The Massachusetts Story: How Change May Unfold in Other Markets
By David Burik and Lisa Rolfe
- Cost control issues dominate early years of reform
- ‘Readiness for Reform’ criteria suggest which states will be next
- Some states will move faster than Federal healthcare reform
The multitude of complex regulatory, economic and care delivery factors that led to the Accountable Care Act (ACA) are largely the same factors that led to the sweeping healthcare reform implemented in the state of Massachusetts in 2006. Of course, in the last six years healthcare has become even more volatile with growing levels of uncompensated care, proliferation of new science and technology and the associated escalation of healthcare costs. Still, there is much to be learned from the Massachusetts experience that can serve as a predictive framework of how change might unfold throughout the country. Specifically, the conditions that led to the Massachusetts law, the most effective responses, surprises and other lessons learned can help inform other states, commercial payers, physician groups, health system providers and other industry players as they plan for the impact of reform on their core strategies.
So what were the conditions that led to the Massachusetts law in the first place? As a state that enjoys a tradition of direct engagement with healthcare, Massachusetts had considered many models over many years that could address the issues of:
- Growing levels of uninsured and uncompensated care
- Constrained access to primary care and preventive care services
- A need to reduce overall state healthcare costs
Through the Commonwealth Health Insurance Connector and other reform initiatives, Massachusetts succeeded in providing coverage to more than 95 percent of state residents, and increased access to a broad range of healthcare services, including primary care and preventive services. These successes built upon the state’s long history of reform efforts across public and private sector groups. While much progress was made on the access front, Massachusetts was largely unsuccessful at containing costs through these initiatives. In fact, the Massachusetts experience showed that when access increases, costs go up. Healthcare spending in Massachusetts is 15 percent higher than the national average, although premium growth has slowed somewhat. This gap has continued to widen, an issue that the state ultimately will need to address under the ACA through provider payment reform and other significant cost reduction initiatives. (In August, Massachusetts Gov. Deval Patrick signed into law a bill that state lawmakers say could save Massachusetts as much as $200 billion over the next 15 years by pegging healthcare spending at or below the state’s overall rate of growth.)
LESSONS FROM MASSACHUSETTS
The state’s inability to deal with fundamental financial and cost of care issues in the early years of reform offers many important lessons for the healthcare industry under the ACA. These lessons fall into the following general categories:
Size is not the only predictor of contract quality. Through the early days of reform, Blue Cross Blue Shield of Massachusetts plans sustained preferential rate structures with several “quality” providers in the Boston market. Some estimates put these payment differentials as high as 30 percent. The focus of payers and employers was to access “must-have” providers, not to enhance their value. It was not until large employers in the marketplace put pressure on the Blues that payment levels began to level out across the provider community, making cost reduction possible. The next step in achieving significant and lasting cost reductions is in the adoption of significantly different payment methodologies, including innovative cost-sharing and risk-bearing arrangements. Massachusetts’ Blue Cross’ Alternative Quality Product, implemented in 2009, has shown early signs of success in slowing cost-of-care increases while maintaining quality.
Proliferation of academic medicine entrenched in quaternary care may provide additional hurdles to meaningful progress toward cost containment. Massachusetts has a plethora of academic medical centers. This concentration brings significant barriers to cost reduction. While academic providers may have supported the concept of cost reduction, they had fundamental cultural and cost structure issues that limited their ability to make meaningful progress in the early days of the Massachusetts law. On one hand, these centers can accurately be described as job creators that generate economic development. On the other hand, a large percentage of care may be provided in a less-costly setting, leading to healthcare being too expensive and posing a barrier to economic development. It remains to be seen what role the academic medical center of the future can and will play in healthcare cost reduction. Successful academic medical centers will be those that embrace opportunities to increase efficiencies in the delivery of complex care, while also deploying their teaching, research and clinical missions toward population health management initiatives. These changes may require a fundamental shift in academic culture, faculty incentives and new models for approaching the marketplace (e.g., new roles for community-based providers affiliated with the academic medical center.)
Some level of provider consolidation must occur before real cost containment and value creation can be achieved. It is difficult, if not impossible, for freestanding community hospitals and physician practices to have the assets required to thrive under a reform scenario in a timely manner. Specifically, hospitals and physician groups need to be part of something bigger than a single, stand-alone structure to ensure access to capital, managed care contracting and infrastructure, and fixed cost leverage across multiple sites. In addition, the leadership requirements for succeeding are quite different than the leadership requirements of the past. Future leaders should not be afraid to make the jump to “curve 2” care delivery and the corresponding reallocation of capital, physician incentives and operational priorities. In the future, this leadership will be concentrated in large, complex organizations that will be sufficiently capitalized to move nimbly in executing core strategies. Despite several recent hospital mergers, Boston still is ranked as one of the nation’s 19 least-concentrated health system markets, according to a Navigant estimate of the Herfindahl-Hirschman Index (HHI) used by the U.S. Department of Justice and Federal Trade Commission.
Taxable/private equity participation in the provider market can instigate change. One only has to look at the entry of the private equity firm, Cerberus Capital Management, into the Boston market to see the impact a new, well-capitalized player can have on the pace and nature of market consolidation. In a market previously dominated by large academic players, Cerberus’ acquisition of Caritas Christi Health Care and the resulting formation of Steward Health Care System significantly changed the landscape of Boston healthcare. Cerberus’ desire for a “big platform” deal led it to invest more than $800 million in the formation of Steward Health Care System – $400 million in acquisition costs and another $400 million in committed capital for information technology investments, physician development and other strategic and operational initiatives. These investments raised the bar in the market for cost containment and other reform-friendly activities.
IS YOUR STATE THE NEXT MASSACHUSETTS?
So how do these lessons help predict the future for other states as providers and payers prepare for national healthcare reform? The following conditions suggest a predisposition and perhaps a predictor of where early stages of change may be implemented most successfully. Interestingly enough, many of these conditions are the very same criteria that taxable providers use when evaluating desirability of market entry – a market where they can have a fundamental positive financially accretive outcome.
A political climate “friendly” to taxable providers: Massachusetts is a good example of what can happen when taxable providers become a significant component of the healthcare landscape. With their focus on shareholder value, for-profits can reset the bar in terms of cost of care delivery.
High unemployment: High statewide unemployment means more people will gain access/coverage in the future. This will encourage providers and payers to work together toward the common goal of providing the best possible care under the highest value delivery model.
Exchange progress/experience with Pioneer ACOs: National healthcare reform is likely to unfold most constructively in those states that already have made significant progress on commercial exchange initiatives. Specifically, progress in state exchanges increases the likelihood of people gaining commercial rather than Medicaid coverage, a desired outcome for key stakeholders. To become a Pioneer Accountable Care Organization, the Centers of Medicare & Medicaid Services must be convinced that the ACO has the infrastructure to successfully manage a medical expense budget. With this criteria, it is not surprising that Massachusetts, with the first phase of reform behind it, has six of the 32 Pioneer ACOs nationwide.
A moderately concentrated commercial payer market: A commercial payer market that is not overly concentrated may enhance the ability of employers and providers to negotiate innovative value or budget-based payment programs with multiple commercial payers.
A moderately consolidated provider market, particularly those with many small to mid-sized Integrated Delivery Networks (IDNs): Provider consolidation will be essential under reform, as the cost of building the infrastructure needed to succeed will most certainly need to be spread over a larger organizational base. Both individual hospitals and small to mid-size IDNs will be especially pressured to consolidate.
Market experience with capitation: States with an existing risk-based presence and, specifically, those with high Medicaid HMO enrollment or a high Medicare Advantage population, will be more likely to be early adopters of the types of risk contracting approaches required. Given this experience, it is likely that the infrastructure required to manage care is farther along in these markets.
High inpatient utilization rates: Markets with above-average utilization rates may have more upside potential to control costs/utilization through accountable care approaches. The exception to this may be in a state that derives these high utilization rates from a high concentration of academic and other quaternary providers.
An adequate supply of physician providers: Access to physician and other non-physician providers is essential as the number of insured increases. This need for sufficient providers is particularly acute in the primary and preventive care specialties.
Using these criteria and the lessons learned in the Massachusetts experience, Navigant completed a high level “ranking” of how states might be expected to perform under national healthcare reform. Navigant scored 140 MSAs in this analysis, with 49 markets scoring in the top quartile of “readiness for reform.” The top quartile markets are located in 20 states and the District of Columbia, with only 10 of these markets west of the Mississippi River. Examples of high, medium and low “readiness” scores from this analysis are as follows:
Markets that scored the highest in their readiness for reform included large urban markets such as Philadelphia, Detroit and Atlanta. These three markets’ moderately concentrated provider communities, combined with the markets’ experience with capitation, are the two most consistent criteria that led to these states’ high scoring.
In the Philadelphia market, payers are proactively approaching the need to reduce costs. Examples include the growth of consumer-driven health plans that have enabled employers to shift rising healthcare costs to employees, and Independence Blue Cross, the market’s largest insurer, which is implementing a number of coordination of care and payment reform initiatives. Additionally, a Philadelphia-area physician group is among 32 Pioneer ACOs selected by CMS to manage care under its new payment initiative. Philadelphia hospitals and health systems are responding to the need to reduce costs by shifting more care to the outpatient setting and forming new community-based partnerships.
In Detroit, unemployment remains high, although the economy is beginning to rebound as the automotive industry stabilizes. The provider market is only moderately consolidated with pressure for greater consolidation, leading to new models for health system collaboration. In fact, many Detroit area health systems have formed ACOs and are negotiating alliances in specialty areas. Taxable dollars are present in the market with Vanguard Health Systems’ acquisition of Detroit Medical Center in 2011.
In Atlanta, both Emory Healthcare and Piedmont Healthcare have made key acquisitions that have provided them with critical mass to build infrastructure required. Additionally, three of the market’s top four health plans are forming patient-centered medical homes and multiple forms of ACOs. These are just a few examples of the types of market activities that might suggest a market’s “high readiness” for national healthcare reform.
Markets as diverse as Albuquerque, N.M., and Louisville, Ky., scored in the middle of the pack in terms of readiness. In Albuquerque, the large and growing Medicaid market has led to significantly reduced payments to hospitals and physicians. As a result, providers are looking for new ways to attract insured patients, including service expansion into suburban areas. In 2011, New Mexico Gov. Susana Martinez vetoed a bill that would have created a state health insurance exchange initiative and pushed for repeal of Federal healthcare reform legislation. With national reform still moving forward, the Albuquerque market will be forced to explore new models for cost-effective care delivery for its diverse and challenging payer mix.
In the Louisville market, significant provider consolidation has proven difficult, with Kentucky Gov. Steve Beshear rejecting the three-way merger of University of Louisville Hospital, Jewish Hospital & St. Mary’s and Saint Joseph Health System in Lexington. That said, significant opportunities exist as the Louisville physician sector continues its alignment with these large area health systems, which are looking to tap into the infrastructure required to take on new payment methodologies.
Lastly, examples of markets that scored at the low end of the “readiness for reform” analytic include Raleigh, N.C., Baton Rouge, La., and Omaha, Neb. The Raleigh market has seen turmoil in the payer market, exemplified by Aetna’s contract termination with UNC Health Care in 2011. Employers were not willing to be without UNC and switched to other payers, leading to new product and network offerings. These changes have taken the focus off of true managed care cost savings, and, as a result, providers and payers have some catch-up to do to prepare.
Hospitals and health systems in the Omaha market, while highly consolidated, have not had the reputation of being early adopters of healthcare reform initiatives. Providers have only moderate use of disease management and utilization management programs, although that may be changing with the formation of a market-wide Accountable Care Alliance. That said, economic pressures for healthcare reform are not as strong as in other mid-sized markets, given the relative strength of the local economy.
The Baton Rouge healthcare market faces significant challenges, as the state closed Louisiana State University’s Earl K. Long Medical Center, the market’s safety-net provider, and transferred care to the market’s largest healthcare system, the Franciscan Missionaries of our Lady Health System and its Our Lady of the Lake Regional Medical Center. This has led to major hospital construction initiatives and the need to grow and reorganize the physician community away from small groups and solo practices into larger entities that can more proactively manage the health needs of the region.
These examples show that there will not be a “one-size fits all” strategy for a market to prepare for national healthcare reform.
So what are the implications of the key learnings from Massachusetts and the predictors for which states will be next? The implications can be summarized as follows:
- Some states and markets will move faster than Federal healthcare reform.
- Increased access will increase total costs. Those organizations that focus intensely on lowering per-member cost early on will increase their likelihood of success.
- The pace and level of market consolidation will escalate and new organizational models/legal structures for IDNs will emerge. Partners HealthCare and Steward Health Care System in Boston are good examples of this evolution. Both have developed a variety of wholly-owned and contractual participation models.
- Continued growth is expected in physician employment, with compensation programs that include risk pools and mirror the value and budget-based payment systems adopted under reform.
- Antitrust and state attorney general activities will evolve as they wrestle with the conflict inherent in balancing pro-competitive behavior with the need for market consolidation to access capital required for infrastructure.
- There will be a premium on management’s ability to manage through the conversion from fee-for-service to value and budget-based compensation.
Providers and other market participants can and should use these Massachusetts lessons and market-specific predictors to refine organizational strategy and operational priorities. At a minimum, organizations should evaluate the readiness of their current structures (e.g., simpler, less complex corporate structures will be preferred) and incentives (e.g., are we incentivizing the “right” behaviors?) under their predicted reform scenario. Additionally, organizations should prepare to collaborate, both horizontally and vertically, with a variety of other market participants that can align around common goals. Whether a market is earlier or later in its stage of reform impact, reform is coming and proactive planning will heighten the probability of organizational success.
For more information on how your state scores under the rankings described in this article, please contact Chris Myers, at firstname.lastname@example.org or 312.583.4161.
About David Burik
David Burik is a Managing Director at Navigant Healthcare with more than 30 years of consulting experience within all segments of the healthcare industry. His expertise includes the definition and communication of key strategic issues, as well as the successful execution of platform solutions for those issues. He has a bachelor’s degree and master’s degree in finance and hospital health service management from the Kellogg School of Management at Northwestern University. For more information, contact David at email@example.com or 312.583.4148.
About Lisa Rolfe
Lisa Rolfe is a Managing Director at Navigant Healthcare with 20 years of strategic consulting experience and longstanding client relationships within all segments of the healthcare industry. Lisa has a bachelor’s degree in human biology from Stanford University and a master’s degree in business administration, marketing and business policy from the University of Chicago. She currently serves on the Board of Directors at the Michael Rolfe Pancreatic Cancer Foundation. For more information, contact Lisa at firstname.lastname@example.org or 312.583.4154.