Partners in Power

Below, a guest post by Frank Pasquale, a Visiting Professor of Law at Yale Law School where he teaches Intellectual Property and Health Law. Much has been written about Partners’ high prices, but Pasquale does a particularly good job of showing how, in a market economy, pricing often has more to do with power than with productivity. Moreover, the Partners story underlines the fact that insurers do not bear primary responsibility for the high cost of health care in Massachusetts. Some health care providers have demanded premiums of 30 percent, and insurers have been powerless to stop them. This post originally appeared on Concurring Opinions.

Harvard Business School Professor Regina Herzlinger has long fought
for "consumer-directed health care." She states: "People can choose
from 240 models and makes of cars pretty intelligently . . . .Why do we
assume they can't do the same when it comes to their health?"

A recent Boston Globe series on hospitals in Massachusetts helps answer that question.

The Globe's fascinating series
on the rise of Partners Health in Massachusetts tells a story of market
forces inexorably driving up the cost of health care, without
commensurate quality improvements. Threatened by declining insurer
reimbursements in the 1990's, Mass General Hospital and the Brigham
& Women's Hospital
united to anchor Partners. Now they're in the driver's seat, demanding reimbursements up to 30% over what other hospitals receive for identical procedures. Their market share has steadily increased as well, allowing them to stockpile the resources necessary to enter into new markets and threaten the viability of cheaper community hospitals.

of those quoted in the series contend that Partners' anchor hospitals
are terrific places to go if one has a rare illness–they pride
themselves on cutting edge medicine. But in
procedures including
coronary bypass, CT-scan of the chest, MRI of the brain, and
ultrasound, they appear to offer no quality edge–just far higher
a simple, market-based model, this should not be happening. Patients
should be investigating quality, getting value for their money, and
opting for cheaper hospitals when, all things considered, these are
bargains. But here's one account of patient decisionmaking from the

[A 31-year old named Dahl] lives less than 2 miles from
Mount Auburn Hospital in Cambridge, but when she became pregnant with
her first baby last year, she decided to go to a Boston teaching
hospital to deliver. "I talked to women in the area who had babies in
Boston," said Dahl, a self-described nervous patient who gave birth to
son Henry by Cesarean section at the Brigham last November. "I also
looked at the US News rankings for female care. The Brigham was rated
very high."

State health officials have tried to encourage women like
Dahl to reconsider their flight to Boston, pointing out in a 2003 study
that community hospitals are generally just as reliable as teaching
hospitals for normal births. In fact, they had a slightly lower
complication rate – and they're a lot cheaper. Dahl's care cost
$8,282.14 at the Brigham, while the cost at Mount Auburn would have
been about $5,700, according to state insurance data.

In other words,

brand power has a lot more to do with choices here
than objective assessment of outcomes. Admittedly, insured individuals
may be so insulated from health care costs that they have little reason
to sniff out the best deals. The private health insurance market is
supposed to help here, acting as proxy and agent for the insured, but
consider how Tufts was treated by its customers when it tried to
bargain with Partners:

Partners' dominance became clear in 2000, when executives
of Tufts Health Plan had the temerity to refuse Partners' demand for a
substantial rate increase. Partners countered by declaring it would no
longer accept Tufts insurance at its hospitals. Within days, as
thousands of Tufts customers threatened to change insurance rather than
lose the right to treatment at the two famous hospitals, Tufts gave in
to Partners' demands. Since then, Partners has negotiated one big pay
increase after another from insurance companies fearful of a similar

Those reimbursement rate increases are not simply windfalls to
Partners' highest-paid employees and shareholders. They are also serve
as a warchests for Partners' expansion into the lucrative niches that
now keep many community hospitals afloat. As Marc Roberts, a professor
of political economy at the Harvard School of Public Health, says in
one Globe piece, "By paying Partners more, you build up their war chest
and then they build more and more and then they drive other people out
of business . . . . This is a huge slow-motion train wreck for the
Massachusetts healthcare system." I've explored the dynamics of specialty hospitals
elsewhere; suffice it to say, it's now become evident that certain
procedures in hospitals serve to cross-subsidize other, less-profitable
ones. A former chief of a hospital likely to be adversely affected by
Partners' expansion puts it this way:

During an interview earlier this year at Caritas Norwood,
Chessare passionately decried Partners' move into his neighborhood,
arguing that the healthcare giant was triggering a medical arms race in
which the rich get richer and the poor face extinction. Community
hospitals are already doing much of the same work that Partners is
offering and doing it more cheaply and, for the most part, just as
well, he said. "It's cherry picking," Chessare said. "What are they
going to do there? They're going to do high-end imaging. Why? Because
you make money at it. And they're going to do ambulatory surgery. Why?
Because you make money."

Chessare is complaining that the new Partners' facilities will be
competing for "high-margin" services, which smaller community hospitals
like his use to cross-subsidize things like 24-hour ER's, care for the
uninsured, and other community services. According to one study I saw
(admittedly from 1991), about a quarter of community hospitals have
levels of uncompensated care above 8%, and a quarter have levels below
1%, with the rest in between those figures. If Chessare's hospital is
at the high end, it's not hard to draw a connection between the
relevant Partners' satellite's success and decreasing ER services for
the area and health care for the the uninsured generally.

This brings me to a final point brought up by the article–a darker
narrative about quality assessment than we are used to. High US News
& World Report rankings are one anchor for public perceptions of
Partners' quality. For fans of market-driven health care, rankings are
a key heuristic for harried consumers used to treating health care as a
credence good. But the USNWR rankings appear to have a salience far
greater than more granular measures of quality–which in turn are
challenged by one of Partners' own doctors:

Partners officials said some of the ratings are based on
untrustworthy data that should not be used for scoring. In general,
they said, the statistical methods used to adjust for the sickness of
the patients at different hospitals are not sophisticated enough to
recognize how much more vulnerable their patients are. They also noted
that even as governments are making more data public, many of the
existing measures are controversial and often fairly crude.

"I think a consumer that relies on the cross-section of
information that's out there and available to them, it's akin to being
a cork floating in the ocean," said Dr. David F. Torchiana, head of the
Massachusetts General Physicians Organization. "You'll be driven in
random directions by the randomness of the information that you will

I've also

questioned the utility
of many "best doctors" survey and other data. Certainly we can do more
to improve data collection and interpretation. But we also have to
worry about rankings becoming a self-fulfilling prophecy, increasing
the distance between top and bottom that they are meant
merely to report. As the Globe notes, "the
pay gap undermines less powerful hospitals, whose officials say that
they steadily lose doctors to those that can pay more. . . . Partners'
6,000 physicians are paid 15 percent to 40 percent more than most other
Massachusetts doctors, based on Blue Cross rates, while the company's
community hospitals earn at least 10 percent more than their peers."
Small initial differences can become self-reinforcing. What began as a
difference largely rooted in perception may become one rooted in
reality, if we can assume that the highest-paying entity can purchase
the services of the most competent providers. In the worst case
scenario, rankings may serve to route the poorest patients to the
poorest hospitals, while unleashing an arms race of image management by
the rest.

Joe Biden's Chief Economist,

Jared Bernstein,
has pointed out something fundamental about pricing in a market
economy: it can be driven by power as much as by productivity. The
story of Partners casts doubt on the efficacy of market-driven
initiatives in health care. Consumers appear bewitched by marquee
brands which insurers are powerless to bargain with. Only
state action in Massachusetts appears to be an effective check here, leading the Boston Globe to call for more equity in reimbursement generally:

One alternative is to shift from the private dealing
between insurers and hospitals to a more transparent system of
performance-based reimbursements. These would have to account for
complicated medical procedures. Or the state could set an allowable
range for the cost of each procedure.

Ideally, rate-setting would move toward a single payment
system: a gallbladder removal would be reimbursed at the same rate by a
private insurer, Medicaid, or Medicare. Currently, Medicare pays
somewhat less than actual cost, Medicaid much less, and the insurers
subsidize both programs. Ending this disparity would benefit the
hospitals with disproportionate shares of Medicaid and Medicare
patients. A saner rate-setting system would also pay more for primary
care and less for the interventions by specialists that inflate overall
costs and lure medical students away from basic care.

If this system could be implemented in a way that preserved
incentives for innovation, it could be a vast improvement on the
current high-stakes atmosphere of hospital-doctor-insurer brinksmanship.

12 thoughts on “Partners in Power

  1. Thanks for this timely post;
    Having practiced in the Chicago area for many years, I can tell you the same phenomena is occurring here. The major players with name recognition and “branding” receive payments over and above those remaining community hopitals and have used these premiums to buy up and expand their networks. All claim to be of better quality but few have numbers to back up these claims. The same happens on the provider side where docs working for big hospital systems reap higher compensation not because they are superior clinicians, but because the big hospital system leverages their weight to extract higher reimbursement. The end game will be large hospital systems strategically avoiding the poorer neighborhoods and competing with each other for the high end procedures (surgery and imaging). So indeed we are heading for a two tier system with the quality of the hospital mirroring the economic condition of the neighborhood it is located in, and high ticket hospitals for those with insurance (Medicaid exempted and avoidied if possible).
    Just another reason to give up the silly idea that medicine is something you can sell like a commodity that is controlled by the invisible hand of the market. Also another example of why marketing and branding has become so important to big hospitals to maintain their reputations.

  2. As a medical provider, I have to renegotiate my contracts with insurers every year, and every year they try to drive down my prices some more. Fortunately, my group is in a strong market position, and we have been able to leverage that fact to keep reimbursements at a level reasonable enough to offset the cost of charity and Medicaid patients. I don’t see any difference between this and the Partners situation.
    My question is this: why is this situation always framed in a way that implies Partners is wrongly driving up prices for medical care or “overcharging” patients when (from my point of view) the problem is that insurers have been effective at suppressing prices so far that the other players in the market are barely solvent?
    Partners is flourishing, and the other hospitals in the region are unable to keep up with them in their expansions, and, according the Globe, Caritas was unable to afford basic supplies such as oxygen tanks. There’s a tendency to view the group with lots of money as the bad guy, and Partners has taken a PR beating, but I think the real bad guy here is an insurance industry that has driven down reimbursement so far that unless you happen to have remarkable market power, your institution will be financially marginal.
    That is of course in addition to the government reimbursement rates which are so low that many services must be provided at a loss. That’s bad, too.

  3. See our comments on this in Health Care Renewal:
    Another factor here may be that the leaders of the organizations that are supposed to negotiate at arms’ length (in this case, the Partners System and Massachusetts Blue Cross/ Blue Shield) may have more in common with their “counter-party” than with the patients and policy holders they are supposed to be protecting.

  4. Maggie,
    Congratulations on this post. I think Partners is using its market power to gouge patients and insurers and the more adverse publicity this receives, the better.
    The only ways to push back against this, in my opinion, are to (1) expose patients to higher cost sharing sufficient to get their attention if they want to continue to use high cost facilities that deliver outcomes that are no better and sometimes worse than other hospitals in the area and (2) for insurers to offer narrow provider networks for a lower premium and do a better job of explaining to health plan members that the providers in the narrow network are not just cheaper but just as good as those that are not in the network. If Partners were deemed a Center of Excellence for certain diseases or conditions, the narrow network could include them for those diseases and conditions only.
    More generally, for expensive surgical procedures, a course of cancer treatment, or specific procedures like imaging, perhaps insurers could have all competitors in a region submit a bid for the full episode of care. The insurer could determine how much it is willing to pay and every provider that bid that amount or less would be paid the insurer’s maximum acceptable amount. The downside is that under the bidding approach, hospitals could be in the network for some procedures but not others. Insurers, in theory, could also offer to pay non-network hospitals at the same rate, but anything above that would have to be worked out between the hospital and the patient or written off. Episode pricing and complete price transparency would be needed to facilitate this approach, of course.

  5. Thank you all for your comments . . .
    Thanks very much for the links. As you point out:
    “The case of the market dominance of Partners Healthcare in Massachusetts shows how health care organizations unfettered by regulation, run by businesspeople, maximized their own financial results, but simultaneously caused vigorously rising costs.”
    When hospitals merge, they rarely save much money. As you point out, they don’t merge overlapping clinical operations; no one wants to give up their fiefdoms.
    In the second post ,you point out that that “in a deregulated system, organizations like hospitals and health insurers/ managed care organizations were supposed to have negotiated vigorously for their interests. The former would try to maximize their reimbursement. The latter would try to minimize their costs. In the secret agreement between Thier and van Faasen, this did not happen.”
    Why? To find out more, I urge everyone to Roy’s posts at
    I like the idea of networks with hospitals like these included only if they are centers of excellence for a particular procedure.
    It is not at all clear that they are better for most procedures. .
    Shadowfax– take a look at Roy Poses posts on this situation. (See links in his comment)
    From what I have read, Partners was charging much, much more . . .
    Also you note that “Partners is flourishing, and the other hospitals in the region are unable to keep up with them in their expansions”
    Do we really want any hospitals in the Boston area exanding? Boston is the Most Expensive Place On Earth for heatlh care, in large part becuase it has so many hospital beds and specialists (excess capacity drives demand and also tends to lead to higher prices as hospitals engage in “medical arms’ races as they try to secure market share in a very competitive market.
    Normally, insurers try to keep prices down and providers try to raise them In theory, that shoudl lead to reasonably fair priciing. But here, the insurers and hospital seemed to be colluding– a great deal of conflict of
    interest, as Poses shows.
    Brad– Yes the “pay one price” structure in Maryland is interesting.
    It wouldnt’ work in all of New York State because the ocst of living, etc. is so much lower upstate.
    But perhaps it would work in Maryland . ..
    Regarding “branding”, you write: “The end game will be large hospital systems strategically avoiding the poorer neighborhoods and competing with each other for the high end procedures (surgery and imaging). So indeed we are heading for a two tier system with the quality of the hospital mirroring the economic condition of the neighborhood it is located in, and high ticket hospitals for those with insurance (Medicaid exempted and avoidied if possible).”
    Yes, that is just what I see happening when hospitals (and doctors) “brand” themselves as upscale.
    See my newest post (going up soon) fearing that health care reform will give us a tiered system.

  6. This is a topic somewhat dear to my heart and I appreciate that rare illnesses are where Partners thrives.
    I actually did go to Mount Auburn Hospital when I was diagnosed with a testicular tumor. I had a great urologist there who took time to go over all of my options and explain in detail my treatment options and why surgery was better for this particular brand of T.C. rather than radiation or chemotherapy. Dr. Lafontaine will forever be near and dear because of the tremendous care he gave me at a critical time in my life.
    However, because TC is very rare (approx. 8,000 new cases a year) and the RPLND surgery is even rarer (maybe 800 procedures nationwide annually), I was exceptionally fortunate that an expert in the procedure was practicing at Brigham and Women’s. The surgeon was a great technician but bedside manner was clearly not a strength. I don’t think I ever spent more than 30 seconds with him at a time while conscious.
    If I had prostate cancer or another more common illness, I’d go back to Dr. Lafontaine. Gladly.
    I can only imagine how much it costs the system to pack the Brigham Urology waiting room for care that is probably no better and potentially worse than what can be received at Mount Auburn far cheaper.

  7. Mike C.–
    It sounds like you received very good care.
    And you are right, All of us pay for the higher prices at brand-name hospials through Medicare and through higher insurance premiums.
    This isn’t free market competition. It sounds more like powerful hospitals extorting higher reimubursements from insurers. In some cases this might be justified becuase the hopsital’s overhead is higher (based on location) but it’s hard to see why overhead would vary so much among hospitals located in the same city . . .

  8. This is not an example of a “market-based” operation. If it were truly market-based then consumers of health care would be privy to the prices charged by Partners Health and could compare them to other hospitals.
    If it were truly market-based, then the insured would not depend on state or employer-provided insurance but would be actively seeking policies that provided the optimum coverage for the best price. Massachusetts’s experiment in health-care-for-all may be called many things, but “market-based” isn’t one of them.

  9. Who cares if there is a tiered system? The goal of government should be to provide a BASEMENT LEVEL of minimum acceptable healthcare, not to try and “level” the playing field so that everybody gets exactly the same level of care. No country on Earth has been successful at doing that, not even the socialized medicine countries. Rich people get more access to healthcare in Canada, UK, Germany, France than poor people do, even though everybody is covered.
    Lets focus on a problem we can fix instead of getting distracted by issues that arent relevant and are virtually impossible to “solve.”
    Rich people will ALWAYS have better access to healthcare, I dont care what kind of system you put in place.