House bill plays Robin Hood on health care

Introduces concept of ‘unwarranted factors’ of price variation

THE HOUSE HEALTH CARE BILL breathes new life into an approach taken in the 2012 cost containment bill—using some Robin Hood-like assessments as a means to improve the financial plight facing some of our have-not health care providers.

Essentially, the House bill attempts to raise some $450 million in assessments over three years to finance a trust fund for needy community hospitals. Of the $450 million, $330 million would come from commercial insurers and $120 million from acute hospitals that had more than $750 million in total net assets in fiscal year 2017 and less than 60 percent of their patients on Medicaid. Some of the hospital monies would be subject to mitigation and neither the insurers nor the hospitals could hike their rates to cover the assessments.

The 2012 health care cost legislation adopted a similar approach, creating a fund called the Community Hospital Acceleration Revitalization and Transformation, or CHART, fund. CHART money was redeployed as care-redesign grants for a group of eligible community hospitals, although not all of them were financially distressed.

The hospitals that meet the assessment definition in the House bill are similar to those that were subject to assessments in the 2012 law:  Partners Healthcare and its hospitals; Boston Children’s Hospital; and the Caregroup hospitals, including Beth Israel Deaconess, Mt. Auburn, and New England Baptist. Dana Farber Cancer Institute, which always seems to escape the accountability net, may also be snagged this time around.

The bill gives the Baker administration authority to disburse the funds to hospitals whose relative prices are less than 90 percent of the statewide median. And while the statute seems to suggest that those with the lowest prices get the most proportional help, it also allows some discretion to target some of the funds based on factors relating to the overall financial health of a particular hospital.

Contrast this approach with legislation passed by the Senate last fall, which directs insurers to raise the commercial prices they pay to those hospitals below 90 percent of the industry median in relative commercial price. The Senate bill also included a provision stating that, if overall commercial spending for hospital services grows by more than a defined benchmark, hospitals that are paid the highest commercial prices – Massachusetts General, Brigham and Women’s, and Boston Children’s – would face the possibility of having to pay back a portion of their negotiated rate increases so that the total pool of commercial hospital spending dollars would not grow.

While the House bill feels much more uncertain in establishing the amount that a lower paid hospital might receive,  perhaps its wisdom is that in many instances (though not all) these lower-paid hospitals have continuing financial challenges because they care for large numbers of Medicaid and even some number of uninsured patients.  This is an important point, because boosting only commercial hospital rates may not generate enough additional revenue to get them to a more stable financial operating position.

The House bill also contains language that creates a new way by which the Health Policy Commission can force a hospital to have to undergo a performance improvement plan.  While a bit obscure as to how exactly it will work, the Division of Insurance, with its authority to review and approve provider contracts, is expressly given the power to refer any provider contract to the Health Policy Commission if it is “influenced by unwarranted factors of price variation.” How the DOI makes this determination from the information that it usually collects in rate filings is not clear. If referred, it seems that both the provider and the insurer would then have 45 days to come up with a performance improvement plan to try to bring forward a contract that eliminates these unwarranted factors. The statute defines unwarranted factors as market power, brand, geographic isolation, government payment shortfalls, and research.

From where I sit, every contract that Partners, Boston Children’s, and Dana Farber negotiates with commercial insurers contains unwarranted factors for the high prices that they receive. The hospitals and their advocates basically admit that when they talk about how important it is that they maintain their premium commercial rates to not only cover their patient care costs but to also help pay for government shortfalls and for additional unfunded research.  While the statute calls for a referral to the Health Policy Commission when unwarranted factors seem to be present, making that determination is not straightforward.  Also, it does not appear that anyone is empowered to stop the contract from going into effect—even if unwarranted factors are alleged.

Last fall, the CEOs of Massachusetts General and Brigham and Women’s argued at a Senate hearing that taking away their high rates would be a job and economy killer for both the health care and the life sciences research sectors in Massachusetts.  The CEOs claim that there is a geographic competition among states and metro areas for attracting private capital to support innovation in health care and biomedical research.   They argue that absent a strong and freely spending life sciences research environment in Massachusetts, private capital to fuel job and economic growth will go elsewhere—in particular to California, which is still tops in overall life sciences research spending and related employment.

Massachusetts is among the top tier of states in the biosciences industry—and especially in research. In 2017, according to the just-released BIO 2018 report, Massachusetts grant recipients received $2.7 billion in National Institutes of Health funding awards, and the state attracted $5.2 billion in venture capital investment. In 2016, our state’s colleges and universities also generated an additional $1.7 billion in bioscience research expenditures beyond NIH funding.  Partners Healthcare and its hospitals and Boston Children’s captured collectively $967 million of the NIH funding in 2017.  No question, they are national leaders in this regard.

The issue for many of us worried about health care affordability is not that biomedical research conducted by these hospitals (and others) is a bad thing. Problems arise when in addition to what our hospitals bring in for grants and contracts and gifts for research spending, they demand higher prices for patient care as a way to subsidize significant additional investments in research—money which comes from our health care premiums.  Mind you, the state’s Health Policy Commission and others have shown that premiums are financed regressively—i.e. low-income people with commercial insurance actually pay more absolutely for their share of premiums than higher wage workers.

While most of the life sciences research at these hospitals is financed by formal research grants and contracts, not all of it is. A review of their financial filings indicates the three hospitals gain significant profits from the prices they are paid in caring for commercial payments.  These net profits not only cover whatever shortfalls there may incur in caring for Medicaid or other governmentally insured patients, but collectively give Partners and Boston Children’s the cushion to invest hundreds of millions of additional dollars each year in research and other things that they deem of value to them.   Beth Israel also likely uses some of its commercial dollars in this way; and even Dana Farber, with its huge Jimmy Fund donations still dedicates some of its commercial insurance profits towards research expenses that do not have an outside funding source.

If we focus for a moment on Partners and Boston Children’s and look at their audited financials and other governmental submissions we can learn a few interesting things about this issue.

Take Partners:  Admittedly, in reading the hospital system’s financial statements, it is difficult to discern exactly what the subsidy from patient care into research is at this time.  But in its reporting as part of the 2015 cost trends hearings conducted by the Health Policy Commission, Partners said it committed $175 million of its own dollars toward the $1.4 billion of reported research expense in fiscal year 2014.  At present, their research base has expanded to about $1.8 billion, so using the same proportion from three to four years ago would yield a subsidy on their part of about $225 million toward current research spending.

With its profits from patient care, Partners certainly has the means to fund additional research expenses. Partners’ most recent filings with the Health Policy Commission for its two largest hospitals—Massachusetts General and Brigham and Women’s —showed an average of about $722 million in annual commercial operating margin for the four most recent reporting years–$777 million in the most recent year.  And even after claimed losses from not recovering all of their overhead expenses in caring for Medicare and Medicaid patients are subtracted out, the two hospitals combined still had a total average operating margin of $272 million each year over the four years.

For Boston Children’s Hospital, its 2016 audited financial statements show nearly $185 million in direct research grant and contact revenue from external sources, however on the expense side that year they reported $371 million in research expense. The expense number is about double the revenue figure. While the source of funds to help pay this additional expense could in part come from donations or investment income, it is also true that in 2016 Children’s reported a net $341 million of operating margin from its domestic commercial patients.

Even after Boston Children’s Hospital reported operating shortfalls for not capturing all of its overhead from Medicaid and other governmental patients in 2016, the hospital still netted about $156 million in operating profit.  I would think that a good amount of this $156 million was ultimately dedicated to funding the difference between research revenues and research expenses.

Apparently the drafters of the House bill concluded that stopping this form of regressive financing of hospital unfunded research is necessary. But their approach contains loopholes, particularly the reliance on the Health Policy Commission’s performance improvement plan process, a process that at the end of the day hospitals can ignore. Hospitals can even pay a penalty of $500,000 and then continue to collected premiums for hundreds of millions of dollars annually to be used for “unwarranted factors.”

What should happen now?

First, let’s see what the amendment process looks like before the House passes its final version.  I can imagine that some of the institutions being assessed on the hospital side (and probably insurer as well) are not too happy with this bill. Next, the differing House and Senate versions need to be reconciled, a process that will likely involve some give and take. Whatever happens, the state’s bioscience research enterprise will not fall apart even if Partners and Children’s have to constrain some of their research spending a bit.

Meet the Author

Paul A. Hattis

Associate professor, Tufts University Medical School
The goal should not be about punishing some hospitals and helping others. It should be about whether we can maintain a system of more efficient community hospitals that have adequate resources to care for people, while at the same time helping move our health care system to a more affordable place.

Dr. Paul A. Hattis is an associate professor of public health and community medicine at Tufts University School of Medicine. He is a former member of the Health Policy Commission and a current member of the commission’s advisory council.