Taming Healthcare Cost: Massachusetts is Caught Between a Rock and a Hard Place

Taming Healthcare Cost: Massachusetts is Caught Between a Rock and a Hard Place

Early this month, the Massachusetts Department of Public Health approved a $2-billion expansion plan submitted by Mass General Brigham (MGB, formerly Partners HealthCare), the largest provider system in the state. This approval is part of the determination of need program, under which substantial changes in capital expenditure, services offered, and sites of care must be reviewed and approved by the state. The state’s Health Policy Commission (HPC) estimated that the hospital expansion would increase healthcare costs by $37 to $62 million per year. 

According to HPC, MGB’s prices increased faster than the state average and are already among the highest. During 2014-2019, its cumulative commercial spending exceeded the HPC benchmark by $293 million, higher than any other providers, and the excess spending was driven by increases in prices rather than volume. This has most likely resulted from MGB’s leading market position because it has the two best hospitals in the state: Massachusetts General Hospital and Brigham and Women’s Hospital. As a consequence, insurers do not have much negotiation power if their members want to include at least one of these hospitals in their network. 

In order to control healthcare cost growth, HPC has put its credibility on the line by demanding that MGB submit a performance improvement plan. MGB will need to identify the causes of spending growth and implement cost-controlling measures to meet the state’s benchmark. This is the first time HPC used this authority, although it remains to be seen whether an improvement plan will be well implemented and achieve expected results. 

But odds are not in the state’s favor for several reasons. First, determination of need (or certificate of need in other states) programs do not have a good track record, and other stronger enforcement measures will be needed. Prior research shows that on average, such programs increased healthcare costs. Also, the determination of need is subject to potential political influence and may serve special interests by blocking potential market entrants. 

Second, decisions of state agencies may be contradictory, leading to weak enforcement of determination of need and as a result, healthcare cost control. The fact that MGB’s $2-billion expansion was approved demonstrates that achieving the state’s healthcare spending growth targets will be challenging if more expansions are approved against HPC’s opinion. 

In addition, as prescribed in the 2012 health reform law (Chapter 224), HPC has limited tools to enforce cost-controlling measures. After a performance improvement plan is approved, an entity should act in good faith and is given 18 months to achieve expected cost performance results. As the last resort, HPC can impose a civil penalty of no more than $0.5 million, which may not be sufficient to deter non-compliance for large providers. HPC can also escalate a case to the state attorney general if a dominant provider charges prices that are “materially higher than the median prices” and has a per-patient expenditure “materially higher than the median” after adjusting for patient health status. 

As the compliance conflict intensifies between HPC and MGB or other providers, HPC may request greater authority from the state legislature, and additional tools obtained will likely be intrusive and severely interfere with the healthcare market. Actually, a new bill was passed in the state House in November 2021 that would authorize HPC to scrutinize hospital expansions in addition to mergers and acquisitions. The bill would also require hospital systems to obtain a letter of support from community hospitals whose services areas are affected by expansion projects, which essentially grants affected community hospitals veto power.

If such an approach were adopted, the state would embark on a dangerous path that may stifle market competition, reduce service provision, and discourage innovation for the years to come. In the meantime, resource-rich or innovative hospital systems would seek to invest and expand in other states or overseas. For example, in 2017, MGB acquired Wentworth-Douglass Hospital based in Dover, New Hampshire. 

The best option for the state is to vigorously prevent anti-competitive mergers and acquisitions. But unfortunately, that ship sailed in 1994 when Boston’s top two hospitals merged and formed Partners HealthCare. The state’s healthcare market became even more concentrated in 2018 when the merger of Beth Israel Deaconess Medical Center and Lahey Health was approved, adding another heavyweight provider to the market. 

Moreover, the tendency of the state to trade a more concentrated market for short-term commitments is unlikely to help tame healthcare spending in the long run. For example, in exchange for the merger approval, Beth Isreal Lahey Health––the newly formed entity––promised to adhere to a price growth cap for 7 years, enroll Medicaid and Children’s Health Insurance Program beneficiaries, and invest $72 million in health programs for vulnerable populations. 

Also, in 2014, MGB (then Partners HealthCare) attempted to acquire South Shore Hospital and Hallmark Health Corporation’s two acute care hospitals. The state attorney general and Partners HealthCare reached a consent judgment that would have allowed the acquisitions if certain conduct remedies had been implemented, including a price cap for 6.5 years and specific provisions on price negotiation with insurers, among others. This consent judgment, however, was rejected by the Superior Court of Massachusetts on the ground that a court does not have the capacity to police specific market transactions. 

The fact of the matter is that short-term conduct remedies are not going to prevent healthcare consumers from the harm of a concentrated market in the long term, as the Federal Trade Commission describes in its landmark report on healthcare competition: “The resolution of hospital merger challenges through community commitments should be generally disfavored.” 

That said, the state should strengthen its anti-trust measures. And if there is enough political will, it may be preferable to break up large healthcare systems into smaller ones to promote market competition, access, and efficiency. 

Regardless, the state may not want to fall back on more intrusive measures such as hospital price control that was used prior to the early 1990s or a global hospital budget program used by the State of Maryland. Apparently, these intrusive measures will limit the state’s ability to harness the benefits of market competition. 

The state is at a crossroads. It can choose either strong anti-trust measures aiming for a competitive and efficient market for the long-term or more intrusive measures to enforce compliance to cost growth benchmarks for the time being. Based on the decades of published literature, one thing is clear: the determination-of-need program by itself is unlikely to work well. Breaking up market juggernauts may be a good option if it is politically feasible. The last thing we want to do is to let healthcare spending run wild.

Other states are watching as they have adopted or will implement a similar healthcare cost control model.