The "Scorpions in a Bottle" Shook Hands - A Secret Deal Between a Health Care System and a Managed Care Organization

The Boston Globe just published a series of investigative reports about a case that illustrates what went wrong with last 20 years' paradigm of health care reform. Remember how business-like management and competition were going to control health care costs (while improving quality and access)?

The reports focus on how Partners Healthcare, the health care system formed from the merger of the Massachusetts General Hospital and the Brigham and Women's Hospital, was able to use its position and prestige to improve its reimbursement. The key points from the key article:

- The merger occurred in a climate of deregulation and laissez faire, based on the theory that managed care would damp down hospital costs

Formed in an era of fervent deregulation, Partners has benefited throughout its history from remarkably limited government oversight, considering the vast impact of the merger on the medical marketplace. The administration of Governor William F. Weld never held a public hearing before approving the merger of the state's two biggest hospitals. And the state sharply curtailed regulation of hospital expansion in the 1990s, freeing Partners to dramatically expand into the suburbs, drawing patients and revenue from already struggling community hospitals.

Weld and the Legislature unleashed the forces that led to the creation of Partners when they ended the state's authority to regulate hospital rates in 1992. Beacon Hill wanted to force hospitals to jockey for contracts with savings-minded HMOs, which, at the time, sent their members only to select hospitals and doctors.

'I favor putting the scorpions in the same bottle . . . and letting them fight it out,' said Democrat Edward L. Burke, then cochairman of the Legislature's healthcare committee.

- The rationale for the 1993 hospital merger was cost control

But at the press conference announcing the deal in December 1993, leaders of the two hospitals said their alliance would only make them greater. They described twin ambitions underpinning their once unthinkable alliance: to build a high-quality healthcare system, and to save money. A lot of money.

They said their goal was to cut 20 percent out of their combined $1.2 billion annual budget, which meant saving $240 million a year.

'Put it this way,' said Dr. J. Robert Buchanan, who was then the head of Mass. General. 'We're pretty sure we've got to save 20 percent at minimum.'

The Boston Consulting Group, which helped facilitate the merger, told the hospitals that they could reduce annual costs by between 12 percent and 28 percent, according to a description of the consultants' analysis in a 1996 Harvard Business School study of the merger. Partners would not provide the consultants' recommendations to the Globe.

- But these plans soon went awry. The merged health care system did not control costs

But Partners made only a small fraction of the cuts. The company claims that the merger saved $200 million to $250 million - total - over five years.

Those savings came almost exclusively from administrative consolidation. The two hospitals have rarely collaborated on clinical operations. In fact, soon after the merger, Mass. General opened a new obstetrics unit that would compete with its sister hospital at a time of declining births in Massachusetts.

Partners' current management denies that saving such large sums was ever the intention, and argues the smaller amount they did save was a commendable achievement. Jay B. Pieper, then the Brigham's chief financial officer and now a Partners vice president, suggested there was no basis for the comments Buchanan made at the press conference.

'Everybody kind of scratched their head and said, 'Bob, what did you mean?' ' Pieper said.

According to Pieper and others, melding of medical services would not have saved much since each hospital had programs large enough to achieve economies of scale on their own. Consolidation would have inconvenienced patients and driven away top physicians, they said.

But Buchanan and other Partners founders told the Globe recently that their original intention had been the consolidation of services, at least for rare treatments, and possibly many more. The idea was "to have at least one superb major teaching hospital when all this is over," said Dr. Eugene Braunwald, Partners' former chief of research, who said that didn't happen because their finances never deteriorated to the point they had feared.

The year before his death in 1998, Partners cofounder Dr. H. Richard Nesson told the Globe that he was still looking for ways to consolidate.

'I do not believe, for example, that we should both be doing every kind of transplant,' Nesson said.

A decade later, Partners continues to offer an array of competing transplant programs, even though surgeons sometimes struggle to find enough work to keep skills sharp.

- As the merged hospital system concentrated its power, the state's biggest insurer abandoned any pretense of negotiating down its costs

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.

And so, in May 2000, the two simply shook hands on this: Van Faasen would give Partners doctors and hospitals the biggest insurance payment increase since Massachusetts General and Brigham and Women's hospitals agreed to join forces in 1993.

In return, Thier would protect Blue Cross from Van Faasen's biggest fear: that Partners would allow other insurers to pay less. Those who helped broker the deal say Thier promised he would push for the same or bigger payment increases for everything from X-rays to brain surgery from Van Faasen's competition, ensuring that all major insurers would face tens of millions in cost increases. Blue Cross called it a 'market covenant.

The deal, never before made public, marked the beginning of a period of rapid escalation in Massachusetts insurance prices, a Spotlight Team investigation has found, as Partners repeatedly used its clout to get rate increases and other hospitals tried to keep up. Individual insurance premiums have risen 8.9 percent a year ever since the "market covenant," state figures show, more than twice the annual rise in the late 1990s.

- Then the hospital system used its dominant position to extract higher reimbursement from other insurers

Dr. Harris Berman said he felt like he'd wandered into an ambush.

The chief executive of Tufts Health Plan thought he had been invited to the Prudential tower on Oct. 23, 2000, to continue contract talks with top Partners officials. Thier, the Partners chief, wanted a substantial increase in payments for medical services, $100 million more than Berman was willing to pay for the care of his members over three years.

But Thier was done talking. He told Berman that Tufts insurance would no longer be accepted at Partners starting April 1. It was a devastating blow to Tufts' business. Almost as soon as Berman left his office, Thier launched a million-dollar marketing campaign to drive the point home. Signs went up at Partners reception desks notifying Tufts members that their insurance would soon be denied. A new website told them how to switch insurers. A call center in Texas was set up to field questions from worried patients and doctors.

Within days, major employers and thousands of Tufts members began threatening to cancel their policies. Tufts surrendered in little more than a week.

'I finally concluded, in the middle of the night one night, that our very viability was at stake,' Berman recalled later.

The humiliation of Tufts became an object lesson for other insurers, a lesson they would not soon forget.

- The result was markedly higher health care costs, and a big premium to Partners

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.

Ellen Zane, Partners' chief negotiator in 2000, said she didn't realize the extent to which other hospitals were not keeping up with Partners until she left to become president of Tufts Medical Center in 2004.

'It turned out that insurers didn't support all hospitals as we thought they would,' said Zane, who said her hospital won't survive if insurers don't substantially increase reimbursement rates. 'I was quite surprised by the rate disparity when I came to Tufts Medical Center. In some ways, it defied logic.'

Tufts' patients, on average, are sicker than either Mass. General's or the Brigham's, based on a standard measure of patients' average severity level. But Tufts Medical Center is paid about 35 percent less, according to confidential Blue Cross rate information obtained by the Globe.

The cozy deal between Partners and Blue Cross and Blue Shield is now the subject of a state investigation, nine years later, according to this Boston Globe article:

Governor Deval Patrick will convene a panel of top state officials Monday to look into whether a recently disclosed, eight-year-old agreement between Partners HealthCare System Inc. and Blue Cross Blue Shield of Massachusetts drove up healthcare costs, making it harder to extend healthcare insurance to all residents.

The panel will also look at current contract negotiations between Partners, the state's biggest health care provider, and healthcare insurers to see whether the negotiations might also create artificially high rates that threaten healthcare reform, officials said.

And the Globe editorialized, in a rather subdued way, that the sort of "negotiation" that occurred between Partners and the state's biggest insurer was not the best way to do things:

But this is more than a case of men and women in white jackets putting one over on the suits at Blue Cross Blue Shield of Massachusetts and the other insurers. Especially now that the state is committed to health coverage for all its residents, anything that pushes up overall costs is the state's business.

Still, the higher rates that Partners-affiliated institutions outside of Boston generally get from insurers push up the state's overall health bill each time a suburban resident has a procedure done at a Partners facility and not at a lower-cost community hospital.

In the long term, rate-setting should move away from the private contracts that providers and insurers carve out together to ones based more on performance, with the state setting an allowable range for each procedure. In the best of all worlds, such rates would be universal - covering Medicare and Medicaid as well as privately insured patients - and would thus end the systematic underpayment of hospitals like Boston Medical Center and Cambridge Health Alliance that serve more low-income patients.

During the 1980s, many "health care reformers" pushed to take control of health care away from the doctors' "guild," which was blamed for ever rising costs, and give it over to bureaucrats and managers. They would be able to fix the "market failure," and provide health care in a business-like manner. By having private entities compete and negotiate with each other, a brave new world of low cost, accessible, high quality health care would ensue. (See post here.) Or that was the idea, but then it went so wrong.

The case of the market dominance of Partners Healthcare in Massachusetts shows how health care organizations unfettered by regulation, run by businesspeople, maximized their own financial results, but simultaneously caused vigorously rising costs. Whether the brave new world improved quality or not is an open question.

But why did it all go so wrong? In this case, a key question is why did Blue Cross and Blue Shield of Massachusetts so readily surrender to Partners' demands? The only explanation provided by the Globe article was this:

As the state slashed oversight of healthcare, 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.'

That doesn't make a whole lot of sense. Admittedly, Partners, composed of two very prestigious hospitals, was known for the excellence of its care. However, a "tougher stand" did not require trashing the hospitals' reputation. Partners was arguing that its two hospitals were so much more excellent than some of Boston's other excellent academic teaching hospitals that they deserved very special treatment. (Full disclosure: please note that as a medical student, I did several rotations at one of those other excellent medical centers, now the Beth Israel Deaconess Medical Center, and I did my internship and residency and another one of those excellent medical centers, now Boston University Medical Center.)

Why were Blue Cross and Blue Shield leaders unwilling to reply? And why have they continued to increase Partners' disproportionate reimbursement without second thoughts, as long as what they were doing did not see the light of day?

The fact that the deal was never put in writing, much less fought over in the media, suggests that those who signed it were uneasy about it. So why did they do it?

There are no clearer explanations, leaving only speculation. But watch Health Care Renewal for our speculation about why the "scorpions in the bottle" became best of friends.

Meanwhile, this case illustrates just some of the consequences of health care run by bureaucrats and managers operating in secrecy and unfettered by external accountability.