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20 Years Ago … The Health Care Market Came to Stay

Posted by John McDonough  January 1, 2012 03:15 PM

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I may be the only person who remembers that 20 years ago yesterday, Gov. William Weld signed into law the crowning achievement of his first year as governor, the deregulation of the Massachusetts hospital payment system.

Well, someone should note it, especially because this year it's likely the Legislature and Gov. Deval Patrick will rewrite those rules for the first time since 1992. Before we look forward, let's walk down memory lane together.

In the mid-1970s, facing a deep recession and a health care cost crisis, and at the urging of business and insurance industry leaders, Massachusetts joined a small group of states in launching a vigorous regulatory program to control the growth in hospital spending and to make sure that all hospitals were paid by insurers according to consistent rules. Evidence shows that the system held down the rate of growth for about ten years, and lost its effectiveness in the late 1980s.

In 1991, in the midst of another deep recession and health care cost crisis, new Republican Gov. Weld convinced the Legislature to embrace his deregulatory agenda, particularly Senate President Bill Bulger, Senate Ways and Means Chair Patricia McGovern, House Speaker Charlie Flaherty, and House Ways & Means Chair Tom Finneran, all Democrats. Weld's key architect was his Health Under-Secretary, Charles D. Baker, more recently the unsuccessful Republican candidate for governor and former CEO of Harvard Pilgrim Health Care. 

From 1992 on, hospitals and insurance companies negotiated rates of payment for services among themselves, in private, with no government interference or oversight.

The results, 20 years later, are mixed, positive and negative, and not everyone agrees which is which. Let's look at some key ones, best cataloged in this 2006 report from the MA Division of Health Care Finance & Policy, still the most up-to-date compendium, as well as the Division's 2010 update:

Perhaps the biggest change, the number of acute care hospitals in Massachusetts dropped from 93 in 1990 to 65 today. In 1990, most were independent, and today most are part of larger systems such as Partners and Steward. Most of the closings happened in the 1990s, while the merger and affiliation game keeps going today. Discharges dropped from 52,209 in 1990 to 28,266 in 2004, and beds dropped from 23,262 to 16,190. Health insurers also consolidated, with the number of plans dropping from about 18 in 1990 to 8 today.

In the late 1980s, reducing the size of the hospital system was an unattainable policy obsession, and in the 1990s, the deregulated market made it happen with stunning efficiency. This is a clear-cut case of "be careful what you wish for, because you just might get it." While the downsizing eliminated excess capacity, it also enabled market consolidation triggering widespread hospital payment and health insurance cost inflation over the last ten years.

The emblematic event happened in late 1993 with the announcement of the merger of Mass. General and Brigham & Women's Hospitals into the Partners Healthcare System. That move, at the time, was utterly defensive as the two behemoths worried about their survival in the new deregulated environment. Their move was replicated across the state as hospitals formed mini-monopolies in nearly every region.

It took about seven years for providers, led by Partners, to find their footing. In October 2000, Partners and Tufts Health Plan reached a stalemate on a rate re-negotiation, and Partners' chief Sam Thier told Tufts Health Plan chief Harris Berman to take a hike. Tufts folded and gave into all Partners' demands. From that point on, providers dominated rate negotiations until the recent emergence of a harder line by Massachusetts Blue Cross and Blue Shield over the past two years.

The year 2000 would have been a logical time for state government leaders to assess how the system was working; instead, it's been more than ten years since then of hyper-inflation in health insurance premiums, and only three or so years of meaningful efforts to turn the tide.

So 2012 will be the first year the Massachusetts Great and General Court is expected to revisit the law signed 20 years ago yesterday. I expect that a new law will be passed and signed by Gov. Patrick in July (the session ends on July 31). The tension will be between those who want a tougher and fairer set of rules applying to all providers and payers to hold down the rate of growth versus those advocating a softer governmental hand because of recent signs of progress in lowering the rate of increase. The risk with the latter course, of course, is that when the spotlight moves, accountability always wanes.

In the meantime, happy 20th anniversary hospital rate deregulation. May it be your last.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About the author

John E. McDonough is a professor of practice at the Harvard School of Public Health. He is the author of the book “Inside National Health Reform”, published in 2011 by More »

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