Financial Woes and Contract Disputes Disrupt Market

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization that operated with principal funding from the Robert Wood Johnson Foundation.

Community Report No. 11 -- Summer 2001

Authors: Kelly Devers, Jon B. Christianson, Laurie E. Felland, Suzanne Felt-Lisk, Liza Rudell, Linda R. Brewster, Ha T. Tu

A research team visited Boston in February 2001 to study the community's health care system, how it was evolving, and what the changes meant for consumers. As part of the Community Tracking Study, HSC conducted interviews with more than 95 market leaders. Boston was one of 12 communities that HSC followed every two years through site visits and surveys, with individual reports published after each round of fieldwork. The first two visits in 1996 and 1998 established baseline data and initial trends. The Boston market covered the city of Boston plus Bristol, Essex, Middlesex, Norfolk, Plymouth, and Suffolk counties.

Financial Difficulties and Contract Disputes Roil the Market

Following a stretch of relative calm, Boston's health care market was thrown into turmoil over two years by financial crises in the health plan and hospital sectors and by bitter contract disputes between the area's largest care system and local insurers. State policymakers moved quickly to pass legislation that stabilized the market and protected consumers' access to care. Employers accepted double-digit premium increases to help the local not-for-profit plans recover financially. Consumers continued to enjoy comparatively generous benefits but saw higher copayments for prescription drugs and outpatient services.

Other notable developments during this period included HMOs continuing to dominate the insurance market while beginning to change substantially as plans and providers moved away from risk contracts and tested new products and payment models. A state ballot initiative for universal health care coverage was narrowly voted down, though the campaign prompted the Massachusetts Legislature to enact a long-debated patients' bill of rights. Safety net providers, backed by strong state support and sound management, remained on relatively stable footing.

Leading Health Plans Stumble Financially

When HSC last visited in 1998, the Boston market had settled into a rough equilibrium after a series of mergers and acquisitions left it organized around three locally operated, not-for-profit health plans and two large academic medical center-based provider systems. That balance was upended by a sequence of events that threatened consumer access and forced policymakers to step in.

Harvard Pilgrim Health Care (HPHC) and Tufts Health Plan, two locally rooted, not-for-profit HMOs with national reputations for quality and innovation, both ran into severe financial trouble. Their difficulties rattled the roughly 1.8 million people enrolled in the plans at their peak and raised doubts about whether locally owned, not-for-profit insurers could survive. HPHC's problems came to light in late 1999 when the plan disclosed an unexpected $226 million loss. The state placed HPHC into receivership to prevent care disruptions for enrollees and to block a potential takeover by a national for-profit insurer. After restructuring the plan's debt and permitting certain accounting changes, regulators moved HPHC to administrative supervision and committed to monitoring its finances through 2002.

HPHC's financial collapse was driven largely by an ill-fated effort to expand into neighboring states. Beginning in 1999, the plan retreated from those markets, cut its workforce significantly, adopted a three-tier pharmacy benefit, capped Medicare prescription drug coverage, and invested in information technology to improve relationships with providers and members. The turnaround appeared to be gaining traction, with the plan posting a small operating profit in the first quarter of 2001. Still, HPHC had lost roughly 700,000 members through its geographic pullback and local membership declines, and some observers questioned whether rising costs would eventually outstrip the plan's shrinking revenue.

Tufts Health Plan ran into similar problems tied to failed regional expansion. The plan reported a $42 million loss in 1999, cut staff, and withdrew from three adjacent states. Tufts shed an estimated 122,000 members and saw its financial reserves decline substantially, but by 2001 it was considered relatively stable. The near-collapses of HPHC and Tufts exposed the limited tools Massachusetts regulators had to protect consumers from large-scale care disruptions. In late 1999, the Legislature passed the HMO Insolvency Act, giving the state Department of Insurance the authority to take over failing plans and ensure continuity of care for enrollees.

Community Hospitals Under Growing Pressure

After years of difficulty, the financial condition of Boston's community hospitals deteriorated further, resulting in two closures and putting other institutions at risk of scaling back services or shutting down. Multiple factors were at work. Hospitals across the market faced declining reimbursement from both private and public payers, rising labor and pharmaceutical costs, and losses from unsuccessful merger and physician-integration strategies. A growing preference among patients for Boston's prestigious academic medical centers -- often described as a flight to quality -- drained community hospitals of patients and revenue. Teaching hospitals' share of total inpatient discharges in the Boston area rose from 34 percent in 1990 to 42 percent in 2000, according to state data. On top of all this, all hospitals were required to contribute to a state uncompensated care pool, but many did not receive reimbursement commensurate with the charity care they actually provided.

Hallmark Health, a struggling community system in the northern suburbs, closed inpatient services at its 210-bed Malden campus in 1998 and later announced it would end outpatient services there in 2001. The system also said it would close Everett Whidden, a 121-bed facility in north Boston. Symmes Hospital, a 111-bed freestanding community hospital in the northern suburbs, closed in 1999. Quincy City Hospital, a 282-bed institution in the southern suburbs, announced closure plans in 1999. Caritas Christi, a large Catholic hospital system, disclosed plans to scale back services at three of its facilities.

These closures and threatened shutdowns provoked fresh concerns about access and costs in a market historically known for having excess hospital capacity. Community leaders worried that closures in specific neighborhoods would cut off nearby residents from care, particularly those without transportation. The growing frequency of emergency room diversions suggested emerging inpatient capacity constraints that further closures could aggravate. There was also alarm that as community hospitals disappeared, more routine care would migrate to costlier academic medical centers.

The public backlash after the Malden and Symmes closures pushed policymakers and hospital leaders to intervene to save other at-risk institutions. The city and state provided financial assistance to keep Quincy City Hospital open, and it entered into an affiliation with Boston Medical Center. These rescue efforts illustrated the political difficulty of allowing community hospitals to close, even in markets where analysts had long argued there were too many beds.

Academic Medical Centers See Mixed Results from Consolidation

The major academic medical center systems in Boston had pursued consolidation aggressively, but the results were uneven. Partners HealthCare, formed from the merger of Massachusetts General and Brigham and Women's, had used its dominant market position to extract higher payment rates from insurers and remained on solid financial ground. CareGroup, the system anchored by Beth Israel Deaconess, faced mounting losses after the Beth Israel-Deaconess merger produced operational headaches and cultural clashes. The system's difficulties underscored the risks of hospital mergers that looked compelling on paper but proved difficult to execute.

HMOs Undergo Extensive Transformation

Health maintenance organizations continued to hold the largest share of the Boston insurance market, but the HMO model was changing in significant ways. Plans and providers were moving away from capitated risk contracts, which had produced unpredictable financial results for both sides. Several plans were experimenting with new payment arrangements and product designs, including point-of-service options that gave members more flexibility in choosing providers. These shifts reflected a broader national retreat from the tightly managed care model that had dominated the 1990s.

Universal Coverage Ballot Initiative Fails but Spurs Legislative Action

A ballot initiative that would have established universal health care coverage in Massachusetts was narrowly defeated by voters. The campaign nonetheless had a lasting impact: it pushed the state Legislature to pass a patients' bill of rights that had been stalled for years. The legislation gave consumers new protections in their dealings with health plans and signaled that public frustration with managed care practices had reached a tipping point, even in a market where HMOs remained the dominant form of coverage.

Safety Net Remains Stable

Despite the financial turbulence affecting the broader market, safety net providers in Boston stayed on relatively firm ground. Strong state financial support and competent management shielded these institutions from the worst effects of the market disruption. Boston Medical Center, the city's primary safety net hospital, continued to operate effectively, and community health centers maintained their capacity to serve low-income and uninsured residents. The stability of the safety net was a bright spot in an otherwise turbulent period for Boston's health care system.

Sources and Further Reading

AHRQ -- Federal health care quality research agency.

Commonwealth Fund -- Research on health care coverage and quality.

Health Affairs -- Peer-reviewed health policy journal.

Robert Wood Johnson Foundation -- Health policy research and funding.

Centers for Medicare & Medicaid Services -- Federal agency overseeing Medicare and Medicaid programs.