Partners, insurer under scrutiny

AG seeks details on agreement; Possible collusion over prices cited

By Scott Allen and Thomas Farragher
Globe Staff / January 23, 2009
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Attorney General Martha Coakley has launched an investigation into whether the state's largest health insurance company and its largest healthcare provider may have illegally colluded to increase the price of health insurance statewide over the last nine years, according to several legal and government sources.

The attorney general sent formal demands for information to Blue Cross and Blue Shield of Massachusetts and Partners HealthCare late last week, the sources say, calling for a detailed account of their contract negotiations in recent years.

Since 2000, Blue Cross has boosted the rate it pays for medical care by Partners doctors and hospitals by 75 percent, dramatically more than the increases given to most other Massachusetts hospitals. Blue Cross now pays $2 billion a year to Partners, parent company of Massachusetts General and Brigham and Women's hospitals.

Coakley's investigation comes just weeks after the Globe Spotlight Team reported that the leaders of Partners and Blue Cross made a private agreement in 2000 under which Blue Cross would give Partners a significant increase in payments as long as Partners obtained similarly big pay increases from Blue Cross's competitors. The deal - never written down because Partners lawyers feared that the agreement was legally risky - required Blue Cross and its competitors to raise insurance premiums to pay Partners, ushering in a decade of rapidly escalating healthcare costs.

State Inspector General Gregory W. Sullivan called the attorney general's probe "historically significant."

"The attorney general is fulfilling an important role by examining the concentration of market power by major medical providers and insurers on the cost of healthcare to consumers in Massachusetts," said Sullivan, who has pushed for a public review of whether hospitals and insurance companies use market power to increase prices.

A spokeswoman for the attorney general declined to comment on the investigation, but Coakley has increased oversight of hospitals and insurance companies since assuming office in 2007, saying she was concerned about the market power of some insurers and hospitals. After the Spotlight story appeared late last month, Coakley said: "We will continue to monitor Partners' expansion plans and will take action as appropriate regarding Partners' market behavior."

Partners and Blue Cross officials say they have done nothing wrong and that the real drivers of the 78 percent increase in Massachusetts insurance premiums since 2000 are factors such as new medical technology and the growing incidence of chronic diseases such as diabetes. Both acknowledge that Partners price hikes in 2000 helped start a trend toward rising insurance rates, but say the higher pay to Partners and other hospitals was necessary so that the company could meet its own rising costs.

Dr. James J. Mongan, Partners chief executive, denies that Partners has driven up healthcare costs disproportionately, arguing that his eight hospitals and more than 40,000 employees are caught in a national trend toward higher costs. Mongan has said that insurance rates in Massachusetts have gone up at roughly the same rate as the national average.

Yesterday, Blue Cross and Partners officials declined to comment on the investigation.

But the report by the Spotlight Team in November that Blue Cross typically pays Partners' flagship hospitals, the Brigham and Mass General, 30 percent more than other teaching hospitals that mainly treat adults has focused debate on the disproportionate cost of Partners, which treats 1.7 million patients. Though the Partners teaching hospitals have excellent reputations for quality, quality data does not show they consistently achieve better results than other, less well paid hospitals such as Beth Israel Deaconess Medical Center.

Partners now makes hundreds of millions of dollars from its contracts with insurers while some other hospitals say they actually lose money every time they treat a Blue Cross member. Underscoring the point, doctors at Tufts Medical Center had announced plans to stop accepting Blue Cross HMO insurance after Jan. 31, but relented when Blue Cross agreed to a significant payment increase to offset what Tufts said were big losses.

Donald J. Thieme, executive director of the Massachusetts Council of Community Hospitals, said the 23 hospitals he represents welcome Coakley's investigation. . Thieme said his organization submitted legislation seeking a formal review by the attorney general's office into anticompetitive behavior between hospitals and insurers.

Though the agreement was never disclosed publicly, its consequences were clear: a few months later, Partners announced plans to stop accepting Tufts HMO insurance after Partners negotiators determined the offer to Partners was not enough to "match Blue Cross," according to a 2000 Partners memo reviewed by the Globe.

"Everybody wished they had the same handshake," Thieme said. When the difference in rates paid to Partners and others was reported by the Globe and then by the state Health Care Quality and Cost Council website, he added, "A lot of our members were shocked at the degree of difference that existed."

The type of agreement that Partners and Blue Cross forged in 2000, known as a "most favored nation" agreement, is not automatically illegal, but such deals so often lead to higher prices that most-favored-nation agreements have been banned in several states, including New Hampshire and Rhode Island.

In this case, Blue Cross chief executive William Van Faasen feared that if he gave Partners the extra $193 million the company wanted over three years, Blue Cross insurance might become more expensive compared to the competition. But Dr. Samuel O. Thier, then the Partners chief, promised to seek similar increases from Blue Cross rivals, easing Van Faasen's fear about price competition.

Keith Hylton, a law professor at Boston University who has written a book on antitrust law, said that Coakley would have the option of taking legal action under either federal antitrust or state consumer protection law, which should worry Blue Cross or Partners. He said the federal law governing anticompetitive behavior by companies, know as the Sherman Act, allows prosecutors to recover three times the damage caused by the anticompetitive behavior.

"The concerning thing here is that antitrust laws are so serious in this country," said Hylton, who believes Coakley did the right thing by launching the investigation. He had this advice for Partners and Blue Cross: "They need to talk to lawyers."

Skyrocketing healthcare costs are under more scrutiny than ever in Massachusetts, partly because the success of the state's new health insurance mandate depends on controlling medical costs. The state has budgeted $869 million this year to pay for subsidized insurance. The governor and several groups have begun attacking the problem in the last month and are hoping to recommend solutions this year.

Governor Deval Patrick called a meeting of providers and payers on Jan. 12, during which he said he could resume state regulation of health insurance rates if people in the industry could not resolve the cost crisis.

Jeffrey Krasner, Marcella Bombardieri, and Liz Kowalczyk of the Globe staff contributed to this report.

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