Mass. cost-containment law could hurt hospital margins, report says
Report: New Mass. law may hurt hospital margins
A new cost-containment law in Massachusetts is facing concerns about whether it will hamstring hospitals as it attempts to hold down healthcare spending. The law is being closely watched in other states and, if successful, could serve as a model for reducing healthcare costs nationwide.
Massachusetts Democrat Gov. Deval Patrick signed the legislation Aug. 6. The law requires healthcare providers to limit spending increases to a rate no higher than the change in the gross state product through 2017 and to half of a percentage point below the GSP thereafter. Hospitals that don’t comply will face penalties of $500,000.
In a report last week, credit analysts at Standard & Poor’s Rating Services said the law could negatively affect hospital operating margins as well as add costs associated with greater monitoring and compliance. A report from Moody’s Investors Service similarly expected the law to limit revenue growth and reduce operating flexibility at hospitals.
According to Moody’s, the law is expected to limit spending increases to about 3.6% in 2013 from their current level of 6% to 7%.
The law also implements an assessment on the state’s larger medical centers to help pay for infrastructure improvements at smaller community hospitals, and requires all providers to adopt alternative payment models for at least 50% of Medicaid patients by July 1, 2014.
“I don’t think it’s a secret that Massachusetts had a higher growth rate of healthcare spending per capita than other states,” said Jim Vallee, a Democrat who is the former majority leader in the Massachusetts House of Representatives and now serves as counsel at Nixon Peabody.
Vallee said hospitals were at the table to draft the law, but he acknowledged that they will face ongoing financial trials, particularly as upwards of 60% of hospitals’ costs come from labor. “It will challenge them to restructure,” he said.
Timothy Gens, executive vice president at the Massachusetts Hospital Association, expressed support for the law, but said it does not address some underlying issues, namely that more than 50% of hospital revenue comes from government payers, and Medicaid only covers 71% of the cost to deliver care. “As long as we’re judicious in its implementation, we can be successful,” he said.
Stephen Weiner, a Boston-based healthcare attorney at law firm Mintz Levin, said states likely will take the lead on any containment actions, as the
cost- federal government may have limited authority to enact price controls. Although the U.S. Supreme Court upheld the individual mandate of the Patient Protection and Affordable Care Act, it did so as a tax, not as an extension of the commerce clause.
Weiner noted that while some states will be hesitant to enact heavy-handed regulation, others will be watching Massachusetts’ example more closely. He emphasized, however, the state law is not a direct regulatory intervention. “Politically, it was more palatable than it could have been,” he said.
Yet Joshua Archambault, director of healthcare policy at the Pioneer Institute, a Bostonbased think tank, questioned whether it will have the intended effect of helping smaller community hospitals. He predicted that healthcare delivery in the state is likely to coalesce around a handful of large accountable care organizations.
“We think they focused almost exclusively on the supply side of the equation while completely ignoring the demand side,” Archambault said. “As a result of this, I think we’ll see hospitals closing.”
Patrick, who spoke at the Democratic National Convention last week, said about the law: “We are ushering in the end of the fee-for-service care.”