"Gentleman's Agreement" Drives Health Care Costs in Massachusetts, Highlights Need for "Public Plan" Option in Health Reforms

In 2000, the CEOs of the largest hospital system and largest insurance company in Massachusetts shook hands on a plan to manipulate the health care market and ensure each other greater profits and market-share, an extensive report by the Boston Globe has revealed.  Under the wink-and-a-nod handshake deal, Blue Cross insurance agreed to raise reimbursement rates to Partners HealthCare - the largest hospital system and private employer in the state - in exchange for Partners' insistence that other insurers pay them at least the same rates paid by Blue Cross.

The agreement enabled Partners to secure higher reimbursements from all insurers and gave Blue Cross a competitive advantage in the market.  Since the agreement, Blue Cross has raised its payment rates to Partners by 75%, far more than it pays to other hospitals, helping Partners hospitals earn 30% more than other teaching hospitals - resulting in hundreds of millions in extra payments to Partners each year, as the Globe reports. Blue Cross, for its part, dominates with 60% of the health insurance market and has seen profits soar from $82.7 million in 2002 to more than $200 million each year since.  Consumers in Massachusetts have faced ever-rising premiums, with individual insurance premiums raising 9% each year, twice the rate of the late 1990's, before the handshake deal.

In response to the Globe report and as part of lawmakers' efforts to sustain the Massachusetts health care reforms, Gov. Deval Patrick is considering hearings into insurance premiums and hospital charges, as well as tougher regulations. Some insurers have expressed support for the hearings, which could shed additional light on the 2000 Partners/Blue Cross side-deal and the extent to which it artificially increased profits and health care costs.  Additionally, a new legislatively created commission on payment reform is getting extra billing in light of the Globe report.  The commission will look at how to shift provider reimbursement to pay for healthy outcomes, rather than based merely on the number of tests and procedures performed. 

The Public Plan Option - Increasing Choice and Value in Health Care, and Preventing Industry Collusion:  This kind of collusion between insurers and providers to keep costs up is chronic across the nation.  In a report by the New York Times, Linda J. Blumberg, a health economist at the Urban Institute, said:

Large insurers do not seem to use their market power to drive hard bargains with health care providers. The presence of a well-run public plan could constrain private spending because private insurers would have to compete on price, in a way they do not often do today.

In short, the profit-motive in the health care sector is too strong and fails to keep costs down. Part of the solution would be the creation of a public plan option to offer families and businesses greater choice in health care and to compete with private insurers.  Such a plan would vigorously negotiate for lower costs and give families and employers an alternative to high-priced private insurance plans. The idea is gaining momentum among advocates for progressive national reform and in state proposals across the country, including Healthy Wisconsin, the Washington Health Partnership, New York Health Plus, emerging legislation in Iowa, and a new proposal from the Universal Health Care Foundation of Connecticut which builds on legislation vetoed by Gov. Rell in 2008 that would have opened the state employee health plan to small businesses and towns.

National Political Fault Lines Over Public Plan Option:  In Congress, it is emerging as a partisan and ideological fault-line in the brewing reform debate. Proponents of some sort of public plan option, including President-Elect Obama, Senators Ted Kennedy and Max Baucus and Rep. Pete Stark - each of whom will be instrumental in fashioning any health care reform package this year - argue that a public plan could use its purchasing power to negotiate better value for families, businesses, and taxpayers. Former Senate Majority Leader Tom Daschle, who has been tapped by President-Elect Obama as his health secretary and to spearhead his health care reform efforts, says:

Together with traditional Medicare, this new program would have tremendous clout to bargain for the lowest prices from providers and push them to improve the quality of care.

In voicing opposition to the idea, Congressional Republicans and conservative insurer and business organizations express an ideological allegiance to free-market principles and argue that private insurers would not be able to compete with a government plan.  A recent USA Today opinion, however, deconstructs the arguments opposing a public plan and, in part, points out that a public plan would "test the [conservative] notion that private health insurance plans operate more efficiently than government." In short, conservatives fear that a public plan would expose the failings of private insurance.

Short of a new and coordinated health care system that eliminates the manipulative profit-motive from health care, the Massachusetts experience and Globe report offer many lessons for lawmakers and regulators. Along with creating a public plan option, these include: government to serve as a watchdog; increased oversight and transparency of premiums, payment rates, quality metrics, and other financial arrangements; and greater public review and control over hospital mergers, as a 1993 merger created the Partners behemoth.


Progressive States Network - Stop Health Care Industry Profiteering - The Office of the President-Election - Agenda: Health Care
Boston Globe - A Handshake that Made Healthcare History
Institue for America's Future - The Case for Public Plan Choice in National Health Reform, by Jacob Hacker, PhD
AFSCME - Health Care for America