Yesterday’s Boston Globe features an interesting article on the vastly different fees that different Massachusetts hospitals charge to insurance companies. The Globe reporting team – Scott Allen, Marcella Bombardieri, Michael Rezendes, Liz Kowalczyk, and Jeffrey Krasner, with editor Thomas Farragher – analyzed private insurance data and found that one hospital can earn two or three times more than another hospital for performing the exact same procedure. Even with the same doctor performing a procedure, costs can vary wildly, with the hospitals that have greater prestige or are the only facility in their geographic area commanding higher prices.

The story seems designed to incite outrage. It notes that insurance premiums for the average Massachusetts family have jumped 78% since 2000 and quotes an insurance-company president who “believes a significant portion of the rise has been driven by hefty insurance payment increases to dominant providers, who use the extra income to install the latest technology and expand, often on rivals’ turf.” It highlights Massachusetts General, one of the hospitals that command higher payments; it’s engaged in a $686-million expansion while Caritas Christi, the state’s second-largest hospital chain, “had to borrow money this year to pay for basics, like oxygen tanks.”

We certainly ought to be outraged about the state of healthcare in this country, and premium escalations and the imbalance between favored and less-favored hospitals are serious concerns. Before we go placing too much blame on the favored hospitals, though, it’s important to recognize the environment in which hospitals are operating.

Hospitals’ major problem is that they don’t get paid for all of the care they provide. The ones that survive are the ones that successfully cost-shift – that is, charge some payers more to cover shortfalls from others. If they didn’t do that, they’d shut down, or at least have to close departments that regularly operate at a loss, like emergency departments and burn units.

One reason emergency departments can be such a drain on hospital resources is that the 1986 Emergency Medical Treatment and Labor Act (EMTALA) requires Medicare-participating hospitals that offer emergency services to screen and stabilize all patients who present themselves with an emergency medical condition, regardless of their ability to pay. A lot of emergency patients are uninsured and can’t pay, so the hospitals that treat them are stuck with the costs. (More on that problem here.)

Non-profit hospitals are also required to provide community benefits in exchange for their tax-exempt status, and that’s generally understood to include providing charity care and performing certain services at a loss. That’s more revenue the hospitals have to make up for somewhere else.

Over the years, it’s gotten harder for hospitals to shift costs. In the 1980s, Medicare switched to a prospective payment system that cut the program’s costs but led to an overall reduction in payment to hospitals. Hospitals responded by shifting more costs to private insurers, who began to resist; by the 1990s, hospitals were again trying to shift costs back to public payers, but it had become more difficult. 

Insurers are often in the position of power over hospitals, because they can threaten to drop coverage for hospitals that don’t agree to the insurers’ payment rates. The Globe reporters found that this wasn’t the case for one hospital company:

But no company has thrived more in this sharply competitive world – or has had more impact on the cost of medicine here – than Partners HealthCare, a company formed in 1994 to fight back against what its founders saw as the stinginess and lopsided power of insurance companies, which had brought many hospitals to their knees. By bringing together two of the most prestigious hospitals in Boston – the Brigham and Mass. General – Partners became what some called the “800-pound gorilla” of Massachusetts healthcare, able to bend insurers to its will.

Almost from the start, Partners played its powerful hand with conspicuous – rivals would say relentless – aggression and skill. No other city can boast two of the top 10 hospitals on US News and World Report’s honor roll, and every insurance company is vividly aware that its members want access to their famed halls.

Partners’ dominance became clear in 2000, when executives of Tufts Health Plan had the temerity to refuse Partners’ demand for a substantial rate increase. Partners countered by declaring it would no longer accept Tufts insurance at its hospitals. Within days, as thousands of Tufts customers threatened to change insurance rather than lose the right to treatment at the two famous hospitals, Tufts gave in to Partners’ demands. Since then, Partners has negotiated one big pay increase after another from insurance companies fearful of a similar humiliation.

The Globe team calculates that Partners receives $800 million more than they would if they were paid at rates similar to those of their competitors. As a result, Partners and other relatively wealthy hospitals are better able to invest in expansions and new equipment that might lure some of the better-paying patients from their poorer competitors, and cause the gap between hospitals to widen further and threaten poorer hospitals’ survival.

The more financially strapped hospitals will probably respond by cutting services, or they may shut down altogether. This is a serious problem, but it’s not an unexpected development. These are the kinds of actions we see in a market-based health system.

There’s definitely an imbalance between individual hospitals, but we can’t assume that $800 million more in payments to Partners is directly responsible for an $800 million increase in total premium payments in Massachusetts. (The Globe article does seem to make this assumption, saying the $800 million is equivalent to $170 per member of the state’s three leading insurers). Insurance companies are constantly adjusting multiple variables in a complicated equation that includes premiums charged to different groups, services covered by different plans, prescription-drug benefits, payments to a wide range of providers (not just hospitals), administrative functions, executive salaries, and profits.

Also, while the 78% growth in Massachusetts families’ premiums since 2000 is alarming, calculations using Kaiser Family Foundation figures find that at the national level, average family premiums grew from $6,348 in 2000 to $12,106 in 2007 – a 91% increase. (I don’t know if those numbers are comparable, since I’m not sure what went into the Globe calculation; the point is that premiums increased rapidly nationwide as well as in Massachusetts.)

Steep premium increases and struggling hospitals will continue to be problems until we fix our healthcare system. Looking at the worsening imbalances between favored and less-favored hospitals is valuable, but we should consider it in the context of the economic forces at work. Hospitals may deserve a little bit of outrage, but our broken system deserves more.