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MA Healthcare Cost Containment Law Comes with Teeth

 |  By kminich-pourshadi@healthleadersmedia.com  
   August 13, 2012

Massachusetts, a leader in healthcare reform is now the first state in the country to set healthcare spending goals. Bill S 2400, signed into law last week by Governor Deval Patrick (D), was written to address the quality of healthcare and reduce costs through increased transparency, efficiency, and innovation.  "We are ushering in the end of the fee-for-service care system in Massachusetts," said Patrick at the signing, according to The Boston Globe.

But does this law have sharp teeth (and who stands to get bitten)? And why should financial leaders nationwide take note of this state mandate?

The law takes effect November 15, 2012 with the goal of slashing an estimated $200 billion from state healthcare costs over the next 15 years. For that to happen, hospitals and physician will have to cut their costs in half.

"This law really gets at the market leverage and negotiating power of the larger hospitals; it is very much targeting them, but it shouldn't be a surprise to the C-suite at those organizations. This type of cost containment [legislation] has been coming for a long time," says Stephen Sadowski, principal for the Boston division of ECG Management Consultant, Inc.

The law directs that healthcare costs cannot increase faster than the Massachusetts gross state product (GSP) from 2013 through 2017. From 2018-2022 the target would dip to GSP minus 0.5 and after 2023 it would resume being equal to the GSP and be open for revision by an oversight committee. For greater detail, check out the bill summary here.

There's also a $165 million surcharge which will be levied against health insurers and a $60 million surcharge will be levied against larger hospitals in order to create a trust fund. These monies will be used to finance several provisions of the law, such as the $60 million to go toward a prevention and wellness program and another $135 million for community hospital infrastructure upgrades. In addition, trust money will fund state grants for programs to reduce the rates of preventable chronic diseases such as obesity, diabetes, and asthma.

And then there's enforcement. The law calls for the formation of a commission to track healthcare costs and all healthcare entities must comply with the performance targets or face fines of as much as $500,000. The commission will use a total system metric to assess performance, and health plans must also meet the reduction targets.

Those hospitals or health systems that don't hit the targets would be publicly exposed.  But, these sums are just drops in the bucket for large health systems with millions and in some cases billions in annual revenue, especially considering these organizations could potentially lose millions once insurer contracts are renegotiated.

Unfortunately, four of the state's largest hospitals, Beth Israel Deaconess Medical Center, Massachusetts General Hospital, Brigham and Women's Hospital, and Hallmark Health declined requests for comment.  They may be still parsing through the details and working on their compliance strategies.

As perhaps they should. "When the state's Attorney General [Martha Coakley] says she feels there's plenty of enforcement authority associated with the bill, I take that as a signal that the AG intends to be active, not passive, when it comes to insuring the implementation and execution of the legislation," says Sadowski.

And it was Coakley's office that helped spark the state legislature's interest in this issue to begin with. The AG's office released reports in 2010 and 2011 indicating that costs were, to paraphrase, unequivocally uncontained.

The reason, the 2011 report notes, is that "the commercial healthcare system does not pay for care based on value. That is, wide disparities in prices are not explained by differences in quality, complexity of services, or other characteristics that might justify variations in prices paid to providers. Instead, prices reflect the relative market leverage of health insurers and health providers."

"In significant measure," the report adds, "this market dysfunction resulted from historic negotiating and contracting practices that were not challenged because the system lacked the transparent, reliable information needed to identify, measure, and correct the dysfunction."  

When S 2400 passed, Coakley released a statement saying, "Any meaningful effort to control costs must address the market leverage of providers, and this legislation ensures that our office will pay a critical role in those efforts. The bill sets forth a strong role for our office to carefully scrutinize market conduct, and then use our 93A authority [Principles of Unfairness or Deception] and other tools when appropriate to address negative impacts on the marketplace. This is a role we will continue to play in a serious and meaningful way."

Sadowski notes that this law has the potential to hurt larger hospitals' pocketbooks, as they will be losing leverage and negotiating power just as Medicare reimbursement rates decline, and many of these hospitals have a high Medicare patient mix.

"That's a double whammy and it will affect their ability to manage revenue increases per unit of service. I imagine [with this law] we'll continue to see great consolidation across the state, which is one way to drive revenue, thought not on a per-person unit increase," says Sadowski.

Already the credit rating agencies are taking notice. Last week, Moody's Investors Service noted, "The legislation is credit-negative for Massachusetts hospitals because it will limit their revenue growth and reduce their operating flexibility." Moreover, Moody's noted that while the law requires alternative reimbursement models for at least 50% of Medicaid beneficiaries (by 2014), "no specifics are provided."

Moreover, Moody's also expects new reimbursement models, such as bundled payments and shared savings, will reduce Massachusetts hospital revenues. "The state will also likely incentivize the creation of additional accountable care organizations (ACOs), a loosely defined concept that involves a hospital managing the health for a set group of people. Hospitals unable to swiftly adapt to the new models will likely lose revenues. Given that payment models have not yet been defined, it is too early to estimate the revenue impact," Moody's wrote.

S 2400 isn't all bad for large providers, though. It seeks to control medical malpractice costs by creating a 182-day "cooling off" period. This is supposed to give both sides a chance to negotiate a settlement.

Though Massachusetts may have been the first state to climb aboard the health insurance reform bandwagon, its success has been mixed.  For while an estimated 95% of the state's population is insured, the healthcare costs have also risen 6% annually.

"There wasn't anything in the initial Massachusetts reform [legislation] to 'restrain' or bend the cost curve. It really was about universal coverage," says Sadowski. "The pursuit [of universal coverage] is not the solution, [but] rather the first step. Now we have universal coverage and we need to figure out how to constrain costs. So as I look at this law and at healthcare reform elsewhere in the country I think there is still a long, arduous journey ahead for all."

Financial leaders should keep a close watch on how this law plays out at reducing costs. If it proves successful, it may become the model that other state legislatures adopt in the coming years.

Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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