The Feds Join The Massachusetts Healthcare Debate

Cross-posted from Critical Condition on National Review Online.

There is a new player in the ongoing battle over spiraling health-care costs in Massachusetts: the U.S. Department of Justice. The Boston Globe reported yesterday that the DOJ has opened an investigation into “anticompetitive behavior” by Partners HealthCare, the most powerful hospital organization in Massachusetts.

This fight matters, and not merely because it is a window into the unraveling health-care experiment that is the Bay State. It is also a key to solving the fiscal crisis caused by Medicare and Medicaid.

The Centers for Medicare and Medicaid Services (CMS) project that, in 2010, the federal government will spend $966 billion on health care, with state governments tacking on another $300 billion, for a total of $1.3 trillion. Over one-third of those expenditures are for hospital care: $386 billion of federal and $79 billion of state expenditures.

Traditional approaches to entitlement reform are conceptually simple but scary to politicians: they involve things like raising the age of eligibility for Medicare above 65; curtailing benefits for the wealthy; etc. Such reforms would certainly be helpful, if they could be enacted, but they are incremental measures that will ultimately be overwhelmed by runaway health-care inflation. Paul Ryan’s roadmap is a big improvement upon these traditional solutions, as it introduces consumer choice and other market reforms that can help drive costs down.

But consumer choice only matters if consumers actually have a choice. If Republicans can successfully introduce a real market into the provision of hospital services, they can help Americans shop for medical value, have a significant impact on the growth of government spending, and expand access to health insurance.

The cost of health insurance keeps going up, at a much faster rate than inflation. This problem is especially acute in Massachusetts, which has the most expensive health insurance in the nation. Despite Governor Deval Patrick’s demagogic efforts to blame the insurance industry for the Bay State’s problems, neither he nor the RomneyCare system he inherited have tackled the underlying causes of health care inflation.

Preeminent among these causes is hospital monopolies. Numerous studies, such as this one from the Robert Wood Johnson Foundation, have shown that the wave of hospital mergers that began in the 1990s have created regional monopolies that have driven up the cost of health care. Partners is one such example.

Partners HealthCare was formed in 1993 from the merger of two eminent Boston hospitals affiliated with Harvard Medical School: the Massachusetts General Hospital, and Brigham and Women’s Hospital. Then-Governor William Weld signed off on the merger, along with his Secretary of Health and Human Services, a guy named Charlie Baker. Partners went on to acquire a half-dozen other major community hospitals around Massachusetts, and is now the state’s largest private employer.

In 2008, the Globe exposed the “handshake that made healthcare history”: Partners’ successful effort in 2000 to get Blue Cross Blue Shield of Massachusetts to agree to pay them more money, in exchange for Partners’ promise that they would demand the same rate increases from everyone else. Ever since, individual insurance rates have grown at 8.9% a year in Massachusetts, twice the previous rate:

It was the gentleman's agreement that accelerated a health cost crisis.

And Dr. Samuel O. Thier, chief executive of Partners HealthCare, and William C. Van Faasen, chief executive of Blue Cross Blue Shield of Massachusetts, weren't about to put it in writing.

Thier's lawyers cautioned that a written agreement between the state's biggest hospital company and its biggest health insurer that would make insurance more expensive statewide might raise legal questions about anticompetitive behavior, according to officials directly involved in the talks...

Both Partners and Blue Cross deny that they acted improperly in the 2000 payment negotiations or in their dealings since. Partners issued a statement saying that Thier pledged only that he would treat all insurers equally. Blue Cross executives have said that the big pay raise to Partners in 2000 was needed to offset years of low rates.

But plainly Thier's attorneys were wary of the legal risk of even discussing a market-setting agreement, those involved in the talks say. And soon it would be obvious why.

By spring 2001, Thier had pressured two insurers, Tufts and Harvard Pilgrim Health Care, to give Partners rate increases as large or larger than Blue Cross got. Partners' internal memos reviewed by the Globe show officials knew that insurers would have little choice but to raise prices to consumers to cover the new Partners rates.

Thus it was that a company originally launched with the promise of saving hundreds of millions of dollars by consolidating two famous hospitals instead became a driving force behind the high cost of medicine in Massachusetts. Blue Cross has increased the rate it pays Partners by 75 percent since 2000, far more than increases given to other teaching hospitals that mainly treat adults. Other insurers have boosted payments to Partners by a similar amount.

Blue Cross was reluctant to go along with Partners’ demands, according to the Globe, but knew that they would pay a heavy political price if they didn’t cave:

No private company was able and willing to moderate Partners' ambitions. Blue Cross, which now controls 60 percent of the health insurance market, was best positioned to do so but flinched at the possibility of a public tangle. As former Blue Cross executive Peter Meade said at a meeting of company executives in 2000 at which some urged a tougher stand against Partners: "Excuse me, did anyone here save anyone's life today? We are a successful business up against people that save people's lives. It's not a fair fight..."

Today Partners dominates what was once one of the most competitive healthcare markets in the world, with a hospital and physician network big enough to overwhelm competitors and intimidate insurers.

Charlie Baker, now running for governor against Deval Patrick, admits his mistake: Signing off on the deal was like “having the grenade that you throw on one end of the boat roll back down and blow up on you when the boat shifts.” His humility is to his credit. But the problem remains to be solved. And Obamacare makes the problem worse by preventing new hospitals from competing against the incumbents.

Many hospitals lose money, and consolidation can sometimes be the most effective way to resolve inefficiencies in the system. But not so in the case of Partners, where the merged behemoth used its market power to preserve its redundancies and build massive, billion-dollar additions to its already extensive facilities. (The photo above is of Mass General's latest expansion.)

In recent years, antitrust lawsuits against hospital mergers have mostly failed in the courts. Judges, perceiving hospitals as sympathetic citadels of healing and hope, are less suspicious of their anticompetitive tendencies. If judges interpret the “market” of a hospital broadly (say, by defining Mass General’s market as the entire state instead of the city of Boston), they can convince themselves that these hospitals have more competitors than they actually do. Will Partners gain an equally sympathetic hearing?

The Republican approach to health care reform has focused almost exclusively on the way we pay for insurance. There is no doubt that this is an important aspect of reform. But a free market for health insurance means little if there isn’t also a free market for health care. Real reform will need to address both sides of the equation.