First, the good news: Everyone in the Massachusetts healthcare debate – hospitals, other providers, insurers, government leaders, employers and consumers – agrees that we must lower the cost of healthcare, and we have all committed to addressing this difficult challenge head-on. But there is both a right way and a wrong way to reduce costs; the right way produces substantial savings and is sustainable, and the wrong way destabilizes our vital healthcare sector and harms the economy. The right kind of progress is already being made in the market:
- Hospital cost management efforts here in Massachusetts have contributed to expense trend reductions worth billions of dollars in FY 2009 and FY 2010.
- Insurance products are now beginning to align with new payment and care delivery models that reward better coordinated and more efficient patient care. The Boston Globe reports more than 1.2 million people are now covered by plans that limit payments to providers based on value over volume, and that number is growing.
- There is increasingly widespread consensus in support of slowing the rate of healthcare cost increases to align healthcare spending with the state's economy in a reasonable amount of time.
Now, the bad news: Three weeks ago, with good intentions but bad judgment, the Associated Industries of Massachusetts (AIM) and Greater Boston Interfaith Organization GBIO made a reckless call for the Bay State's healthcare system to reduce the growth of total healthcare spending to two percentage points below the growth in the overall state economy within three years.
The "GSP minus two" target cuts too much, too fast. It ignores the serious and potentially devastating damage that such a 'slash and burn' approach would cause not only to Massachusetts' excellent healthcare delivery system, but to the overall state economy. And it completely ignores important lessons we should have learned from recent history here in Massachusetts:
- Medical spending has tended to exceed state economic growth. Overall medical spend in the U.S. is about 1.5 to 2 percent above income as measured by Gross State Product – or GSP. This is the state version of "GDP" you hear so much about.
- Aggressive managed care in the 1990's suppressed that trend. At the height of managed care, from 1992 to 2000, the payment rate for healthcare costs in Massachusetts was -0.4 percent, less than half a percent below the state's economic growth. Many of you may remember the consumer backlash from those times. Quintuple that if you want a picture of what AIM's/GBIO's "GSP minus two" scenario would look like.
Projected medical spend from 2012 to 2015 comes in at 6 percent, which is 2 percent above the rate of growth for the state's economy. Let’s be clear: That's too high.
But some unadjusted metrics are being cited that mistakenly suggest Massachusetts health insurance premiums are among the highest in the country. Here are some facts:
- Massachusetts had the fourth highest median household income among the 50 states in 2010 (after Maryland, New Jersey, and Connecticut), and when premiums are considered as a percentage of median household income, the cost of Massachusetts premiums ranked 48th out of 51 (including Washington D.C.)
- Massachusetts average family premiums were highest in the nation in 2009, but dropped to 9th highest in the nation in 2010.
- Most people experience the cost of healthcare through the insurance premiums, co-pays, co-insurance, or deductibles that they pay. According to healthcare expert John McDonough, Massachusetts health insurance tends to include lower deductibles and co-insurance payments than most other states, which inflates MA premiums in comparison.
MHA and many other healthcare stakeholders agree with AIM and GBIO that a reduction in the rate of cost increases is needed. Furthermore, Massachusetts hospitals are fully supportive of delivering the right care, at the right time and in the right setting, even though this approach may ultimately result in lower patient volume – and thus lower revenues – for some hospitals. It's still the right thing to do.
But when talking about goals to reduce the total healthcare expenditure in Massachusetts, it's important to remember (or realize) that this isn't just about hospitals and physicians. Every aspect of healthcare spending needs to be constrained.
Hospital costs make up less than 40 percent of total healthcare spending in the state. That 40 percent covers the cost of employing doctors and nurses, developing electronic health information systems that are crucial to providing efficient and effective care, the cost of medications and medical devices, the cost of energy, and all the other costs tied to delivering care. If healthcare spending is forced down to two percent below the rate of economic growth, it's extremely unlikely that there would be a corresponding decrease in these expenses. Hospitals simply won't be able to absorb such costs without job losses, service cutbacks and delays in IT and other infrastructure investments.
Hospitals do acknowledge that there is significant waste in the overall healthcare system that needs to be teased out. Real and substantial progress is being made every day. However, due to the highly complex nature of healthcare delivery and payment, it is impossible to just "lift” this waste in one neat movement. Separating unnecessary costs from worthwhile ones must be done carefully, and that can’t happen overnight.
Former U.S. Medicare and Medicaid Administrator Donald Berwick, the same economist AIM quotes to support removing waste in the system, made this additional point on the subject: "Instantaneously reducing healthcare waste at the theoretically accessible scale—that is, 20% or more of total healthcare costs—is neither practical nor, from the viewpoint of economic stability, desirable."
Ah, yes, economic stability. AIM argues that since healthcare "only" directly supports 13 percent of the gross state product, employers and citizens who aren't employed in healthcare should not be forced to support that 13 percent by overpaying for insurance.
This argument overlooks two important facts: First, the healthcare sector's positive economic impact is actually much larger, because not only do goods and services that hospitals purchase from other businesses create additional economic value for the community, the good jobs hospitals provide for workers at all skill levels feeds the state's economy overall. The American Hospital Association (AHA) last year calculated that each hospital job in Massachusetts results in a total of 2.1 jobs in the economy as a whole. Hospital employees use their wages to purchase goods and services, which creates income and jobs for others. Unemployed healthcare workers cannot support their local businesses.
Second, in order to deal with private insurance "overpayment" by employers and their employees, Massachusetts needs to address the long-term, ongoing cost shift that continues to take place today as a result of government underpayment. Government, both federal and state, does not cover the actual cost of providing care. One of the state's major commitments when Massachusetts' healthcare reform first passed in 2006 was to narrow its underpayment gap for care provided to MassHealth/Medicaid patients. The rate now stands on average at about 70 cents for every dollar of care provided, which is worse than it was in 2006.
Hospital operating margins in Massachusetts are also dangerously anemic. Economic experts agree that operating margins of about three percent are considered 'healthy' – Currently, the median operating margin for Massachusetts hospitals is 1.4 percent. In addition, 40 percent of Massachusetts hospitals have negative operating margins for the third quarter of 2011, the most recent data available.
AIM contends that it is only asking the healthcare industry to do what employers in other sectors "have been doing for decades." That's simply not the case. What other Massachusetts business has more than 50 percent of its revenues dictated by government, which then imposes additional financial burdens through substantial regulations and oversight? What other organization runs services at a loss because of its commitment to the community? What other sector is required to provide its services regardless of customers' ability to pay?
In FY2010, the Health Safety Net (HSN) fund paid for 800,000 hospital visits and discharges provided to low-income uninsured and underinsured patients. Hospitals not only have to provide the care, they pay for the majority of the HSN Fund itself.
Those are not the rules or the environment under which most Massachusetts business operate.
Hospitals proudly embrace their mission of providing services to those without adequate financial resources, and to contributing to the overall societal good, but there must be recognition of these contributions and fair payment by government.
There are still many things that hospitals and employers – as well as other members of the healthcare community – do agree on when it comes to reforming the payment and care delivery systems. Key among them is the belief in shared responsibility for reigning in costs. As hospitals and other providers strive to make thoughtful and innovative changes to increase efficient, coordinated and high-quality care, employers and their employees must purchase insurance products that are aligned with these goals and are easier to administer.
We must all work to make careful but steady and measurable progress toward bringing healthcare costs more in line with economic growth.