The Agenda

Massachusetts and Provider Consolidation

Many on the right are concerned about recent developments in Massachusetts’s health sector. As Kay Lazar of the Boston Globe recently reported, the state’s health reforms have led to a number of headaches for households and firms:


The Massachusetts Division of Health Care Finance and Policy annually surveys employers and found no significant drop in coverage as of the end of 2009, when more than three-quarters of companies offered health insurance.

But insurance brokers say the pace of terminations has picked up considerably since then among small companies, of which there are thousands in Massachusetts. Many of these companies — restaurants, day-care centers, hair salons, and retail shops — typically pay such low wages that their workers qualify for state-subsidized health insurance when their employers drop their plans.

“Those employers are trying to keep their doors open, and to the extent they can cut expenses, they will cut health insurance because they know their people can go to Commonwealth Care,’’ said Mark Gaunya, president of the Massachusetts Association of Health Underwriters, a trade group representing more than 1,000 brokers and other insurance professionals.

The issue is coming to a head as the Patrick administration battles insurers over swiftly escalating rates they have been charging small employers. In February, the governor filed sweeping legislation that proposes to give the Division of Insurance the power to essentially cap health care price increases. That proposal is still pending.

Ezra Klein is convinced that the Massachusetts experience doesn’t tell us much about the prospects for PPACA:

What we can say about Massachusetts now is pretty much what we’ve been able to say about Massachusetts since the early days of its implementation: It’s been a successful attempt to expand coverage and reform the non-group market, and it was never an attempt to control costs. As such, costs in Massachusetts, much like costs nationally, are rising. Insofar as that contains lessons for the national effort, it’s that we should stick to the law and make sure to implement the cost controls and delivery-system reforms.

As examples of cost control mechanisms, Ezra cites the following:

The Massachusetts reforms, unfortunately, were not designed to deal with cost. They weren’t even designed to improve the delivery system. There was no excise tax, no independent commission to fast-track cost controls, no efforts to generate evidence for comparative effectiveness reviews or seed the system with medical records or spark a shift toward medical homes or accountable care organizations. [Emphasis added.]

I happen to think that many of these ideas are very worthwhile. Yet like Austin Frakt, it’s not obvious to me that these reforms will prove terribly effective in achieving their stated objective. In a post on “the provider-insurer balance of power,” Austin writes:


I can think of no sensible argument that–holding all else constant–starts with a reduction in insurers’ market power and ends with a decrease in medical costs and health care premiums. However, if one is willing to add in other elements of reform, I can think of some possibilities that include increased insurer competition. For example, if insurers are permitted to collude to set all-payer rates to medical providers then they can maintain a high degree of leverage over providers while competing vigorously for policyholders. Or, the provider market could be commensurately diluted so that the relative provider-insurer balance of power was held constant.

Do you think for a second either of those things will happen (all-payer rates setting or the break up of dominant hospitals)?

One reason this is unlikely is that the reform effect succeeded precisely by winning over powerful incumbent medical providers. Ezra cites the power and prestige of the dominant hospitals in Massachusetts as a barrier to cost containment. Austin has described the role of hospital mergers:

Hospitals are merging while the political focus is on increasing competition in the insurance market. If market power swings (further) in favor of hospitals, there’s really very little reason to be optimistic about a market-based solution to reducing health care costs on the private side. The only element of the new health reform law that might help is the Cadillac tax. That doesn’t kick in until 2018 and won’t have a substantial effect for at least a decade after that. I don’t think the American public is going to be satisfied with the rate of premium growth over the next two decades.

The Cadillac tax, of course, is the excise tax. Austin is suggesting that it’s impact will come into play in the 2030s. This isn’t very encouraging.

“So what would you do, Reihan?” I’m writing an article on precisely this subject. Thanks for asking, voice inside my head.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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