The Partners premium

Dissecting the tall tales of the state’s largest health care system

IT IS INTERESTING TO WITNESS Partners HealthCare and its efforts to fend off any policy approaches that may attempt to rein-in the unwarranted high prices the company receives from commercial payers in Massachusetts.   With the Special Commission to Review Variation in Prices among Providers half way through its meetings, I guess some of the initial discussions may have made our state’s largest and most prestigious health care system more than a bit worried that commission members could be focused on formulating a set of recommendations to the Legislature that could result in a reduction in the “Partners premium.”

So how is Partners countering such a potential recommendation? There are three parts to the health care system’s spin doctoring:

  1. Press commentary suggesting that Partners faces a threatening financial future with the company’s release of yearly financials;
  2. Shouting continuously at us that Massachusetts health care is “affordable;”
  3. Warning that any hits to commercial prices will help sink the Massachusetts economy by thwarting the development of our life sciences sector.

So let’s examine each of these:

Just recently, Partners released yearly financial statements for operations showing an operating loss of $107.9 million for fiscal 2016, compared to a $106.5 million gain the previous year.  Most of the loss was attributable to its insurance company, Neighborhood Health Plan, and there were also some one-time losses that detracted from profits. Overall, it seems to me that Partners is hoping to create a sense of fear in policy makers that this is no time to rein-in the prices it receives for care.  Claiming that policy efforts and market changes over the past few years are already making it tough for them to get to break-even,  Partners seems to suggest that reducing revenues from a forced price reduction could put the company into an unstable financial situation.  As Chief Financial Officer Peter Markell told the Boston Business Journal recently, “I don’t think it’s clear sailing.”

For a company with more than $12 billion in annual revenue, $6 billion of net worth, nearly $7 billion in paid salary expenses, and incredible market dominance, it is hard for anyone to believe Partners is having a tough time financially.  Partners also claims that governmental and commercial reimbursements can’t keep up with operating expenses.

But wait a minute.

You are talking about an organization that grew operating revenues by 7 percent a year for the last two years. Partners’ competitors would be dying to report similar results. Year after year, Partners revenue grows much faster than practically all other health care competitors and generates anywhere from $500 million to $1 billion in earnings before depreciation and interest expense.

Other health care organizations are able to live within their means.  Yes, Partners has significant salary and pension expenses, and is spending between $1 billion and $2 billion for new information technology. While some of that salary is for lower wage workers, a good portion of it is for highly paid staff. How productive is that staff?  How efficient is Partners in its system of care? We don’t know because we don’t have good comparative cost data on what it takes for Partners to deliver a unit of inpatient or outpatient care.   And a good deal of that expense is likely for unfunded research expenses. (More about that below.) But for many years now, other health care organizations have learned to manage their expenses, and it is about time that this very expensive health care system do the same thing.  The ball is in the Partners court to prove that the firm is an efficient steward of the huge amount of money that comes its way.

Writing that “Massachusetts health care costs to employers and consumers are among the lowest in the country,” Dr. David Torchiana, the CEO of Partners, notes in a recent Boston Globe opinion piece that when you compare the average Massachusetts single person’s premium to the median household income, our state health insurance premiums are quite “affordable” compared with others.   This is a claim that Partners has been making for well over a year.  Part of his argument centers on a Commonwealth Fund composite measure of household out-of-pocket spending for premiums and deductibles, which when compared to our very high average state household income, shows that Massachusetts, at 7.3 percent, is the lowest among states in the country by this measure.

Partners HealthCare CEO David Torchiana: "This for me is a very threatening process."

Partners HealthCare CEO David Torchiana

But don’t be fooled by these statistics.

The 7.3 percent figure calculated by the Commonwealth Fund is low, in part, because of the commitment of many Massachusetts employers to pay a higher percentage of the health care premium than their counterparts in other states. A better measure of the burden of health care spending captures the full cost of health insurance, including the portion employers pay.  Recent data generated by the Health Policy Commission indicate that, for the first time, employers and families in Massachusetts, on average, are forking out over $20,000 a year for health coverage and out-of-pocket spending for health care.  That figure not only gives a sense of how much health care is costing families but likely also scares many business owners away from hiring new workers.

Furthermore, dividing health care spending by average income in Massachusetts can create a misleading picture of the burden of health care spending on the many residents who earn the same low incomes as residents of other states yet who still pay roughly the same high health care costs as other higher-earning residents.

For example, a review of the recent national Medical Expenditure Panel Survey shows that for families with commercial health insurance who are in the bottom half of Massachusetts wage earners, average total employee contributions for insurance plus out-of-pocket spending will force many of those families to dedicate double-digit percentages of income for health care spending.  The data indicate that those workers in the bottom half of the wage scale tend to be employed at businesses that cover less of the employee’s health care tab. These workers are asked to pay a higher absolute amount for health care (as well as a higher percentage of the total health insurance premium) than higher-wage workers in Massachusetts.

Finally, Dr. Torchiana, who earns well over $2 million in annual pay, could also learn a lot about the health care affordability challenge if he met with people from working class households, including someone with a chronic illness.  He should especially seek out households covered under high deductible plans, the fastest growing segment of private health insurance in our state.

On the claim that any decrease in commercial prices will help sink the Massachusetts economy by thwarting the development of the life sciences sector, Partners and its flagship hospitals, Massachusetts General and Brigham and Women’s, have cultivated a steady stream of business and academic leaders defending the status quo. They are not alone in gaining this support. The most overpriced hospital in the state, Boston Children’s Hospital, was able to obtain similar calls for support when it recently won approval for the largest hospital capital project in state history, which will boost operating expenses by $140 million a year.

The basic thesis defending the higher prices assessed by the state’s “crown jewel hospitals” goes something like this:

The life sciences industry is an important contributor to job and economic growth in Massachusetts.  The industry is driven by new innovations that flow from basic sciences research.  While a good portion of that research occurs at for-profit pharma and biotech industries, there is also a good deal of it that comes from nonprofit research universities and from Boston’s academic medical centers.

To their credit, Mass General and Brigham and Women’s are national leaders in this regard.  While federal government and private sector grants and overhead, plus monies from contracts and donations specified for research, add up to move than $1.7 billion a year, the hospitals claim they need additional resources to meet their research expense budgets.  To make up the difference, they turn to the high commercial insurance payments they receive for the care of patients.

The hospitals argue that, if the commercial insurance margin is reduced, life sciences research will suffer. In the very competitive world for life science capital and human talent, the hospitals argue that this loss of marginal research spending will threaten the state’s innovation image, chase researchers away, and cause life sciences capital investment to flow elsewhere—ending the future growth hopes for the Massachusetts economy.

It’s amazing how exaggeration and extrapolation can make a scary argument seem so convincing to government leaders.

Most of us accept the notion that it makes a lot of sense for Massachusetts to be a leader in life sciences research. Between National Institutes of Health funding and American capitalist investments built off the pursuit of profit, we have done a great job so far in Massachusetts in obtaining funding for basic research.  A few states, led by California, have decided to add additional monies to the pot by steering state funds to life sciences research. The money is awarded through competitive grants, much the way the NIH doles out its funds. Under this approach, a state can tax individuals and businesses in a progressive and transparent manner to pay for this funding priority.

But in Massachusetts the research funding approach at hospitals is very unfair and regressive.  Essentially we say to Partners, you determine your research expense budget and then make up any shortfall from outside funding sources with revenue from higher commercial health insurance payments. We have effectively opted for a funding system which hides research subsidies to an elite subset of our teaching hospitals via their ability to extract super-normal payments for medical care under commercial insurance.

Partners in fiscal year 2014 noted in its filings with the Health Policy Commission that, as a system, it subsidized research at the level of about $175 million a year.  I estimate that figure has since grown to about $200 million a year, which is about 12 percent of the total Partners research expenditures.

But the regressive nature of this hidden tax doesn’t end there.

As noted above, the net burden of the state’s expensive health care premiums often falls to lower wage workers who pay disproportionately more for their commercial insurance premiums.  On top of that, as Attorney General Maura Healey recently reported, people living in lower-income areas are less likely to go to the higher-priced Partners hospitals.  Instead, their paid premiums subsidize wealthier people in toney suburbs who use those high-priced hospitals, often for routine or uncomplicated care.

So let’s put this altogether.

Lower and middle-income working people are paying more for their premiums so that wealthier people can go to expensive hospitals for their care. The net effect is a very nontransparent and regressive system for the additional financing of about 12 percent of life sciences research expenses at Partners hospitals.   We do this so that we will not lose our innovation image that could threaten the overall growth of the life sciences sector in Massachusetts.  To top off the socially unjust nature of all of this, many of those lower and middle-income people tend to live in areas where educational opportunities for them and their children—the preparatory backbone to be qualified for one of those higher-paying jobs in the life sciences sector—is often fleeting.

Given these three tall tales, what do we do?

As Partners’ spin doctors continue their work, we should all encourage the state commission working on provider price variation to do the right thing:  develop a set of policies that will lead to a more affordable and fair system of commercial health care insurance payments in Massachusetts.  No set of tall tales should divert attention and action away from righting a wrong that contributes to the ever growing health care premiums and out-of-pocket costs that consumers face here in Massachusetts.

We need a system where providers compete and are paid based on the quality of the care they provide and the outcomes they produce—not where provider payment is tied to market leverage leading to unwarranted high prices.  It should also not be a system where health care research performed at academic medical centers is subsidized by our premiums. If more monies are needed beyond NIH or private grants, then we should create a system of state aid to directly support some of the expense.  Finally, it should be a system where the poor no longer subsidize the wealthy, and a system where health care and life sciences industry jobs bring benefits to all Massachusetts communities and residents, not only Boston’s elite.

Meet the Author

Paul A. Hattis

Associate professor, Tufts University Medical School
Unless the price commission develops tangible steps to address Partners’ misleading claims, we as a Commonwealth will ultimately end up paying higher premiums, higher deductibles, and higher health care costs where elites reap all of the benefits.

Dr. Paul A. Hattis is an associate professor of public health and community medicine at the Tufts University School of Medicine.