In Massachusetts Elite Providers Drive Health Care Spending; What Does This Say about the Dartmouth Research? . . . Maryland’s Solution. Part 1

Massachusetts Attorney General Martha Coakely has just released a report which reveals that the state’s health care costs are spiraling in large part because he state’s primo hospitals and physician groups –those  with brand name recognition– -are demanding exorbitant reimbursements from insurers.   Providers who control the market in geographically isolated areas also are insisting on reimbursements that far exceed what other providers receive for the same services..

These providers have market leverage. Patients want both marquee names and providers close to home in their insurers’ network. If these providers are not included, customers will switch to a different insurance plan.  Thus, insurance companies have no choice but to pay what the providers demand.

The investigators “found no evidence that the higher pay was a reward for better quality work or for treating sicker patients,” the Boston Globe reports.  

“In fact, eight of the 10 best-paid hospitals in one insurer’s network were community hospitals, which tend to have less complicated cases than teaching hospitals and do not bear the extra cost of training future physicians.”

Sometimes hospitals claim that they charge more because they treat poorer patients who are sicker.  But the truth is that, often, poorer patients receive fewer services because they have limited access to care. In addition the public hospitals and “safety-net hospitals” that treat indigent patients frequently have fewer resources: shriveled budgets, fewer specialists, less equipment. As I reported in Money-Driven Medicine, often “safety-net” hospitals must ration care.

The new Massachusetts report confirms what many already know about spending on low-income patients: the investigation discovered that hospitals that treat large numbers of poor patients  . . . are paid 10 percent to 25 percent less than average by commercial insurers.

Meanwhile, Coakley’s report made me wonder: Maybe Massachusetts should consider Maryland’s solution?

But first, consider what this report means– or doesn’t mean– about two decades of Dartmouth research demonstrating that over-use of medical technologies ranging from new drugs to cutting-edge surgical procedures is driving health care spending skyward.   By contrast, Coakely suggest that higher prices explain health care inflation..  

     What Does This Say About the Dartmouth Research?

After reading Coakley’s report, some commentators, including NPR’s Christopher Weaver, concluded that:  “Coakely’ s report challenges a few . . . pieces of conventional wisdom. The Dartmouth Health Atlas has attracted a lot of attention lately for research concluding that changes in utilization—the number of health services used—drive total health spending more than changes in prices. Coakley’s reports says that price changes, rather than utilization, accounted for 80 percent of the growth in Massachusetts’ health spending from 2006 to 2009.

Here, Weaver over-reaches. The report tells us what sent spending higher in Massachusetts over a period of three years (2006-2009). This in no way undermines Dartmouth’s findings that, nationwide over-treatment in the form of more tests, more surgeries, and more specialists’ visits has been a major factor in driving sky-rocketing health care spending in many parts of the country.

Indeed, as Dartmouth economist Jon Skinner reminded me yesterday: “Nationwide, Medicare spending rose 8.6 percent in 2008.”   Medicare has been keeping prices fairly flat.  So, as Skinner points out, “this increase was the result of increased utilization of medical services, not of higher prices.”  Nationwide insured patients continue to undergo more tests and procedures. This remains a major factor driving the nation’s soaring health care bill.

In addition, in 2006, when the study began, utilization in Massachusetts was already extremely high—how much higher could it go?  At a certain point, providers treating patients in a given population are doing so much that it becomes difficult to “do more.” For example, if patients in that region are already undergoing significantly more surgeries than Americans living in other places, the number of surgeries might increase by 3 to 5 percent over two or three years, but volume is not likely to jump by 8 to 10 percent. (These numbers are hypothetical; I’m using them just to illustrate the point.)  

It also is critical to recognize that the Massachusetts report is looking at rising prices over a very short period of time—2006 to 2009. This narrow window tells us little about what is causing long-term growth in health care spending in the state, or in the nation.  

In 2008, the Boston Globe reported thatfive years ago, hospital and doctors  bills were rising mainly because [more patients were receiving  more services] according to Blue Cross data, but now the escalating prices that hospitals and doctors charge is far more important.”  When looking at historical changes, beginning and ending points determine results. The Massachusetts report cover three years when rising prices were very important. This doesn’t tell us how or why health care spending in Massachusetts rose from 1989 to 2009. (Or what will propel spending over the next 15 years.)  But in general, long-term trends are more telling, particularly if they persist.

What we do know is that in 2000, two of Massachusetts’ brand-name providers flexed their muscle and gained new power for marquee medical names throughout the state. That was the year that Partners Healthcare Systems, the result of a marriage between two of Boston’s most prestigious hospitals (Brigham and Woman’s Hospital and Mass. General), demonstrated that, in the words of the Boston Globe, “it could bend insurers to its will.”

Tufts’ Health Plan decided to stand up to Partners and refuse its 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' demand,” the Globe reported. “Since then, Partners has negotiated one big pay increase after another from insurance companies fearful of a similar humiliation.”

 In its 2008 Spotlight investigation the Boston Globe demonstrated that, following that debacle ,  hospitals  with elite reputations were being paid more for identical services.

Dr. James D. Alderman, for example, is an interventional cardiologist who routinely opens patients’ clogged coronary arteries by inserting a flexible tube with a tiny balloon at the tip.  Sometimes he does the angioplasties, at MetroWest Medical Center in Framingham.  Sometimes he operates at Brigham and Women’s Hospital as part of a research program.

When he does the procedure in Framingham, the insurance company will pay the hospital about $17,000, not counting the physician's fee. If Alderman is sent to Brigham and Women's in Boston, that hospital will receive about $24,500 — 44 percent more , even though the patient's care will be the same in both places.

"It's the exact same doctor doing the procedure," said Andrei Soran, MetroWest's chief executive told the Globe. "But the cost? It's unjustifiably higher."

Often, different hospitals charge very different prices for relatively simple tests. “Children's Hospital typically gets about $1,100 for making an MRI of an ankle or a knee, not counting the physician's fee,” the Globe noted.  “Insurers pay Boston Medical Center $490 for the same procedure, using a similar high-tech machine”.

“The technician who makes a simple chest X-ray to help diagnose pain or an insistent cough brings in $75 at Anna Jaques Hospital in Newburyport. Mass. General earns more than twice as much, $160, for producing the same image.”

Consider how much higher charges add to the health care bill that we all pay: “the Brigham and Mass. General receive at least $500 million a year more from the three biggest insurers than if they were paid at the lower rates typical of their rivals. Likewise, 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.

 Altogether, those higher rates add up to at least $800 million more for Partners hospitals and doctors than if they were paid at rates similar to competitors.”

   What the New Massachusetts Report Does Show  

Back in 2008, the Boston Globe Spotlight Team found that hospitals such as Partners’ Massachusetts General Hospital and Brigham and Women’s Hospital typically were paid 15 percent to 60 percent more for essentially the same work as other hospitals, even though the quality was not superior.

Coakley’s report, which is based on tens of thousands of contracts and other documents subpoenaed from insurers and providers and depositions from more than 30 key health care executives, reveals that the payment gap is even wider than the Globe suspected. Today, a small group of about 10 hospitals statewide command up to to 100 percent more than 55 rivals doing similar work.

 Coakley did not release the names of the highest-paid saying she wanted to lay out system wide problems, not blame individual organizations.  But we may get more detailed information during Patrick administration hearings on how to control medical costs, scheduled to begin March 16.

 I believe that this information should be made public.

There may be reasons why certain hospitals need to be paid more—higher labor costs and overhead, or the costs of educating medical students. But the disparities are way too large.

 Preview, Part 2—Should We Break Up Large Insurers? Maryland’s Answer  

In Part 2 of this post, I’ll talk about a proposal , backed  by many in Congress—to repeal the law that exempts health care insurers from anti-trust laws.  Supporters point out that insurers are highly concentrated in many regions, giving them very little incentive to compete on price. Legislators would like to see more,  smaller insurers competing with each other. In theory this would lead to lower prices.

But smaller insurers would have even less leverage in the marketplace. (Austin Frakt makes a strong argument on The Incidental Economist, here.

As hospitals consolidate, insurers are losing negotiating power. And this isn’t just happening in Massachusetts. It is happening anywhere that the balance of power between providers and insurers has tipped to favor largef  providers.

        An Alternative Solution –Maryland

Rather than hoping that market competition will bring down prices (something that rarely happens in health care markets), Washington might consider Maryland’s solution.

In Maryland, hospital prices have been regulated since 1977.  An independent agency sets rates for all patients, including Medicare beneficiaries, at Maryland’s acute-care hospitals.

 Adjustments are made for hospitals located in cities where the cost of labor is higher, as well as for hospitals that care for sicker patients and/or train medical students.

 Private insurers, Medicare and Medicaid all must pay the prices set by the commission. Medicaid cannot underpay hospitals—and private insurers cannot over pay, or negotiate side deals and discounts with certain hospitals while paying others a premium for their brand name.  Hospitals also cannot charge uninsured patients more.

In 1976, before regulation began, Maryland hospital costs were paid 25% more per case than the national average.  By 2007 Maryland's costs were 2% less than the national average. And , according to a recent article in the Wall Street Journal Maryland’s hospitals are seeing small, but predictable profit margins.

To me, this sounds like a much more rational health care system.

I’ll talk about this more in part 2 of this post

15 thoughts on “In Massachusetts Elite Providers Drive Health Care Spending; What Does This Say about the Dartmouth Research? . . . Maryland’s Solution. Part 1

  1. Before you wax too ecstatic about Maryland (in which I have practiced for over 25 years), please take a look at the Dartmouth Atlas and observe the dark green color (highest cost) overlying the state.

  2. Legacy–
    Thanks for the head’s up.
    I went to Dartmouth’s interactive map and clicked on Maryland.
    From 1992 to 2006, the growth health care spending has grown by just 2.69% a year–compared to 3.53% nationwide. Compounded, for 14 years, that’s a lot of money.
    Also growth was much higher in Virgiania (over 4% a near) and in nearby PA towns.
    So the Marlyand law does seem to be helping to put a cap on spending.
    I wonder about utliziation– in some places (for instance Manhattan) Medicare spending per patient in $$ doesn’t look that bad. But if you look at utilization– days in hospital, number of specialists seen, number of proceudres, tests surgeries, number of days in ICUS utilization is very very high.
    It turns out that Manhattan’s teahcing hospitals are very, very well reimbursed for teaching– so they seem less likely to hike the bills they send to Medicare.
    But, when you look at what they are doing to patients– after correcting for race, age, sex, etc, they’re really overtreating them.. .
    I’ll have to take a closer look at utilization.

  3. Maggie:
    With pheumonia and no insurance, I ran into a similar predicament at U of M. Faced with a battery of tests to ascertain what was ailing me, I could not get prices from the doctor, his office, or from the U of M billing department. After waiting a day or so, the billing department representative (after hearing my circumstance) finally told me to go to an offsite imaging and blood/urine testing site. He openly admitted the hospital prices would be far greater than the offsite and nonaligned facility.
    I guess we could chalk that additional cost for the name brand clinic and hospital to Overhead. I also paid twice for a cardiogram, equipment and doctor, hospital and clinic. Where does it stop?

  4. The main reason why health sector prices have increased over the last 20 years is the falling productivity of providers. It has averaged -2.3% per year over the last decade. It explains almost the entire real price increases over the period.

  5. Tor–
    Evidence form a reputable source? (a peer-reviewed journal)?
    run- 75441–
    one advantage of the Maryland solution is that it has created price transparency.

  6. It has always baffled me why no other states have duplicated Maryland’s regs on hospitals. Although hospitals in MD can still unbundle services and get away with it for commercial insurers, the overall low costs of hospital care in the state are and remain unrivaled.

  7. The first to question health sector productivity was a Brookings study many years ago. I picked up on it, and published the first article on the topic in Minnesota Medicine, calculating the the year when health care costs, ceteris paribus, would consume the entire US GDP. Most of my work is published in Proceedings from Productivity Conferences; journals of cost and finance, and in reports to the government. Here is a popular summary of the argument:
    This is a very simple calculation, using the health sector’s own measurements for productivity, and anyone can do it. When used in a large clinic with a strong focus on productivity, the project investment yielded a return far in excess of the expected, when physicians’ productivity reached 1% per MONTH, as compared with their health sector colleagues’ -2.3% per year.

  8. Tor – Your article was provocative, but hard to interpret. Productivity seems to be a complex concept fraught with ambiguity. It appears that much of what has happened in recent decades involves an increase in inputs (money, time, and other resources) with little or no increase in output defined as improved health. In many cases, perverse economic incentives have driven the process in the wrong direction, so that as you mention, it is rewarding to keep patients from getting well too soon. These are enormous problems with the healthcare system that must be addressed to constrain costs.
    On the other hand, productivity is subject to the law of diminishing returns, such that better health in some contexts may require a reduction in productivity. An example that comes to mind is childbirth. I assume, perhaps erroneously, that when we stopped delivering babies mainly at home through the services of midwives, and instead began to use medical institutions and their professional staffs for this purpose, productivity declined. That is to say that the health improvements in terms of lower maternal and infant morbidity and mortality were modest, but the increases in input resources were much greater. Was this a bad thing? I don’t think so, although if the same improvements could be achieved at lesser costs in time and resources, that would be a superior result. It would probably still entail a reduction in productivity, but a lesser one.
    Eliminating the very wasteful or even deleterious productivity reductions is a clear imperative. What to do about the reductions associated with better health will be a judgment call in which we weigh the value of the added benefits against the extra inputs and decide whether we are using our healthcare system most efficiently or whether we can do better.

  9. nowacky,
    nowacky– Yes, the more I look at Maryland’s system, the more puzzled I am as to why more states haven’t tried to do this.
    So much better for hosptials— predictable, stable revenues.
    So much better for patients– hospitals charge everyone the same price. (They can’t charge the uninsured more. They can’t charge your insurers more , and so you don’t wind up paying higher premiums.)
    So much better for everyone– health care inflation is reined in.
    This is why Medicare is willing to go with the state prices in Maryland: Medicare reimbursements to hopsitals in Maryland have not been growing nearly as fast as in othe rstates.
    Win-win-win for everyone–or so it would seem.

  10. Maggie,
    You say: “Yes, the more I look at Maryland’s system, the more puzzled I am as to why more states haven’t tried to do this……So much better for everyone– health care inflation is reined in…..Win-win-win for everyone–or so it would seem.”
    Maryland’s HSCRC has been in existence since 1971 and setting hospital rates since 1974. In 1977 Maryland was “waivered” for Medicare and Medicaid and HSCRC was authorized to set rates for all payors. During the period 1977 to 2007 there has been a tremendous increase in health care costs. If the HSCRC was effective in controlling healthcare costs, Maryland should have some of the lowest costs in the nation.
    If you refer to the Dartmouth data for the zip codes in Baltimore, the Baltimore suburbs and the Maryland suburbs of DC (this is where the bulk of Marylanders live) you will find that healthcare costs are in the highest quintile ($9,000 to $16,351) and if you look at the state as a whole, you will find it in the 4th highest quintile (due to lower costs in the primarily rural Eastern Shore and in Western Maryland). Although Maryland is not one of the highest cost states it is a high cost state. How can this be if the HSCRC is effective and has been in control since 1977?
    The answer is actually fairly simple. The HSCRC controls hospitals and “regulated space” on hospital campuses. Anything which goes on outside of “regulated space” is not controlled by the HSCRC. The HSCRC has merely pushed healthcare out of hospitals. So if a hospital wants a high tech imaging center or surgi-center on its campus, it gets built on “unregulated space” outside the hospital. Or the facility gets built off campus as a joint venture. This leads to the interesting spectacle of a seriously ill patient being sent by ambulance with nursing escort to an imaging center 100 yards from the hospital so that they can be scanned in “unregulated space”.
    The HSCRC tried to expand its influence to facilities outside hospital walls during the 70s and 80s, but was beaten back in a series of high profile lawsuits. Now apparently, the HSCRC is content to regulate hospitals and leaves out patient surgi-centers, imaging centers, etc. alone. From a politicians and bureaucrats perspective the HSCRC is a wonderful thing. It allows politicians and bureaucrats to have control over hospitals (and possibly to extract campaign contributions from same), while not actually doing anything to improve the quality or control the cost of healthcare.
    “Things aren’t always as they seem, skim milk masquerades as cream”

  11. Legacy–
    Maryland shows up as an expensive state on the Dartmouth map because Dartmouth is only looking at Medicare data, and in Maryland Medicare pays the same rates as private insurers, meaning that Medicare is paying higher rates in Maryland than in any other state. (See part 2 of post)
    But because rates are set by the state, private insurers are often payer lower rates than they would in other states where big brand-name hopsitals “shake down” insurers, and where hospitals “shift costs” to private insurers.
    Because rates are fixed Maryalnd has been able to hold down inflation of total hospital spending.
    You suggest that providers simply move treatments out of the hospital, and that as a result, total spending in Maryland is very high.
    But in fact, a Health Affairs study published in 2007 showed that total health care spending per capita was highest in these ten states:
    “In 2004, the ten states with the highest per capita personal health care spending were Massachusetts, Maine, New York, Alaska, Connecticut, Delaware, Rhode Island, Vermont, West Virginia, and Pennsylvania. These ten states consumed an average of $6,345 per person in 2004—nearly 20 percent higher than the U.S. average of $5,283.”
    Maryland is not among them.
    Yet like Massachusetts and New York, Maryland has large academic medical centers (even though it is a much smaller state.) And academic medical centers make care more expensive (they have hte added cost of teaching, and Medicare pays them more for htat reason.)
    . In addition, Baltimore is a very poor city, which could lead to more spending (insofar as the poor have access to more care.)
    Johns Hopkins also attracts very sick patients–which would lead to higher spending.
    Yet Maryland is not among the top ten in terms of total health care spending.
    30 other states tried rate regulation and gave it up.
    Why? Politics– and a hope that “managed care” would regulate costs by negotiating good discounts from hospitals.
    “As the political winds also shifted in many states (Maryland being an exception), more conservative governments both abandoned . . . rate-setting. and hoped that “managed care” would control costs.
    Unfortunately for payers, as described above, the period during which insurers could extract lower fees from providers, especially hospitals, proved short-lived. Hospitals increased their market power and came to dominate the negotiations. That has now been true for a decade, and there appears to be little prospect that uncoordinated payers will be able to change the bargaining dynamic.”
    In many states the regulatrory body was not indepnedent.
    In Maryland it is. The Rand report cites this as a major reason why Maryland succeeded.
    As this 2009 Healht Affairs article notes,
    Maryland is tackling the problem of begining to rein in spending outside of the hospital as well: ”
    For much of its history, the HSCRC regulated outpatient services on a fee-for-service basis. Beginning in 2008, however, it implemented a new system for ambulatory surgery, clinic, and emergency room services using APGs. This new system is much more bundled than Medicare’s outpatient PPS. It extends the per case constraint concept to outpatient services, which provides strong incentives to control outpatient utilization.”
    Finally, this 2009 Healht Affairs article sums up Maryland’s experience:
    “Maryland’s rate-setting system is one of the most enduring and successful cost containment programs in the United States. Lessons learned are relevant to other states and provide useful bases for consideration of future health reform strategies.”

  12. Maggie-
    Your intelligence has always been obvious.
    But your persistance is inspirational.
    I will try to re-engage health care reform
    Dr. Rick Lippin