Healthcare Business News

Reform Update: Mass. contracts require providers to absorb financial losses

By Melanie Evans
Posted: August 14, 2013 - 3:45 pm ET

In Massachusetts, the state's healthcare giants are heavily involved in contracts that require hospitals and doctors to absorb financial losses when healthcare spending exceeds spending targets, according to a new report.

Blue Cross and Blue Shield of Massachusetts, which dominates the state's health insurance sector with 45% of the market, made half of its payments to providers under global budget contracts last year, a newly released snapshot of the state market done by the Massachusetts Center for Health Information and Analysis. This is the first annual report on the Massachusetts healthcare market, which was required by the state's healthcare cost-control law passed last year.

The state's largest health system, Partners HealthCare System, last year received one-quarter of its revenue from financial risk contracts.

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The report also found that Boston-based Partners is the state's biggest player, accounting for one-third of Massachusetts spending on acute-care hospitals and one-quarter of spending for physician groups.

The report said Partners' acute-hospital prices last year were above the median in each commercial insurer's network. The same was true for Partners' physician group prices in nearly all private insurer networks.

Partners accounted to 28% of the state's healthcare spending, based on 2011 and 2012 data, the report said.

Peter Markell, Partners' chief financial officer and treasurer, said that early results from financial-risk contracts show promise that the 12-hospital system can curb spending growth. Partners leaders, he said, are debating the extent to which the system will increase its exposure to financial risk contracts.

Last year, Partners entered into risk contracts with Medicare, Medicaid and the state's three largest commercial insurers, including Harvard Pilgrim Health Plan, Tufts Health Plan, and the Massachusetts Blues.

Early results from the Partners' Medicare Pioneer contract—one of 32 Pioneer accountable care contracts awarded by the Center for Medicare and Medicaid Innovation—show that Partners' ACO slowed spending by 3% in 2012 for its Medicare members, which resulted in Partners receiving a bonus equal to half the $14.4 million in savings.

On its three commercial risk contracts, Markell said that Partners on average held costs 1% below target last year. Those contracts protect Partners from extreme losses but also limit potential by establishing a cap for both. Markell said the system may seek to adjust the caps to increase the potential for loss and gain. Risk contracts could account for up to half of Partners business, the system's officials estimate.

Markell said his system's large share of state healthcare spending reflects the system's share of the Massachusetts market, the higher cost of care at its Brigham and Women's Hospital and Massachusetts General Hospital, and the fact that more patients choose Partners. “We frankly don't apologize for the kind of care we deliver,” he said.

Some observers are asking whether Partners, with 10 hospitals and 6,000 physicians, has too much market power and is driving up prices. The system recently completed a merger with Cooley Dickinson Hospital in Northampton and has proposed an acquisition of South Shore Hospital in Weymouth. State and federal antitrust officials are reviewing the proposed merger for potential anticompetitive effects.

Weak hospital demand …

Penalties under the Patient Protection and Affordable Care Act for some hospital readmissions and new payment models promoted under the law have pushed hospitals to work more aggressively to keep patients away, when possible. That push comes as other factors have also slowed demand for hospital care, Modern Healthcare reported this week. Those factors include a weak economy, but also a growing number of hospital patients who are deemed “observation” patients, and do not count as admissions.

… means pressure on margins

Fitch Ratings said that sluggish demand and continued pressure on hospital reimbursement will likely weaken median profit margins among hospitals and health systems in its portfolio. Hospitals improved operating margins slightly in 2012 from the prior year. The median operating margin was 3% for hospitals and health systems in the Fitch portfolio in 2012. Since 2006, the median operating margin for the portfolio, on average, was 2.7%.

Follow Melanie Evans on Twitter: @MHmevans

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