At first glance, Boston and its surrounding area appear to be solidly in the grip of managed care's market hand, feeling the squeeze on healthcare prices.
Nearly four in 10 Massachusetts residents belong to HMOs, putting the state ahead of California for the highest concentration of HMO enrollment in the nation.
And HMO enrollment doesn't tell it all. If that figure were to include "hybrids" that offer more choice of providers outside an HMO network, managed-care concentration in the state would be higher than 50%.
But figures also show that the Boston area has among the highest healthcare costs in the nation:
Hospital stays continue to be expensive. The 1992 adjusted expense per hospital admission of $6,800 in Boston was 18% higher than the national average, according to American Hospital Association statistics.
Use of resources continues to be intensive. The average per-day expense of $1,008 in Boston hospitals exceeded the national average by 23% in 1992, according to AHA figures.
Healthcare continues to take bigger bites out of paychecks. In 1993, the total cost of healthcare took 18% of personal income in the state, up from 14% in 1989, according to calculations of a healthcare watchdog group at the Boston University School of Public Health. That was during a period when HMO penetration grew to 36% from 26%. The university group, called the Access and Affordability Monitoring Project, calculated health spending per person at nearly $4,500 in 1993, about 25% above the national average.
As the theory goes, this wasn't supposed to happen in markets of such high HMO concentration. Managed care, and HMOs in particular, were supposed to control utilization, impose discipline on providers and reverse longstanding incentives to churn out healthcare revenues.
But Boston is not the typical healthcare market, and observers say a number of unique forces have combined to forestall managed care's impact on healthcare delivery.
They also say those forces may be about to run out of staying power. An explosion of provider-network building and budget cutting during the past six months is evidence that the market is bending to managed care's pressure.
Stemming the tide.Healthcare markets nationwide are struggling to convert their reimbursement approach from a billing emphasis to a resource-conserving emphasis. But Boston seems to be having a bigger-than-usual problem getting the past out of its system.
Part of the problem is its concentration of a dozen prestigious teaching hospitals, including Massachusetts General Hospital, Brigham and Women's Hospital and three other major affiliates of Harvard University's medical school.
Accustomed to billing for their state-of-the-art care and collecting what they billed, many teaching hospitals resisted the idea of reining in their costs of providing tertiary care, said Joseph Avellone, M.D., chief operating officer of Massachusetts Blue Cross and Blue Shield. He said some facilities were able to "create a brand-name presence around themselves" that forced growth-minded HMOs to include those facilities.
Until about three years ago, the market was divided between providers that saw managed care as the inevitable future "and those that thought, because of their world fame, they were immune from what was happening," said Harris Berman, M.D., president and chief executive officer of 330,000-enrollee Tufts Associated Health Plans, based in Waltham, a western Boston suburb.
The state's formula of rate-regulated reimbursement did provide a measure of immunity from cost conservation, said critics of the rate-setting law that was enacted in 1981 (See related story, p. 104).
Turning the tide.After the state deregulated hospital charges in 1992, insurers such as Blue Cross and Blue Shield won increased bargaining power. This power, combined with pressure from larger employers smarting from a deep recession, finally gives HMOs and insurers the clout to change referral practices, de-emphasize billing volume and prod the formation of primary-care networks as a way to reduce hospitalization, consultants said.
"The last 18 months make it seem like nothing happened in the last 18 years," said Ann Thornburg, Boston-based partner with Coopers and Lybrand's New England healthcare consulting practice. "While we've had managed care statistically, we now have care being managed."
The state's business community recently gave HMOs and other health plans a push to scrutinize their provider networks. The Massachusetts Healthcare Purchaser Group, representing 41 employers and more than 1 million covered lives, issued a "challenge" to HMOs in the state to keep premium rate increases to 6.4% for 1994, a target based on the local consumer price index.
Eighty percent of the plans met or bettered that target, resulting in an average increase of 3.2%. That's a contrast to average increases of 9% in 1992 and 1993, and 17% in 1990, according to the state's division of insurance.
The heat is filtering down to providers, whose costs must be controlled if HMOs expect to profit from leveled-off premiums. That's touched off a flurry among providers to become more efficient, said Ms. Thornburg. "They've stopped trying to justify their cost levels. They're trying to lower their costs. That's a big shift," she said.
That trend was punctuated last December by the announced affiliation of Massachusetts General and Brigham and Women's. The two organizations finalized their ties in March as the dual hubs of a proposed regional provider network, Partners Healthcare System.
It came amid recent predictions that by the end of the decade, the market would need 40% fewer beds than the 10,000 now being staffed by Boston-area hospitals. "Effectively, people were saying one of the teaching hospitals had to go," said Raymond J. Cisneros, national director of the healthcare practice of Deloitte and Touche.
The partnership of two formerly fierce competitors for tertiary dominance in Boston "established that they were going to be around and had to be reckoned with," Mr. Cisneros said. "That created the `What do we do now?' syndrome among the other teaching hospitals."
Other major Harvard affiliates in Boston are 493-bed Beth Israel Hospital, 349-bed Children's Hospital and 349-bed New England Deaconess Hospital. The list also includes 333-bed Boston University Medical Center/University Hospital and 502-bed New England Medical Center, affiliated with Tufts University.
The mood to talk affiliation has spread throughout the market, said Ms. Thornburg. "I equate it to the freshman rush: Everybody's courting everybody," she said.
In addition to seeking partners, hospitals are finally taking a hard look at staffing and payroll costs. Last month, New England Medical Center cut 170 of its 5,900 employees and Boston University Medical Center eliminated 179 of its 1,800 positions. Savings are projected to be $8.5 million a year at each hospital.
Brigham and Women's Hospital eliminated 250 of its 5,000 full-time-equivalent positions, 41 through layoffs and the rest through early retirements or freezes in hiring, said spokeswoman Michelle Scarlatelli. It's part of a goal to reduce the hospital's expenses by $20 million a year over three years.
The affiliation of Massachusetts General and Brigham was seen as the ultimate sign that hospitals could no longer rely on name and fame for their survival and had to deal better with managed care, said Tufts' Dr. Berman.
The fallout from that development is that "everyone else is talking about how to position themselves in this new order," he said.
Competition that once centered on specialty services is now focused on bringing primary-care physicians into the organization.
Hospitals as suitors.Massachusetts General was among the first to court general practitioners, mainly in suburbs along the seacoast north of Boston. The new Partners organization has a separate unit to develop a network of physicians and community hospitals, which will be integrated into the operation of the parent organization's two teaching facilities.
Competition for physician practices also is coming from HMOs and from the Lahey Clinic, a Burlington, Mass.-based multispecialty group practice. Last year, Lahey began affiliating with small group practices of primary-care physicians in the northern and western suburbs. It also struck an agreement with Harvard Community Health Plan to jointly develop a primary-care network.
Primary-care physicians would be the front-line members of any operation that focuses on keeping track of whole populations for a set fee per person. That's the scenario on the minds of hospital executives looking for help in setting up networks, Ms. Thornburg said. "Their No. 1 question is, `Ann, tell us how to deal with capitation.'*"
In spite of the longtime presence of managed care, hospitals in the Boston area generally aren't prepared for such forms of healthcare management, she said. "They do not have the systems or the organization or the management mind-set to deal with capitation. But it's on the horizon."
Seeds of capitation.Tufts' Dr. Berman said the HMO will make its first foray into capitation later this year through a licensing arrangement with PacifiCare, a Cypress, Calif.-based HMO with experience managing Medicare risk contracts. Under PacifiCare's Secure Horizons plan, which has 300,000 enrollees in five states, Tufts will manage the care of Medicare beneficiaries for an upfront fee.
Blue Cross and Blue Shield's 475,000-enrollee HMO Blue is developing a prototype of a capitation-style arrangement by organizing its primary-care physicians into groups of five to 10 physicians and giving them more authority and accountability for costs and care decisions, a Blues spokesman said.
Among other things, the physicians will be able to select hospitals for their patients without having to go through approval channels, said the Blues' Dr. Avellone.
By letting physicians make the decisions, the HMO is trying to combine the sophisticated clinical decisions and practical cost decisions that go into choosing a hospital, Dr. Avellone said.
Hospitals will negotiate reimbursement rates individually with HMO Blue, and physicians will have the list of rates as one factor influencing their decisions, Dr. Avellone said. Physicians with an incentive to control costs of admissions can create competition among tertiary hospitals, and physician decisions at the care level are more credible than those made by HMO executives, he said.
Ghosts from the past.The interest in primary care may go beyond preparing for managed-care contracting, because the same physicians who make capitation go are the ones who decide where hospital patients go.
Ms. Thornburg said the teaching hospital staffs are still loaded with specialists who need primary-care physicians "to continue to support what they have in specialized services."
Torn between their traditional specialty emphasis and the need to form prevention-minded networks, "it's an open question (whether) teaching hospitals will be able to succeed as the center of these systems," said Dr. Avellone. "Organizational influences should start with primary care rather than the other way around."
He said the market was bulging with nearly $1 billion in capital expansion plans when the tide turned against costly competition for tertiary dominance. That raises the likelihood that the scramble to build alliances with physicians and community hospitals is motivated partly by the need to feed patient volume, he said.
The traditional emphasis on cultivating referrals isn't the only vestige of the past that may be hard for Boston to get out of its system. Most HMOs have yet to pull back from a provider-amassing strategy that became popular as an alternative to Harvard Community's selective network.
Tufts' 330,000-member network, for example, includes more than 7,000 physicians and 48 hospitals, which overlaps the rosters of other HMOs.
When HMOs rose to prominence as an alternative to indemnity plans, competition among HMOs became a race to include as many hospitals and physicians as possible, which provided wide choice to employers.
Some HMO executives blamed the sign-everyone-up market approach on Bay State Health Care, an HMO that tripled its enrollment to 380,000 in a decade but lost nearly $100 million in 1991 and went through a state-brokered merger with the Blues.
Though Bay State's loosely managed style of operation-"indemnity in drag," as some called it-was cited as the main reason for its financial problems, it set up the consumer expectation that HMOs offer everyone the choice he or she wants instead of selective and competing panels of providers, said Dr. Berman.
"Now Bay State is out of business (as an independent plan), but we're stuck with this model where everyone looks alike," Dr. Berman said.
The notable exception is Harvard Community, the oldest and largest HMO in Massachusetts with 565,000 enrollees. Its staff- and network-model physician practices and close-knit relationship with a limited number of hospitals have helped it pursue savings from clinical cost management in addition to discounts from providers (See related story, p. 106).
With Bay State as a lesson, Harvard Community's competitors have taken steps to tighten patient management and utilization, consultants said. Those efforts extend to the Blues-managed Bay State, where attempts to reduce hospital admissions, include case management, control referrals to specialists and discourage inappropriate emergency-room care helped it earn $36 million in 1993, according to a statement issued in April.
But recent trends have moved more toward choice than control. The Blues late last year started a point-of-service plan, called Blue Choice, that gives enrollees an option to pick either a Bay State provider or choose a non-network provider when they need care.
A point-of-service plan at Tufts accounts for 25% of its managed-care enrollment. And the provider network keeps growing: approximately 2,000 of its physicians and three hospitals came aboard in 1993, a year in which it boosted enrollment by 27%.
Choice of provider, which surfaced as a consumer concern during last fall's opening debate on healthcare reform in Washington, was used as a key marketing point for Blue Choice. Consumer expectations may keep it a priority in Boston.
"Most employers aren't yet ready to say to their employees, `You're going to be offered this health plan, and that means you're going to go here,"' said Kathryn Angell, assistant vice president for managed-care development at Brigham.