My Op-Ed on Mass. health policy

So I had to write an Op-Ed for one my classes and, naturally, I chose to address health care. My somewhat long piece (sorry!) is in response to recent legislation proposed by Massachusetts' governor Deval Patrick. We had to assume the position of a leader in the state; therefore, I am the CEO of a community hospital...my dream job. Enjoy!

Measuring the True Costs of Health Care

Recently, Governor Deval Patrick proposed a bill that would allow the state insurance commissioner to cap the price of care charged by providers in Massachusetts. The motivation for this bill comes from years of debate as to how the government can curb health spending and relieve employers and individuals from paying increasingly high premiums for private health insurance. However, the governor’s proposals are purely political and would not effectively manage the cost of health care. Rather, providers, particularly community hospitals, would suffer greatly from the impact of such a bill. Further, Patrick’s legislation would contribute to a decline in patient safety and quality for the entire health care industry.

Community hospitals that treat most of the country’s lower-income and older citizens would be forced to compromise excellent patient care due to Patrick’s legislation. Unlike specialty hospitals and larger academic medical centers, community hospitals serve significantly more government-subsidized patients than those with private health insurance. These patients include low-income individuals who have state and federally funded Medicaid as well as those ages 65 and older with federally subsidized Medicare, in addition to other government-run programs. On average, a community hospital’s patient population includes about 55% to 65% of patients with government-subsidized health insurance; the remaining patients subscribe to private health insurance paid by their employers or out of pocket.

Because the government cannot afford to fully reimburse providers for the amount of costs associated with caring for Medicaid and Medicare patients, community hospitals must recoup losses by charging private insurers higher prices for care. Like any business, hospitals must adhere to basic principles of economics when designing pricing plans. In order to break-even, or generate enough revenue to at least cover costs, hospitals must charge private insurers for the deficit created by the government’s partial reimbursement system. On average, the government only pays community hospitals about 75% to 85% of the costs of caring for Medicaid and Medicare patients. Therefore, providers must impose a 15% to 25% premium on private insurers to simply maintain equilibrium between cost and revenue. This pricing strategy does not allow any room for the hospital to earn a margin, which would provide capital to invest in technology, expansion, and new employees. Further, many private insurance companies leverage their size to negotiate lower prices from providers; this deepens the financial strain on community hospitals.

Governor Patrick’s proposed cap on providers’ prices would force community hospitals to accept a deficit representing billions of dollars in revenue, patient services, and the quality and safety of the organization. Patrick’s bill allows the government to essentially squeeze providers from both ends. While continuing to offer only partial reimbursement for services, the governor’s legislation would prevent community hospitals from breaking-even. The consequences of which are dire for the entire health care industry.

If Patrick’s bill passes, community hospitals will have three basic choices. First, and depending on the financial health of the organization, community hospitals could redesign pricing strategies, eliminate patient services, and continue struggling to generate enough revenue to survive. This is a poor option for consumers, as patients would have to go elsewhere for important services like obstetrics, cardiac surgery, and radiation oncology. These services, among others, would most likely be eliminated first as they represent enormous costs for the organization due to required technology, specialist salaries, and insurance against risky procedures. Unless the financial performances of the organizations dramatically improve, community hospitals could continue cutting services until they exist solely as emergency clinics. The second choice is even bleaker. Community hospitals could decide that they cannot generate enough operational revenue to repay bondholders; this would force the closure of the organizations. Shutting down a community hospital, however, is a major ethical dilemma. Patients within the community would be forced to travel greater distances for care and would face longer wait times for appointments at larger specialty hospitals or academic medical centers.

The third and most likely option involves mergers and acquisitions among community hospitals and larger hospital networks. Massachusetts has already seen a vast number of partnerships develop in the past few years. Currently, most community hospitals in the state no longer exist as freestanding organizations but are affiliated with larger medical centers in Boston. The larger and more advanced centers treat severe cases while referring patients to community clinics for routine procedures. Patrick’s legislation, though, would alter the depth and breadth of hospitals’ affiliation. No longer would the partnership exist to provide patients with better care; rather, the organizations would become financially dependent on the network. Administration would most likely be streamlined to save costs, eventually resulting in only one or a few management teams controlling all the state’s hospitals.

The economic incentive for hospitals to join monopolistic networks would virtually eliminate consumer choice and contribute to decreased patient safety and quality. The basic theory driving hospitals to merge is known as economies of scale. Not unlike major U.S. corporations McDonald's and Wal-Mart, hospital networks would seek to generate revenue by keeping prices low and treating as many patients as possible. While consumers may benefit to some degree by this strategy in the restaurant and retail industries, health care is far too risky to put in the hands of just a few individuals. Further, while McDonald's and Wal-Mart certainly dominate their markets in terms of pricing, consumers still have many choices when searching for quality products. Health care, however, presents a challenge in terms of a patient’s ability to choose. Unlike fast food restaurants and retail stores, it takes a tremendous amount of capital to run a hospital; this means far fewer hospitals can exist than other business outlets. Patients, then, would have to travel extreme distances to reach a hospital run by a different network, not to mention that choice becomes virtually impossible while having a heart attack in the back of an ambulance.

Because the consumer’s choice is limited, there is significantly less incentive for health care managers to continually improve the safety and quality of patient care, particularly when such tasks involve financial investment. The tradeoff for the “dollar menu” at McDonald's and the steep discounts at Wal-Mart is the occasional dirty store, incompetent employee, and poor quality product. Is this something that residents of Massachusetts are ready to compromise for cheaper health care? If so, the true costs of health care may no longer be measured in a dollar amount but in patient dissatisfaction, medical errors, and lives lost.

Rather than proposing legislation that makes providers look like the enemy, the government should focus on managing their own expenses so that they can reimburse community hospitals for the full costs of treating Medicaid and Medicare patients. If that means raising taxes, than Massachusetts’ residents should elect a leader that has the fiscal responsibility and courage to do the right thing and fix health care in this state.