Cost Control Efforts Working 'So Far' in MA

Health policy veteran Stuart Altman, PhD, is hopeful, but not optimistic, about healthcare delivery reforms and thinks hospitals will be forced to bring costs down because patients won't tolerate any more cost shifting.

This is the first of two parts. Read part 2.

Ten years ago, the Commonwealth of Massachusetts enacted an approach to universal health insurance coverage that became the model for the Patient Protection and Affordable Care Act.

The next step: to control costs.

In 2012, the Bay State established the Health Policy Commission, an independent agency that monitors healthcare costs against "growth benchmarks." At its helm, Stuart Altman, PhD, a Brandeis University healthcare economist who has advised presidents from Nixon to Obama.

He's seen it all, from DRGs to HMOs to the ACA. HealthLeaders Media talked with Altman about what the Massachusetts cost control effort could mean for hospitals across the nation.

He is hopeful, but not optimistic, about the ACA's delivery reforms and thinks hospitals will be forced to bring costs down because patients won't tolerate any more cost shifting. The transcript below has been lightly edited.

HLM: What are the major challenges facing the hospital industry?

Altman: We're dealing with a situation where spending, or costs, are still an overriding issue. There is constant pressure on hospitals to spend more money, whether it is providing good patient care, buying drugs, buying devices, paying high salaries, or modernizing their facilities. It is a high costs product on one side. 

On the other side, you have government that is increasingly limiting the amount of money that it is willing to spend for the hospitals.

We also have this situation, which is a good one, where government patients on Medicare and Medicaid have equal access to all hospitals, just like private patients. Hospitals need those patient because we've developed a capacity that cannot sustain itself if you only had private patients.

Costs are high and revenue coming out of 50% to 80% of the patients who are government (insured) is not keeping up with those costs. What hospitals have been doing for the better part of 20 years is charging their private patients higher and higher rates.

So the gap between private rates and government rates is now, by some averages, a difference of 75%. The hospitals feel they have to use the higher private rates in order to maintain an overall revenue flow which is commensurate with their costs.

HLM: How is Massachusetts trying to address high costs?

Altman: First of all, it is the only state that has recognized that it should be involved in total state spending. Some other states that are closer are Vermont and Maryland. But the Massachusetts state government is really acknowledging that it has responsibility for not only what it spends on Medicaid, but that it should be concerned with total spending.

How it deals with trying to do something with total spending is a politically complicated issue.  There were strong forces who wanted to go to a form of price regulation. They included both the governor (Deval Patrick at the time) and several key members of the (State) House.

But the decision was made not to have a very formal regulatory system and instead put in place a set of measures and new organizations to try to keep spending in line with the state's income.

Prior or 2010, healthcare spending both in Massachusetts and around the country had been growing 2% to 2.5% beyond income.

And Massachusetts was among the most expensive states in the country. We also have a reputation for having very good hospitals -- we probably have, per capita, more teaching hospitals than any other part of the country.

We train a lot of the country's physicians and we do a lot of the country's research. There is reason why we are expensive. That said, the cost of doing all these things for the country is disproportionally falling on the backs of the private patients.

HLM: How are hospitals in Massachusetts responding to the effort?

Altman: We have a hospital industry that has been very innovative and willing to participate in a lot of these new efforts. And we have a hospital industry that, I think it is fair to say, has been more than willing to be actively engaged with state government to try to makes things better in a way that, from their perspective, doesn't destroy the hospital industry. 

They're not openly hostile to government having a role.

So, what are we trying to do?  We are trying to maintain as much competition as we can by not allowing one or two organizations to totally take control of the delivery system.

We don't have regulatory power to stop that, but we do have a strong relationship with the Attorney General's office, which does have that regulatory power.  They will look seriously at any reports we do about consolidation that has the potential to significantly raise prices.

That's what happened with the whole Partners (HealthCare) situation. 

[Editor's note: Last year, Partners HealthCare, which includes Massachusetts General Hospital and Brigham and Women's Hospital, abandoned plans to buy the suburban South Shore Hospital after opposition from Attorney General Maura Healey. 

Each year, we put together a cost trend report that outlines what forces are at play in the state in terms of raising spending and we have hearings every October. We are trying to play an interesting role which is not be regulatory, but really to be in the face of the healthcare system in terms of saying, "Hey  be careful. Don't go the extra mile on in spending or pricing."

We want to do it in a way that doesn't destroy or even hurt the health system.  In any attempt to do that, some of the forces within the health industry scream.

But, for the most part, the hospitals have been supportive of our efforts. If we were to squeeze too hard, they would react more negatively. Everyone is engaged in a very interesting balancing act. We are trying getting the system to work more efficiently… and they are trying to control costs without destroying themselves. So far it's working.

[Editor's note: A report on state healthcare spending released last week found a 3.9% increase for 2015. The increase was lower than 4.2% increase in 2014, but higher than the state's healthcare cost growth benchmark of 3.6%.] 

Next week: The limits of costs shifting and the HPC's effort to assist struggling community hospitals.