17 November 2008

Private payers: the unlevel playing field

Kevin linked to an interesting article in the Boston Globe. It has way too many words, and as usual when the media tries to write about health care economics, completely misses the point. In fact, the authors, bless them for trying, can't even bring themselves to ask the right questions.
A brief summary:

  • Brigham & Women's Hospital, Mass General, and other well-known hospitals ("Partners HealthCare") get reimbursed 15-60% more than less-elite institutions in and near Boston.
  • The quality of care at all these institutions is comparable.
  • Partners HealthCare are extorting patients by leveraging their market power to demand higher compensation from commercial insurance companies.
That's it. The whole 5,000 word bowel movement, distilled in all its ineffable ignorance to under sixty words.

Now the first impenetrably stupid thing the authors do is begin with the assumption that compensation for services in medicine is linked to quality. I can understand their desire to believe this to be so, and I can understand their error, given the publicity given to the various quality initiatives and Medicare's P4P programs. But it is not so. Quality measurement is in its infancy and at this time the financial linkage of quality to compensation is something on the order of 2% of medicare revenues and a few small pilot programs by commercial payers. If the authors wished to write an editorial arguing that we should link quality to compensation on a grand scale, that would be a fair matter for debate. But they assumed their conclusion, and proceeded to lambaste the Partners health system without ever once considering the bigger picture.

In fact, I have to wonder if they even read their own article.

In context, readers need to understand that health care (especially the hospital business) is not a lucrative business. The typical hospital's profit margin is about 1.75%, and fluctuates wildly year to year in the throes of economic cycles and federal budgetary shortfalls. The pressure is ever downwards, from Medicare and Medicaid especially. Hospitals, especially those with significant charity care costs, must cost-shift, which is to say they must charge private patients more than the actual cost of their care in order to subsidize the care provided at a loss to the government-insured and uninsured patients.

Insurers, understandably, do not like this, and will fight tooth and nail to drive down the amount they will pay for their patients to be served at a given facility. Those that are able to negotiate favorable contract terms will do well. Those that cannot will wind up like this:
[T]he state's second-largest hospital chain, Caritas Christi, had to borrow money this year to pay for basics, like oxygen tanks.
This is, mind you, from the same article which strongly stated that Partners was making too much money, and that they were overcharging patients for sub-par services. (At least Partners hospitals have oxygen tanks, though! Hahaha.) The authors stated outright that the greed and lasciviousness of the Partners system was a key force in the explosion of premium costs for Massachusetts residents. Partners clearly should back off and charge reasonable rates, like the rest of Mass. hospitals. Say, how are they doing, anyway? Let's go to the same damn article:
Massachusetts hospitals are losing money. Many of them would be profitable if they had even a fraction of Partners' contract clout. Caritas Norwood Hospital, for instance, could erase the $242,347 deficit it reported through the third quarter of this fiscal year if the hospital were paid Partners rates for the babies it delivers.
I'm sorry, my irony gland is hurting. I'm not sure I read that right. So, if the other hospitals were able to get compensated for their services at the Partner's rates, they would be making money. Instead, the insurance companies underpay when they can get away with it, and all the rest of the hospitals are losing money. And Partners is the bad guy? What about the insurance companies who are conspiring to depress the prices paid to the hospitals? (To say nothing of the government which underpays everybody.)

So how much is Partners fleecing the Boston public for? Let's see:
Partners' favorable insurance contracts have helped the company to reap $1.7 billion in profits since 2004, reflecting a profit rate that is average compared with the nationally known hospitals the company considers its peers.
Average, huh? That doesn't sound too bad. But what's average? Well, according to the Fitch bond rating agency, Partners posted a 2.2% operating margin for 2006 (the 2006 Fitch average was 2.8%) with $132 million "profit" (which isn't actually a profit but can be re-invested into the organization). Fitch also expresses concern about:
"Partners' high Medicaid mix and increased charity care at certain facilities, the concentration of three large managed care organizations that control a significant 80% of the managed care payer market, the competitive Boston market, and future capital needs. Partners has incurred significant losses in Medicaid and uncompensated care, which has hindered overall profitability."
What I see here is a well-run institution which manages, despite a mission which includes charity care for indigent patients, to market itself effectively and sustain itself, and to renew and grow the organization. The victims in this scenario are the regional centers which manage to deliver excellent care (as measured by the rather crude statistical metrics) despite being undercapitalized and under-reimbursed by the insurance companies.

And what about those insurance companies, anyway? How did they figure into this piece of investigative journamalism? The Globe reports:
Private insurance data obtained by the Globe's Spotlight Team show that the Brigham, Mass. General, Children's Hospital, and a few others are, on average, paid about 15 percent to 60 percent more than their rivals by insurance companies such as Blue Cross Blue Shield of Massachusetts and Harvard Pilgrim Health Care. [Emphasis added]
Hmmmm. How do you think The Globe just happened to chance upon the very closely-guarded data cited here? What player would be in a position to know how much BCBS pays all the local hospitals? Let me think . . . waitaminit! It's BCBS! How else would The Globe happen to obtain the complete (or selected?) fee schedules for all the regional hospitals if it was not deliberately leaked to the media? And why would the insurance companies want to do this? Maybe they are sick of having to pay higher rates to Partners, and decided to leak embarrassing information to gullible journalists to make Partners look bad. Maybe it'll help BCBS in their next contract negotiation, and if not, at least it's a finger in the eye of their hated enemy.

Make no mistake, this bit of "investigative journalism" is nothing more than a hit job on Partners HealthCare by the insurance companies, abetted by the naivete of poorly-informed journalist-stenographers who eagerly gobbled up the data they were spoon-fed and happliy ran with the prefabricated narrative they were handed by Blue Cross Blue Shield, with some bonus snark thrown in by Partners' jealous competitors, and layered with a veneer of concern for quality of care.

And we wonder why the traditional media is losing credibility.

Disclosure: I have never set foot in Boston and have no relationship to or brief for the Partners system. My own facility is itself in a tense struggle with the local high-profile, better funded regional giant. I, however, do not blame them any more than I blame Microsoft for selling a lot of copies of Office. It's market economics. We are playing at a disadvantage and we will only prosper if we can run a leaner operation, deliver excellent care, and find our own leverage with private payers.


  1. Well done.

    The problem is that there is residual credibility that means that junk like this gets put up as fact by a lot of people. Partners is undoubtedly doing a huge PR campaign at this moment because of this non-credible article.


  2. I read this article on the train this morning on my way into Boston (money-less medical student=I often read an old paper from the recycle bin) and I had a similar reaction. I would say, though, that Partners' success probably is dependent long-standing fame and wealth. I mean, how can other hospitals gain clout without having clout already? I'd say there's no lack of arrogance (or maybe it's cheerful awareness of one's institution's cloutiness?) on the part of Partners, but I agree that it's hard to fault them for leveraging it well.

  3. Blogger,
    You miss the entire point of newspapers and reporters in general. Their purpose is not to inform, but to sell papers. In order to sell papers they must marginalize facts and inflate the story into something more exciting like "the sky is falling".

  4. chuckr44,

    You are so right, my friend, so very right.

  5. I followed the link and was sympathetic to your defensiveness when I read the headline and subhead (which, incidentally, are determined by an editor not by a stroy's reporters). But I think you've assigned a perception or agenda that isn't evident in the journalism. Or at the very least, I think you've overstated the case severely. Certainly the article never makes any such claim as "Partners is extorting patients."

    I think your initial "impenetrably stupid" mistake is to completely misread their treatment of the link of compensation to quality. The article never assumes that such a relationship exists, and in fact devotes several paragraphs and quotes to discussing the difficulties of such efforts, the primitive stage of the metrics, the general debate over the available measures. Their extensive discussion of variations in compensation for essentially identical procedures and of Partners hostpitals' broad rankings for care and outcomes are most often couched in the context of investigating the patients' criteria in choosing a facility, not in evaluating the justifiability of the rates. The article explicitly questions whether patients know (or care) about cost and outcome variations when choosing hospitals, and it explicitly questions whether cost variablility is good for the system as a whole, and it explicitly investigates how cost variability came into effect in the marketplace.

    This leads you to read the thesis of the article as being that "Partners makes too much money." In fact, I think the article makes no such implication. The article covers a lot of topics, and certainly asks whether patients receive more for their money at the leading Partners hospitals (or any "name brand" research hospital) on typical basic care than they would at their local facility. It also emphasizes the question of whether the rising costs of healthcare overall are to be laid at the feet of the shift in power from insurance companies to powerful care providers.

    Now, I'm not saying that the article is unflawed or anywhere near complete in covering the story. I certainly learned a lot from your post (on factual matters and discounting your editorializing), and I would expect that I should read a dozen more treatments from various sources to feel like I was properly informed.

    I think that your final, and most critical, mistake is to misunderstand the (to quote another commenter) "entire point of newspapers and reporters in general." Journalistic objectivity is not a myth or a goal or an ideal; it's a process. The fact that you can find other information, some of which may lead you to an opposing conclusion from the one you might draw from a given piece, does not invalidate the process of the initial questions the reporters asked or the answers they were able to receive. The fact that this article does not complete the discussion in no way discredits the portions it does address.

  6. "It also emphasizes the question of whether the rising costs of healthcare overall are to be laid at the feet of the shift in power from insurance companies to powerful care providers."


    You had me until that part. Then I lost you.

  7. Nice analysis.

    Unfortunately, the debate of "who's doing it to who" masks the key underlying issue: the cost of healthcare in our country, and its rate of increase, is unsustainable. Our per capita cost of healthcare is already roughly twice that of other developed countries...and our outcomes are worse.

    In September six experts in fiscal and healthcare policy debated the nature of the nation’s pending fiscal crisis at the National Press Club. Their consistent conclusion was that our country's long range fiscal crisis is driven primarily by health spending.

    In the long run, if our nation is to maintain its economic viability, they forsee we will either have to increase taxes significantly, or dramatically transform our health delivery system to improve its efficiency and outcomes. Or both.

    Is debating 15% or even 60% payment differentials for our current relatively inferior health services productive, or is it diluting focus from what really needs to be done.


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