August 20, 2012

Bay State Health Care, Take Two: Industry Players See Risks, Opportunity In New Law

Jack Dutzar of Reliant Medical Group: “There's a real challenge in this. To get to (the level of growth in gross state product), you're going to really have to work hard to decrease unnecessary services and control inefficiencies.”

The most striking aspect of the state's new health care cost containment law is that it aims to cut health care spending growth by about half.

That would mean $200 billion in savings over the next 15 years, achieved by capping health care spending growth – both public and private — at the level of growth in the state's economic output, or gross state product.

Under the law, hospitals will face unprecedented levels of oversight from state regulators and will be required to be more transparent about the costs of tests and procedures. Providers who don't adhere to cost goals could be fined $500,000.

Moody's Investors Service called it "credit negative for Massachusetts hospitals because it will limit their revenue growth and reduce their operating flexibility."

The law will raise some of its revenues through insurers to help fill a fund for distressed hospitals and other initiatives.

Fallon Community Health Plan, the only insurer headquartered in Central Massachusetts, expects to receive a "very large" bill "in the millions of dollars," said David Przesiek, senior vice president of sales and marketing for Fallon.

The Local Take

John G. O'Brien, president and CEO of UMass Memorial Health Care, the largest employer in Central Massachusetts, said UMass will be forced to accelerate what it's already been doing: analyzing its business model, shedding pieces that are not meeting profit goals and looking for new pieces that could provide a boost.

"I think it's inevitably going to force hospitals and health systems to really take a hard look at our whole business platform given the constrained growth we're going to have in health care spending," O'Brien said. "No question about it, there will be fewer resources."

UMass recently sold its home health care business division and cut 150 jobs.

O'Brien called cost containment a "natural progression" for Massachusetts after it required residents to have health insurance in 2006.

But that doesn't mean it will be easy for the industry.

"I think it's going to be extraordinarily challenging for hospitals and health systems and others over the course of the next three to four years," he said. "In the end, I think this will be a positive thing for the state and the country."

Erik G. Wexler, president and CEO of the generally lower-cost Saint Vincent Hospital in Worcester, said some hospitals will likely lose revenue under the new law, but he doesn't expect his to be among them.

"For Saint Vincent's part, I would disagree with Moody's across the board," Wexler said. "I think high-value providers are going to be OK. More patients will be directed to high-value providers, so revenues should prevail."

Wexler and others expect some patients and jobs to shift to other care settings outside the hospital.

"We've got to create more of a health care system outside of the walls of the hospital so we can prevent people from needing to come to the hospital."

Jack Dutzar, CEO of Reliant Medical Group, a Worcester-based group of 250 physicians, called the state's cost-cutting goals "pretty aggressive."

He added that there are "inherent" cost increases for health care providers each year, from cost-of-living pay raises to changes in medicine and technology upgrades, which can mean annual expense increases of 5 to 7 percent.

Joshua Archambault, director of health care policy at the free-market leaning Pioneer Institute in Boston, said the law assumes that alternative payment and health care delivery methods will create savings. But in several pilot programs, not all such efforts have.

"My counterpoint is that each time those approaches were tried in the real world, they had mixed results on savings," Archambault said. "I think fundamentally why the bill won't save money is it fails to engage consumers. Instead, the approach is still focused almost exclusively on the supply side."

Khalid Saeed, an economics and system dynamics professor at Worcester Polytechnic Institute, who has studied health care, also has doubts about how the new law will work.

"There is a provision for a $500,000 fine, which for large health organization might be peanuts," Saeed said. He noted that a number of hospitals in the state are owned by for-profit companies. "They are operating in a system in which they have to make a profit. So I don't see how they will try to limit costs."

Thomas Connors, senior vice president of employee benefits at Protector Group in Worcester, said it's unclear what impact the bill will have down the road, but for now, cost hikes for employers seem to be slowing, thanks to pressure from the Patrick administration. Recent hikes in health plans his firm has handled were largely in the low single digits. "In general, the lowest increases I have seen in five to 10 years," he said.

Like Archambault, Connors thinks the health care system needs to better incentivize consumers.

He said health plans are emerging that pay patients cash for pursuing health goals with a doctor.

"That's the kind of program brokers and consultants want to be able to deliver," Connors said.

While it remains to be seen whether the state can significantly slow cost growth, the big question for providers is: Can they make up for the potential reductions in revenue through alternative payment models and different models of care?

More Consolidation Ahead?

Taking on more risk will require hospitals to spread it over large pools of patients, and many are predicting that further industry consolidation will result.

Heywood Hospital in Gardner announced this month that it would merge with Athol Memorial Hospital.

Harrington HealthCare System, which operates hospitals in Southbridge and Webster, wants to be certified as an Accountable Care Organization, or ACO, but Douglas Crapser, Harrington's chief operating officer, said that until regulations are crafted, he can't be sure if Harrington will have a large enough patient pool.

Under the law, that would put the system at a disadvantage in pursuing state contracts.

Tom Sullivan, Harrington's CFO, said Harrington doesn't want to have to consider merging with another system.

"We're fiercely independent," Sullivan said. "And we think we can survive."

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