Center for Studying Health System Change

hese values and economic realities have shaped public policy and decision making of private and public purchasers. Support for preserving the community’s state-of-the-art health care system and maintaining broad access to that system is strong, in both the public and private sectors. But there is also recognition that significant changes in health care financing and delivery are necessary to ensure that local health care costs begin to align with those of other regions.

PUBLIC POLICY

Many respondents observed that the government’s role has changed from the regulatory approach of the Dukakis administration in shaping the health care market to a more collaborative model based on complementary public and private sector initiatives that encourage free market dynamics on a level playing field. But although its approach may have changed, the government remains very influential, they emphasized.

State policy has focused on two major areas:

• ensuring access to health care for the poor and uninsured and
• providing safeguards to protect consumers.

Massachusetts has a long history of providing health care for the poor and the uninsured. Currently, care for the poor is financed through two mechanisms: the Medicaid program and the state’s Uncompensated Care Pool. The state’s Medicaid program provides coverage to approximately 500,000 people. The Uncompensated Care Pool, funded at a level of about $315 million annually, compensates hospitals and ambulatory care providers for providing services to the uninsured.⁶

State health reform legislation passed during the late 1980s included a mandate that employers directly provide health insurance coverage as a part of their employee benefit package or contribute to a state-sponsored insurance pool. This provision was never implemented, however, because of strong opposition from the business community and the current governor’s lack of support. As the number of Massachusetts residents without insurance coverage has increased steadily, pressures have mounted to implement the pay-or-play provision or provide for expanded coverage through other means.

In July 1996, the state legislature enacted, over the governor’s veto, the Act Providing for Improved Access to Health Care, which removed the pay-or-play provision and authorized an expanded version of Medicaid.⁷ Under these expansions, it is estimated that an additional 160,000 children will be entitled to some Medicaid benefits, as well as some adults and adolescents in families experiencing prolonged periods of unemployment. The law also provides prescription drug coverage for some 65,000 elderly low-income residents.

Taken together, these Medicaid expansions in effect have replaced categorical eligibility requirements with a basic income standard that provides coverage for eligible residents with household incomes under 133 percent of the federal poverty level and who are not covered by employer-sponsored insurance. These expansions in Medicaid coverage are being financed through three sources:

• a 25-cents-a-pack cigarette tax;

• federal matching funds, to which the state is entitled under its 1115 waiver; and

• moneys redirected from other state assistance programs being absorbed into the Medicaid expansion.

The state also hopes to contain growth in Medicaid expenditures per eligible through expanded use of managed care.

Although these Medicaid expansions are expected to reduce demands on providers for uncompensated care, the state legislature is also considering options for shoring up the Uncompensated Care Pool. Currently, the pool is financed through contributions by hospitals proportionate to their revenue from private payers. As private insurers and health plans have reportedly become more effective in negotiating fees and volume discounts, the hospitals have found it increasingly difficult to contribute their share to the Uncompensated Care Pool. This situation reached a critical level for many hospitals in 1996, when Blue Cross and Blue Shield unexpectedly lowered payment rates to hospitals in response to the Blues’ own worsening financial situation.

The state is also imposing certain requirements on health plans and hospitals to provide free care and other services to the community. The Massachusetts attorney general’s office has been actively enforcing the community benefits standards that apply to not-for-profit organizations, which are expected to provide benefits to the community in return for their tax-exempt status. More recently, the attorney general has raised the issue of ongoing community benefits in negotiations with parties seeking state approval for proposed mergers or acquisitions that would convert the tax status of a not-for-profit hospital or health plan. The state legislature is considering a bill that would add teeth to these negotiations by requiring organizations that convert to for-profit status to maintain their current levels of free care.

Most state policy has focused on improving health care access for the poor and the uninsured, but as the pace of health care change has accelerated in recent years, various consumer protection issues have surfaced on the state’s policy agenda. These consumer protection issues fall into two categories: restrictions on the actions of managed care organizations and quality oversight and reporting mechanisms for health care providers.

Many respondents referred to growing antimanaged care sentiments, as reflected in bills introduced in the state legislature to restrict various managed care practices, including financial incentives to providers, same-day hospital stays for normal deliveries and so-called gag rules in provider contracts. Some respondents viewed these proposals as a manifestation of consumer dissatisfaction with managed care, while others saw them resulting from the influence and lobbying efforts of physician-sponsored organizations. In hopes of averting an ad hoc legislative process, the Joint Committee on Health Care (a committee created by the House and Senate of the state legislature) has been asked to develop a new regulatory framework for insurers and health plans that will respond to the many concerns raised by various constituencies and interest groups.

The state also passed legislation in 1996 giving consumers access to physician profile information maintained by the state licensing board. These data include biographical information (e.g., board certification, residency training, medical school), malpractice experience, disciplinary actions and criminal convictions. Responding further to demands for physician performance data, the Massachusetts Medical Society recently agreed to serve as the first pilot site for a national physician accreditation program being implemented by the American Medical Association.

Federal policy also has had an impact on Boston’s health care organizations, and many leaders of Boston’s AMCs and community health centers appear to have been quite active in federal policy deliberations. In particular, Boston teaching hospitals derive considerable support from Medicare payment policy pertaining to direct and indirect teaching expenses.

PURCHASING

Both public and private sector employers have influenced the direction and pace of health system change to some extent through their purchasing decisions. But for the most part, purchasers are not viewed as a potent force. Many respondents noted the conflicting incentives that face both public and private purchasers in a community where the health care system is integral to the local economy.

Public purchasers are large and well-organized and include the Commonwealth of Massachusetts (which purchases health insurance for its employees through the Group Insurance Commission) and the state Medicaid program. Private employers are predominantly mid-size companies that operate in multiple New England states. A limited number of national companies have a sizable presence in Massachusetts, including Digital Equipment Corporation and Raytheon Company. Leading industries include high technology and financial services.

There is a good deal of cooperation between public and private purchasers. The Group Insurance Commission and the state Medicaid program, along with many private employers, participate in the Massachusetts Healthcare Purchaser Group, a coalition that represents about one million covered lives, of which 50 percent are Medicaid enrollees, 15 percent public employees and 35 percent commercially insured lives. So far, the Massachusetts Healthcare Purchaser Group, which is chaired by the director of the state Medicaid program, has focused primarily on the collection and dissemination of information on cost, atisfaction and quality, but consideration is being given to launching a joint purchasing initiative in 1998.

As a general rule, purchasers have not been bold in their demands. Respondents cited several reasons for this:

• The financial interests of local employers and the public sector are intertwined with those of the health care sector.

• Relatively low unemployment rates in recent years have resulted in a good deal of labor market competition and reluctance on the part of many employers to impose restrictions on health benefits.

• The public sector is constrained by the potential effects of rapid downsizing on public sector revenues and financial obligations. During the 1980s, state-backed bonds represented a major source of capital for hospital expansion and renovation. Reductions in payment rates and service volume may place some hospitals in serious financial peril, jeopardizing their ability to make bond payments. Short-term labor displacement resulting from hospital downsizing is likely to cause a drop in state income and sales tax revenues, as well as increases in unemployment and Medicaid expenditures.

Although most purchasers have not engaged in aggressive negotiations with insurers and health plans, they have sent consistent signals in recent years that premium increases must be moderated. For example, the Massachusetts Healthcare Purchaser Group has issued an annual price challenge requesting insurers to keep premium increases at or below target levels. Some large private purchasers have tied premium contributions to the lowest or average plan premium in the market, thus encouraging employees to consider cost and other differences in various plan offerings when choosing a health insurance product.

Unlike many other geographic areas, HMO products rather than PPO products account for the greatest share of the managed care market in Boston. In 1995, approximately 35 percent of the total population in Boston and the surrounding metropolitan area was enrolled in HMO products, with HMO penetration at about 45 percent in Boston itself.⁸ HMO products in Boston are characterized by large provider networks that afford people a great deal of choice, thus minimizing demand for products that provide some coverage for use of out-of-network providers. The popularity of HMO products also stems in part from the provisions of the state’s hospital rate-setting system that until its repeal a few years ago provided HMOs with distinct advantages over other insurers in negotiating discounted hospital rates.

Widespread perception holds that to be successful in the market, managed care products must offer broad choice of both primary care and hospital providers. Like consumers elsewhere, Bostonians place a premium on maintaining established primary care relationships. They are also accustomed to having access to the most prestigious clinical specialists for more serious ailments.

Numerous respondents characterized the Boston HMO market as having only limit-ed product differentiation. Although there are several large competing health plans in Boston, all have substantially overlapping provider networks, and all are perceived as price-competitive and high-quality. Variations in benefits and copayments were described as nominal.

The efforts of public and private purchasers to compare health plans and hospitals were characterized as having promoted dialogue between purchasers and plans around quality issues, but falling short of providing the requisite market incentives and information to providers to improve performance. Respondents cited two reasons for the limited impact of comparative performance data to date.

• First, products characterized by broad overlapping networks tend to appear quite similar across many measures of patient satisfaction, access and technical quality.

• Second, methodological limitations (e.g., lack of risk adjustment, limited emphasis on quality measures for acute and chronic illness and the absence of measures of statistical significance of reported differences) make it difficult to interpret comparative performance data.