Cost increases tied to market power's impact on payment: Mass. study

Some physician groups and hospitals in the state receive twice the rates of others who provide similar services, according to the state's attorney general.

By Doug Trapp — Posted Feb. 22, 2010

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Recent increases in health care costs in Massachusetts are driven largely by hospitals' and physician groups' market dominance, not by utilization or the quality or cost of providing care, according to a year-long analysis by the state's attorney general.

The preliminary report, released Jan. 29, analyzed five major health plans' commercial contracts with Massachusetts hospitals and physician groups from 2004 to 2008. The analysis concluded that "serious systemwide failings in the commercial health insurance marketplace" exist in the state.

"Our review shows that the current system of health care payment is not always value-based, and health care providers throughout the state are compensated at widely different rates for providing similar quality and complexity of services," Massachusetts Attorney General Martha Coakley said in a statement the same day the report was released.

Massachusetts' landmark Commonwealth Connector health system reforms -- implemented starting in 2006 -- have covered about 97% of residents and have been a model for national health reform legislation. But the reforms have not halted health care cost spikes in the state, especially for certain small businesses. Citing this, the Massachusetts Legislature adopted a cost-containment measure in August 2008 directing the attorney general's office to examine how health care is paid for in the state.

Coakley's staff interviewed 15 representatives from physician organizations and hospitals, focusing on their insurer contracts. They found that health plans did not pay different prices based on quality. Nor were physician groups' and hospitals' price differences explained by their costs for providing care, whether they were paid on a fee-for-service or a per-member per-month basis, or their patients' health status.

Instead, the report concluded, price increases in the state have a strong correlation to physician groups' and hospitals' value to health plans in a certain market. This value is based partly on practice/hospital size, niche of services offered and their brand names.

The best-paid physician groups and hospitals received about double the rates of their lowest-paid competitors. The analysis, however, did not factor in health plans' market power.

An incomplete analysis

Some praised the report's focus but said the attorney general's office needs to dig further to provide a complete picture of what drives health care cost increases.

Jill Butterworth, a spokeswoman for the attorney general, said her office would provide additional analysis in March at payment reform hearings before the state's Division of Health Care Policy and Finance. But Butterworth doesn't expect the report's preliminary conclusions to change.

Massachusetts Medical Society President Mario Motta, MD, said some hospitals and physician groups have used their market position to negotiate higher rates. For example, Partners HealthCare -- a Boston-based network that includes several hospitals and medical centers -- has focused significantly on quality in recent years but probably also has used its leverage to get better pay, he said. "The only question is, based on the quality, do they deserve those higher rates?" Dr. Motta asked. Partners HealthCare did not respond to requests for comment.

The report -- which does not identify health plans, hospitals or physician groups by name -- does not assume that health plans' quality ratings are objectively accurate. Instead, report authors used the ratings as a barometer: They compared pay with quality ratings and found that better-rated doctor groups and hospitals weren't necessarily paid more.

Finding price variation between hospitals or physician groups in Massachusetts is not surprising, said Jim Klocke, executive vice president of the Greater Boston Chamber of Commerce. But, he asked, what constitutes normal price variation?

The Massachusetts Hospital Assn. in a Feb. 4 statement commended Coakley for beginning an examination of the causes of health care cost increases and said it agrees with the call for greater transparency in health care prices. But the association is not ready to agree that prices, and not utilization, are the main force behind cost increases. It said a recent trend toward using more expensive treatments for the same conditions, for example, may have pushed prices higher.

Payment reform at issue

For months, Massachusetts policymakers have been debating ways to link physician and hospital payment to quality and efficiency measures.

The Massachusetts Health Care Quality and Cost Council, a commission created as part of the state's 2006 health reforms, in October 2009 recommended reducing costs by switching from fee-for-service pay to a statewide capitated system, among many other changes. But the attorney general's report concluded that price increases were not related to health plans' method of payment.

Gov. Deval Patrick reacted to the attorney general's report by asking the Legislature on Feb. 10 to adopt legislation giving the commissioner of insurance the authority to reject health plan premium hikes for small businesses that are "excessive or unreasonable in relation to the benefit provided." Premium hikes higher than the consumer price index, a measure of inflation, would be rejected automatically.

But Dr. Motta said such a move won't deal with the long-term issues driving health care cost increases. "Maybe temporarily that's not a bad idea."

The Boston Chamber of Commerce's Klocke also said such regulations wouldn't truly address costs. Allowing the government "to play a formal role in the price-setting process is not the right approach."

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Price hikes drive costs

Higher utilization explains only about a quarter of the growth of health care costs in Massachusetts in recent years, according to the preliminary conclusions of a year-long investigation released Jan. 29 by the Massachusetts Attorney General's Office. The analysis also concludes that:

  • Price increases account for about 75% of the health care cost increases.
  • Price differences correlate to hospitals' and physician practices' market clout relative to competing hospitals and practices.
  • Price differences do not correlate to quality of care, patient health status, the percentage of patients with public health coverage, or whether a hospital is an academic medical center or teaching facility.
  • Prices that health plans pay hospitals and physicians vary widely within the same region for similar levels of service and are not totally explained by hospital and physician cost differences.
  • Standard contracting practices between health plans, physicians and hospitals also drive up costs irrationally. These include bonus payments without regard to pay-for-performance criteria.
  • Capitated payment does not drive down per-member, per-month health care spending. Some of the highest-paid hospitals and physician groups are paid on a capitated basis.

Source: "Investigation of Health Care Cost Trends and Cost Drivers -- Preliminary Report," Massachusetts Attorney General's Office, January (link)

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