Community Report No. 12

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. 12 -- Fall 2003

Authors: John F. Hoadley, Debra A. Draper, Sylvia Kuo, Peter J. Cunningham, Jessica Mittler, Len M. Nichols, Gloria J. Bazzoli, Justin White, Robert A. Berenson

In May 2003, a research team traveled to Boston to examine the community's health system, the changes taking place within it, and how those changes affected consumers. HSC, through its Community Tracking Study, spoke with more than 90 leaders across the local health care market. Boston was among 12 communities that HSC monitored on a biennial basis through site visits and on a triennial basis through surveys. Reports for individual communities were released after each round of field research. Earlier site visits in 1997, 1999, and 2001 established the baseline data and initial trends used to track ongoing developments. The Boston market encompassed the city itself along with Bristol, Essex, Middlesex, Norfolk, Plymouth, and Suffolk counties.

Market Conditions Stabilize After Period of Upheaval

Boston's health care market had calmed down somewhat after the contract fights and financial crises that roiled the system two years earlier. Hospital balance sheets showed some improvement, though a number of institutions remained under financial pressure. Health plans had also bounced back financially. Employers, however, were contending with annual premium increases in the double digits and had begun passing more costs along to workers while casting about for new ways to slow the growth of health care spending. Deep state budget deficits led to cuts in some health programs, but Massachusetts managed to reverse a major Medicaid eligibility rollback and stave off reductions to the state's uncompensated care pool -- moves that, had they gone through, would have further strained providers, plans, and employers alike.

Several other developments stood out during this period. Ongoing budget pressures were jeopardizing the state's progress toward universal health coverage and threatening the financial stability of the uncompensated care pool. Recruiting and holding on to physicians and other trained health care workers had become a growing problem. And health plans and providers continued to invest in quality improvement, putting Boston well ahead of many other markets in that regard.

Hospital Finances Show Improvement

Over the preceding two years, the financial standing of hospitals improved to some degree, with patient volumes rising at the major Boston institutions. Partners HealthCare System, the largest system by market share and parent organization of Massachusetts General Hospital and Brigham and Women's Hospital, posted its strongest financial results since the system's founding in 1994. Caritas Christi, a Catholic community hospital system holding the second-largest share of the market, remained generally stable, though its six hospitals continued to run close to break-even.

Meanwhile, CareGroup -- the system built around Beth Israel Deaconess Medical Center -- had effectively dissolved, as had Tufts-New England Medical Center's ties to its Rhode Island parent organization, Lifespan. CareGroup had originally united Beth Israel and New England Deaconess hospitals with five community hospitals but had been reduced to little more than a bond covenant binding three of its facilities. Waltham Hospital shut down in July 2003. Deaconess-Nashoba was sold to a for-profit operator. Deaconess-Glover merged with the flagship institution. Under new management, Beth Israel Deaconess had strengthened its finances and brought its nursing vacancy rate down from double digits to roughly 7 percent. The hospital was also consolidating operations and eliminating redundancies left over from the original Beth Israel-Deaconess combination.

Community leaders were also watching an upcoming round of contract talks between Partners and Tufts Health Plan, which were underway in fall 2003 and were expected to be followed by negotiations with Harvard Pilgrim and Blue Cross Blue Shield of Massachusetts. Partners, aware of public concern that its status as an indispensable provider network could result in steep rate hikes, was treading carefully in the negotiations. The system tried to show that its requested increases were reasonable by detailing how much of any rate increase would offset lost state and federal reimbursements. Partners also distributed analyses to counter what it viewed as widespread misconceptions about hospital costs in the Boston market. Other providers expected to gain from whatever rates Partners secured, predicting the deals would establish a market-wide benchmark.

Hospital Capacity Constraints Ease Somewhat

Emergency department diversions, which had been a pressing concern two years earlier, had eased to some extent. Even so, the city's urban teaching hospitals reported bed-occupancy rates between 85 and 100 percent, while community hospitals generally ran at about 60 percent of capacity. Caritas Christi was an exception -- its suburban hospitals were reported to be full and its urban facilities were busy. Many observers attributed the persistent capacity crunch to the wave of hospital closures during the preceding decade, arguing that the market may have overcorrected in response to falling utilization rates and pricing pressure in the mid-1990s. Labor shortages among nurses, pharmacists, and laboratory technicians were cited as another factor, as was patients' strong preference for receiving care at academic medical centers, which concentrated demand in a relatively small number of facilities.

The capacity problem had persisted long enough that most systems were actively pursuing solutions, and some of those efforts were paying off. Partners was working to make better use of its existing beds by directing patients from its overcrowded academic hospitals -- Massachusetts General and Brigham and Women's -- to affiliated community hospitals. The merger of Faulkner Hospital with Brigham and Women's proved particularly successful: by relocating certain services and physicians from Brigham to Faulkner, the community hospital saw its occupancy rate climb from the 50-60 percent range to 80-90 percent. Several academic medical centers were also moving patients through the system more efficiently -- for instance, expediting transfers from the ICU to regular beds so that emergency department patients could move into the ICU more quickly.

Physician Recruitment Becomes a Challenge

Boston was encountering serious physician recruitment and retention difficulties -- a notable shift in a market that had long been considered oversupplied with doctors. Observers pointed to the area's high living costs, salaries that lagged behind other parts of the country, and steep malpractice insurance premiums as factors that discouraged physicians from moving to Boston or staying after completing residency training. Several observers also noted that conventional estimates of the local physician supply may have been inflated because they included a large number of researchers at academic institutions whose clinical practice was limited. The most acute shortages were in anesthesiology, radiology, gastroenterology, and emergency medicine, with growing gaps also reported in obstetrics/gynecology, neurosurgery, orthopedics, cardiology, and general surgery. As a result, patients faced substantially longer waits for appointments.

Health plans had not experienced major network disruptions from these capacity constraints, with one exception: plans participating in Medicare+Choice were dealing with considerable network instability because physicians and hospitals were reluctant to accept the program's low payment rates. Several plans had pulled back from that line of business as a result.

Employers and Plans Explore Benefit Design Changes

Boston employers had traditionally offered generous health benefits, but the string of premium increases had gotten their attention. Many feared the rate of increase was not sustainable and were actively searching for cost-control measures. Health plans responded by developing an array of new products, including tiered networks that sorted providers into cost tiers based on efficiency and quality metrics, and consumer-driven health plans with high deductibles paired with health savings accounts. There was also growing interest in disease management programs and pharmacy benefit redesigns using three-tier formularies to steer workers toward lower-cost medications.

Boston Hospitals Advance on Patient Safety and Quality

Health plans and hospitals in Boston were at the forefront nationally in pursuing quality improvement and patient safety initiatives. Several major hospital systems had invested in computerized physician order entry systems, bar-coded medication administration, and other technologies designed to reduce medical errors. Health plans were developing physician profiling programs and pay-for-performance arrangements that rewarded providers for meeting quality benchmarks. These efforts put Boston considerably ahead of most other markets in the quality arena, building on a local culture of academic rigor and institutional commitment to evidence-based care.

Budget Pressures Threaten Universal Coverage Efforts

Massachusetts had been working toward expanding health insurance coverage for years, but the state's fiscal situation threatened to derail those efforts. The budget crisis prompted officials to consider rolling back Medicaid eligibility and reducing the uncompensated care pool that funded charity care at hospitals. Although the state ultimately reversed the Medicaid eligibility cut and preserved the care pool, the episode demonstrated how vulnerable coverage expansion efforts were to economic downturns. The uncompensated care pool, funded partly through hospital and insurer assessments, remained a critical lifeline for providers serving the uninsured, but its long-term stability was uncertain.

Issues to Watch Going Forward

Looking ahead from 2003, several questions loomed over the Boston market. Would Partners HealthCare's contract negotiations set rates that other providers and plans could sustain? Could the state maintain its commitment to coverage expansion amid ongoing fiscal strain? Would hospital capacity constraints worsen as workforce shortages persisted? And would the new benefit design experiments -- tiered networks, consumer-driven plans, and pharmacy benefit changes -- prove effective at reining in costs without creating new barriers to care for sicker and lower-income workers? These questions would continue to shape the trajectory of one of the nation's most closely watched health care markets.

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.