competing for “high-margin” services, which smaller community hospitals like his use to cross-subsidize things like 24-hour ER’s, care for the uninsured, and other community services. According to one study I saw (admittedly from 1991), about a quarter of community hospitals have levels of uncompensated care above 8%, and a quarter have levels below 1%, with the rest in between those figures. If Chessare’s hospital is at the high end, it’s not hard to draw a connection between the relevant Partners’ satellite’s success and decreasing ER services for the area and health care for the the uninsured generally.

This brings me to a final point brought up by the article–a darker narrative about quality assessment than we are used to. High US News & World Report rankings are one anchor for public perceptions of Partners’ quality. For fans of market-driven health care, rankings are a key heuristic for harried consumers used to treating health care as a credence good. But the USNWR rankings appear to have a salience far greater than more granular measures of quality–which in turn are challenged by one of Partners’ own doctors:

Partners officials said some of the ratings are based on untrustworthy data that should not be used for scoring. In general, they said, the statistical methods used to adjust for the sickness of the patients at different hospitals are not sophisticated enough to recognize how much more vulnerable their patients are. They also noted that even as governments are making more data public, many of the existing measures are controversial and often fairly crude.

“I think a consumer that relies on the cross-section of information that’s out there and available to them, it’s akin to being a cork floating in the ocean,” said Dr. David F. Torchiana, head of the Massachusetts General Physicians Organization. “You’ll be driven in random directions by the randomness of the information that you will obtain.”

I’ve also questioned the utility of many “best doctors” survey and other data. Certainly we can do more to improve data collection and interpretation. But we also have to worry about rankings becoming a self-fulfilling prophecy, increasing the distance between top and bottom that they are meant merely to report. As the Globe notes, “the pay gap undermines less powerful hospitals, whose officials say that they steadily lose doctors to those that can pay more. . . . Partners’ 6,000 physicians are paid 15 percent to 40 percent more than most other Massachusetts doctors, based on Blue Cross rates, while the company’s community hospitals earn at least 10 percent more than their peers.” Small initial differences can become self-reinforcing. What began as a difference largely rooted in perception may become one rooted in reality, if we can assume that the highest-paying entity can purchase the services of the most competent providers. In the worst case scenario, rankings may serve to route the poorest patients to the poorest hospitals, while unleashing an arms race of image management by the rest.

Joe Biden’s Chief Economist, Jared Bernstein, has pointed out something fundamental about pricing in a market economy: it can be driven by power as much as by productivity. The story of Partners casts doubt on the efficacy of market-driven initiatives in health care. Consumers appear bewitched by marquee brands which insurers are powerless to bargain with. Only state action in Massachusetts appears to be an effective check here, leading the Boston Globe to call for more equity in reimbursement generally:

One alternative is to shift from the private dealing between insurers and hospitals to a more transparent system of performance-based reimbursements. These would have to account for complicated medical procedures. Or the state could set an allowable range for the cost of each procedure.

Ideally, rate-setting would move toward a single payment system: a gallbladder removal would be reimbursed at the same rate by a private insurer, Medicaid, or Medicare. Currently, Medicare pays somewhat less than actual cost, Medicaid much less, and the insurers subsidize both programs. Ending this disparity would benefit the hospitals with disproportionate shares of Medicaid and Medicare patients. A saner rate-setting system would also pay more for primary care and less for the interventions by specialists that inflate overall costs and lure medical students away from basic care.

If this system could be implemented in a way that preserved incentives for innovation, it could be a vast improvement on the current high-stakes atmosphere of hospital-doctor-insurer brinksmanship.

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