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Part 3

A handshake that made healthcare history

Partners HealthCare was born in 1993, but its powerhouse potential didn’t fully hit home until 2000. That’s when the emerging giant cut a quiet deal with Blue Cross to ratchet up insurance costs across the state. Nothing in Massachusetts healthcare has been the same since.

This story was reported by Globe Spotlight Team members Scott Allen, Marcella Bombardieri, Michael Rezendes, and editor Thomas Farragher, as well as Liz Kowalczyk and Jeffrey Krasner of the Globe staff. It was written by Allen and Bombardieri, and was originally published on Dec. 28, 2008.

It was the gentleman's agreement that accelerated a health cost crisis.

And Dr. Samuel O. Thier, chief executive of Partners HealthCare, and William C. Van Faasen, chief executive of Blue Cross Blue Shield of Massachusetts, weren't about to put it in writing.

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Thier's lawyers cautioned that a written agreement between the state's biggest hospital company and its biggest health insurer that would make insurance more expensive statewide might raise legal questions about anticompetitive behavior, according to officials directly involved in the talks.

And so, in May 2000, the two simply shook hands on this: Van Faasen would give Partners doctors and hospitals the biggest insurance payment increase since Massachusetts General and Brigham and Women's hospitals agreed to join forces in 1993.

In return, Thier would protect Blue Cross from Van Faasen's biggest fear: that Partners would allow other insurers to pay less. Those who helped broker the deal say Thier promised he would push for the same or bigger payment increases for everything from X-rays to brain surgery from Van Faasen's competition, ensuring that all major insurers would face tens of millions in cost increases. Blue Cross called it a "market covenant."

The deal, never before made public, marked the beginning of a period of rapid escalation in Massachusetts insurance prices, a Spotlight Team investigation has found, as Partners repeatedly used its clout to get rate increases and other hospitals tried to keep up. Individual insurance premiums have risen 8.9 percent a year ever since the "market covenant," state figures show, more than twice the annual rise in the late 1990s.

Both Partners and Blue Cross deny that they acted improperly in the 2000 payment negotiations or in their dealings since. Partners issued a statement saying that Thier pledged only that he would treat all insurers equally. Blue Cross executives have said that the big pay raise to Partners in 2000 was needed to offset years of low rates.

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But plainly Thier's attorneys were wary of the legal risk of even discussing a market-setting agreement, those involved in the talks say. And soon it would be obvious why.

By spring 2001, Thier had pressured two insurers, Tufts and Harvard Pilgrim Health Care, to give Partners rate increases as large or larger than Blue Cross got. Partners' internal memos reviewed by the Globe show officials knew that insurers would have little choice but to raise prices to consumers to cover the new Partners rates.

Thus it was that a company originally launched with the promise of saving hundreds of millions of dollars by consolidating two famous hospitals instead became a driving force behind the high cost of medicine in Massachusetts. Blue Cross has increased the rate it pays Partners by 75 percent since 2000, far more than increases given to other teaching hospitals that mainly treat adults. Other insurers have boosted payments to Partners by a similar amount.

Over the last 15 years, Partners has become the state's largest private employer and its biggest healthcare provider, treating more than a third of hospital patients in the Boston metropolitan area. Partners has built a biomedical research juggernaut larger than Harvard University's and embarked on a multibillion-dollar expansion program that rivals those of all other Massachusetts hospitals combined. A doctors' magazine recently named Partners' current chief executive the most powerful physician executive in the nation.

Company officials and industry allies say Partners shouldn't be blamed for medical inflation, which is a national problem. And they say that their rise to power gave Massachusetts a needed counterforce to insurance companies that underpaid hospitals and doctors through much of the 1990s. In 2001, Thier told the Globe he wanted to "reset the prices" that insurers pay hospitals and doctors in Massachusetts, predicting that "that should help other providers as well."

Partners officials also contend that much of the criticism comes from jealous rivals, noting that several others tried but failed to build multihospital corporations like Partners, which now includes eight hospitals. "Most people will say we executed relatively well," said Peter Markell, Partners' chief financial officer. "Everybody else didn't execute well."

Few question the managerial and strategic acuity of Partners' management, or the devotion and skill of its doctors and nurses. But Partners has enjoyed other profound advantages in the 15 years since its founding, a period in which, according to Partners' financial statements, its patient volume more than doubled, revenue rose nearly 400 percent, and profits grew by even more.

Formed in an era of fervent deregulation, Partners has benefited throughout its history from remarkably limited government oversight, considering the vast impact of the merger on the medical marketplace. The administration of Governor William F. Weld never held a public hearing before approving the merger of the state's two biggest hospitals. And the state sharply curtailed regulation of hospital expansion in the 1990s, freeing Partners to dramatically expand into the suburbs, drawing patients and revenue from already struggling community hospitals.

As the state slashed oversight of healthcare, no private company was able and willing to moderate Partners' ambitions. Blue Cross, which now controls 60 percent of the health insurance market, was best positioned to do so but flinched at the possibility of a public tangle. As former Blue Cross executive Peter Meade said at a meeting of company executives in 2000 at which some urged a tougher stand against Partners: "Excuse me, did anyone here save anyone's life today? We are a successful business up against people that save people's lives. It's not a fair fight."

In this laissez-faire environment, Partners has been free to use highly aggressive tactics with hospitals and insurance companies, especially those that don't accede to its demands. In 2007, Partners expelled 290 doctors at Beverly Hospital from its system, exposing them to substantial pay cuts, because they were sending some patients to teaching hospitals outside of Partners - which Partners said made it hard to monitor quality.

Today Partners dominates what was once one of the most competitive healthcare markets in the world, with a hospital and physician network big enough to overwhelm competitors and intimidate insurers.

Even some people who helped create Partners have become disillusioned at how inequitable Massachusetts healthcare has become as Partners' strength has grown. While Partners and a few other powerful hospital companies saw major insurance payment increases, many others were left behind, including teaching hospitals that care for patients just as sick as those at the Brigham and Mass. General. Partners' flagship hospitals typically earn 30 percent more than other academic medical centers that treat adults, representing hundreds of millions in extra payments to Partners each year.

Blue Cross has prospered, too, gaining more members in 2000 than any other year and watching profits soar from $82.7 million in 2002 to more than $200 million a year in each of the next five years.

Ellen Zane, Partners' chief negotiator in 2000, said she didn't realize the extent to which other hospitals were not keeping up with Partners until she left to become president of Tufts Medical Center in 2004.

"It turned out that insurers didn't support all hospitals as we thought they would," said Zane, who said her hospital won't survive if insurers don't substantially increase reimbursement rates. "I was quite surprised by the rate disparity when I came to Tufts Medical Center. In some ways, it defied logic."

Tufts' patients, on average, are sicker than either Mass. General's or the Brigham's, based on a standard measure of patients' average severity level. But Tufts Medical Center is paid about 35 percent less, according to confidential Blue Cross rate information obtained by the Globe.

An unlikely alliance

Many physicians at New England's oldest and biggest hospital, Mass. General, didn't take the news well that they were about to merge with Brigham and Women's across town. They viewed the Brigham as fast-rising and eager but hardly the equal of "The General," the first teaching hospital of Harvard Medical School.

As one senior physician at Mass. General wryly observed about being asked to collaborate with the Brigham: "I was raised to hate three things: the Soviet Union, the Brigham, and Yale."

But at the press conference announcing the deal in December 1993, leaders of the two hospitals said their alliance would only make them greater. They described twin ambitions underpinning their once unthinkable alliance: to build a high-quality healthcare system, and to save money. A lot of money.

They said their goal was to cut 20 percent out of their combined $1.2 billion annual budget, which meant saving $240 million a year.

"Put it this way," said Dr. J. Robert Buchanan, who was then the head of Mass. General. "We're pretty sure we've got to save 20 percent at minimum."

The Boston Consulting Group, which helped facilitate the merger, told the hospitals that they could reduce annual costs by between 12 percent and 28 percent, according to a description of the consultants' analysis in a 1996 Harvard Business School study of the merger. Partners would not provide the consultants' recommendations to the Globe.

But Partners made only a small fraction of the cuts. The company claims that the merger saved $200 million to $250 million - total - over five years.

Those savings came almost exclusively from administrative consolidation. The two hospitals have rarely collaborated on clinical operations. In fact, soon after the merger, Mass. General opened a new obstetrics unit that would compete with its sister hospital at a time of declining births in Massachusetts.

Partners' current management denies that saving such large sums was ever the intention, and argues the smaller amount they did save was a commendable achievement. Jay B. Pieper, then the Brigham's chief financial officer and now a Partners vice president, suggested there was no basis for the comments Buchanan made at the press conference.

"Everybody kind of scratched their head and said, 'Bob, what did you mean?' " Pieper said.

According to Pieper and others, melding of medical services would not have saved much since each hospital had programs large enough to achieve economies of scale on their own. Consolidation would have inconvenienced patients and driven away top physicians, they said.

But Buchanan and other Partners founders told the Globe recently that their original intention had been the consolidation of services, at least for rare treatments, and possibly many more. The idea was "to have at least one superb major teaching hospital when all this is over," said Dr. Eugene Braunwald, Partners' former chief of research, who said that didn't happen because their finances never deteriorated to the point they had feared.

The year before his death in 1998, Partners cofounder Dr. H. Richard Nesson told the Globe that he was still looking for ways to consolidate.

"I do not believe, for example, that we should both be doing every kind of transplant," Nesson said.

A decade later, Partners continues to offer an array of competing transplant programs, even though surgeons sometimes struggle to find enough work to keep skills sharp. Mass. General surgeons performed fewer than the minimum 10 lung transplants per year required for Medicare certification in four of the last seven years, drawing a letter of concern from federal regulators in 2006. The Mass. General surgeons wrote back that their work is of such high quality that low volume is not a hazard.

The Brigham added a new pancreas transplant program recently, even though the existing program at Mass. General typically does only one or two transplants a year. Brigham surgeons predicted to the state they would perform 10 pancreas transplants in 2007, but they did only two.

"One way to look at that is, well, that's just a bunch of doctors running rampant; another way to look at that is, you need to have the reason that those best doctors are with you," said Pieper. He said transplant programs lure top surgeons and are not necessarily expensive: "You should never believe it is not a competitive world."

A changing environment

Weld and the Legislature unleashed the forces that led to the creation of Partners when they ended the state's authority to regulate hospital rates in 1992. Beacon Hill wanted to force hospitals to jockey for contracts with savings-minded HMOs, which, at the time, sent their members only to select hospitals and doctors.

"I favor putting the scorpions in the same bottle . . . and letting them fight it out," said Democrat Edward L. Burke, then cochairman of the Legislature's healthcare committee.

That they did. But as hospitals competed to offer the lowest price and insurers demanded shorter hospital stays, many institutions, including Mass. General and the Brigham, had to close beds and lay off staff. Mergers were seen as a way to survive.

Many doctors saw Mass. General and the Brigham as unlikely partners, given their years of heated rivalry for physicians, students, and research grants. Still, the reasons to get together were compelling: Each brought to the table prestige and financial resources no other partner could match. Once leaders from the two hospitals broached the subject in 1993, the deal came together in less than six months.

Heads of other major Harvard teaching hospitals were aghast at the news, since they thought they'd been in serious talks about building a five-hospital Harvard system.

"It's almost akin to right in the middle of the [Celtics] season Paul Pierce and Kevin Garnett went off with their agents and decided they could form a better team," recalled David Weiner, then CEO of Children's Hospital, one of the five.

That was how Partners would come to be seen by the rest of the medical community, with a mix of envy, loathing, and admiration: a business-savvy organization willing to play hardball in what had been a genteel white-coat world.

Coincidentally, the day after the merger was announced, it became public that Mass. General had chosen a new leader, Thier, who eventually became the second CEO of Partners. More than anyone, he is seen as the architect of the healthcare giant and its aggressive market strategies. He was, and is, formidable by almost any measure - in intellect, charm, and competitive fire.

"In my view, it was a sacred responsibility . . . to make sure this institution and the Brigham were not done in by the changing environment," Thier said in an interview at his office at Mass. General, where he drank coffee from a mug with a red slash through the word "whining" - as in "no whining."

Thier made it clear how important he felt it had been to stand up to the insurers and demand higher rates.

"What [the two hospitals] do is so important to this region, to the country, so I was going to be tough in terms of people who were taking decisions . . . that were going to injure these places."

A prescient prediction

Though many analysts saw the merger as a smart way to reduce costs, three Boston University School of Public Health researchers warned at the time that it "actually may increase the cost of care," adding a layer of bureaucracy while boosting the market power of the combined institution.

"The merged hospital would have great ability to resist payers' demands for discounts," wrote Alan Sager, Deborah Socolar, and Peter Hiam in the Boston Business Journal.

In fact, that thought was high in the minds of Partners' founders.

"There was a feeling . . . that the insurance companies are so big and we're so small," said Jack Connors, then a Brigham trustee and now chairman of Partners' board. "The only way we can really have leverage at the table is if we become big."

Charles Baker, Weld's secretary of Health and Human Services, came to regret signing off on the merger when he later became CEO of Harvard Pilgrim Health Care and sat across the bargaining table from Partners. He has compared it to "having the grenade that you throw on one end of the boat roll back down and blow up on you when the boat shifts."

Attorney General Scott Harshbarger also approved the deal, urging the hospitals "to pass on any cost savings to consumers."

But neither Harshbarger nor other regulators who approved the merger imagined the way that Partners would come to dominate Boston healthcare. First, the company set up a for-profit subsidiary to recruit 1,000 community doctors who could act as "feeders," referring serious cases to the downtown hospitals. Partners gave Ellen Zane $100 million to purchase major physicians' practices.

Then Partners began to build a network, acquiring strategically located hospitals to the north, west, and south of the city. In the process, the company rejuvenated money-losing hospitals in Lynn, Newton, and Jamaica Plain.

"Partners got started for the right reasons," said Zane, who was one of the first employees recruited by Nesson, Partners' first CEO. "Dick believed we had a responsibility to change how care was delivered in this country. Partners wanted to be a leader in creating a more equal balance between insurers and all providers."

A giant expands

It's little more than a hole in the ground now, but the $686 million 10-story addition underway at Mass. General will be the costliest hospital project in state history, and one of the most expensive in the country, according to a leading construction consultant. The facility, which will expand bed capacity by 17 percent, is not so much gold-plated as it is vaultingly ambitious: a state-of-the-art expansion nestled inside an existing hospital.

Across town, the Brigham recently opened a $382 million heart center equipped with the world's most powerful CT scanner. In the suburbs, major new outpatient centers are taking shape in Danvers and at Gillette Stadium in Foxborough.

All this costly work makes it hard to believe that, in the early 1990s, Partners officials thought they might have to close entire wings of the Brigham and the General due to declining hospitalization rates. Today the beds are full, and the company's $2.5 billion expansion and renovation program over the last five years dwarfs everyone else's. For comparison, Children's Hospital, the second most prosperous Boston hospital company, planned to spend $240 million on construction this year before the recession trimmed spending by one-third.

It turns out that the star power of Mass. General and the Brigham fills beds even at a time when more procedures are done on an outpatient basis and the number of hospitalizations is stagnant. Then, as Partners merged with some hospitals and formed close alliances with others, its dominance grew. Today the company says it controls 22 percent of the eastern Massachusetts inpatient market. But the percentage of patients living in the four counties nearest Boston who were discharged from a Partners-affiliated hospital rose from 19 percent to 37 percent from 1996 to 2006, according to the Massachusetts Health Data Consortium.

Despite its power, Partners has never earned more than a 2 percent operating profit, which is modest compared with major teaching hospitals in other states. It is a rate the hospitals deliberately keep low. The company aims for 2 percent profit each year, then calculates how much money is available for new projects, according to Markell. Because of Partners' size and substantial investments, the company reported $1.7 billion in total income from 2003 to 2007 - more than the next six Massachusetts hospital companies combined during the period - but that still left billions for growth.

"Our surpluses get invested back into either the community or the hospitals or whatever," Connors said. "It's a billion dollars [a year] either on bricks and mortar, technology, or information systems. . . . And in my opinion, it's a race, if you will."

All the expansion worries healthcare analysts watching the medical arms race spiral. Dr. Donald M. Berwick, head of the Institute for Healthcare Improvement in Cambridge and a leading healthcare reformer, said new medical facilities generate their own demand, because when there is more treatment available, doctors order more care for their patients.

"When Partners decides to expand . . . the prediction would be it will not add to the well-being of the population," he said. "It will add to cost."

But Partners officials see it differently, noting that state attorneys general have successfully discouraged Partners from acquiring at least four doctors groups or clinics in recent years. Partners officials believe that they've been unfairly limited, and that if they could establish more suburban facilities, fewer suburban patients would travel to downtown hospitals.

“You've got to take the shackles off on that,” Markell said. “We've got to be allowed to be what we need to be. We have two downtown hospitals. We’ve got Newton-Wellesley and we’ve got North Shore, but we have nothing in the whole south corridor.”

An object lesson

Dr. Harris Berman said he felt like he'd wandered into an ambush.

The chief executive of Tufts Health Plan thought he had been invited to the Prudential tower on Oct. 23, 2000, to continue contract talks with top Partners officials. Thier, the Partners chief, wanted a substantial increase in payments for medical services, $100 million more than Berman was willing to pay for the care of his members over three years.

But Thier was done talking. He told Berman that Tufts insurance would no longer be accepted at Partners starting April 1. It was a devastating blow to Tufts' business. Almost as soon as Berman left his office, Thier launched a million-dollar marketing campaign to drive the point home. Signs went up at Partners reception desks notifying Tufts members that their insurance would soon be denied. A new website told them how to switch insurers. A call center in Texas was set up to field questions from worried patients and doctors.

Within days, major employers and thousands of Tufts members began threatening to cancel their policies. Tufts surrendered in little more than a week.

"I finally concluded, in the middle of the night one night, that our very viability was at stake," Berman recalled later.

The humiliation of Tufts became an object lesson for other insurers, a lesson they would not soon forget. The balance of power had shifted, and necessarily so, Thier said.

"If the market didn't change, we were going out of business," Thier said. "We were taking care of patients, and if anything happened to us, we were going to have a public health catastrophe, but if anything happens to them, somebody else is going to come in and sell insurance."

Like Tufts, Blue Cross had initially balked at paying Partners the extra $193 million over three years that Partners demanded, according to an internal memo reviewed by the Globe. Blue Cross had hired analyst Nancy Kane of the Harvard School of Public Health to study the request, and she concluded that Partners was financially much stronger than the company admitted. However, Blue Cross leaders feared they would lose if the dispute became public, according to a former Blue Cross executive involved in the talks.

So Blue Cross negotiators said they would give Partners the money - as long as Partners sought similar or larger raises from other insurers. The company's main concern in giving in to Partners' requested 19 percent increase over three years was that Partners might accept less from other insurers, putting Blue Cross at a disadvantage. At the time, Partners officials estimated that Blue Cross would have to raise premiums by about 2 percent to cover the Partners' rate hike.

For Partners, it was a huge victory, according to officials involved in the negotiations, the first time the company had successfully used its bargaining clout. And Thier's sense of obligation to protect Blue Cross from financial disadvantage gave the negotiators the resolve to seek even more from Tufts, officials involved in the talks said.

At the time the Berman-Thier talks broke down, Tufts was offering $81 million less than the amount necessary to "match Blue Cross," according to an internal Partners memo reviewed by the Globe. The terms of the "market covenant" with Blue Cross wouldn't allow that.

Partners might have been able to extract big rate increases from all three insurers without making the deal with Blue Cross, but it would have been difficult. The Van Faasen-Thier agreement averted a brewing public showdown between Partners and Blue Cross, a company with three times as many members as Tufts, while giving Partners powerful leverage in their subsequent talks with the smaller insurers.

'Normal back and forth'

Former state attorney general Thomas F. Reilly, the state's chief antitrust official from 1999 to 2007, said he never saw anything close to a violation by Partners during his tenure. Reilly said he did not know about Thier's 2000 promise to Blue Cross, but said he would consider that "a normal back and forth in the negotiations."

However, some antitrust lawyers to whom the Spotlight Team described the deal say the Partners-Blue Cross deal raises suspicions, partly because the two companies were so big that they could work in concert to set insurance prices, preventing other insurers from competing on price.

The agreements "raise an obvious antitrust issue," said Keith Hylton, a law professor at Boston University who has written a book on antitrust issues. If the biggest insurer is able to dictate how much other insurers have to pay hospitals and doctors, he said, it prevents other insurers from offering lower premiums to their members.

"They make it hard for anyone to cut a side deal" that saves consumers money, Hylton said.

David Balto, who has challenged hospital mergers in court and served as policy director to the Federal Trade Commission under President Clinton, said Partners and Blue Cross could yet be penalized under Massachusetts consumer protection law if the 2000 deal unfairly increased insurance premiums and the effects are still being felt today. He also said that there is no time limit under federal law to reverse a merger if the merger has led to unwarranted price increases.

Balto, now in private practice in Washington, D.C., said Partners' relationship with Blue Cross "has the effect of raising prices for consumers."

"The is a simple case," he said. "This should be on top of the enforcement agenda for the [Massachusetts] attorney general."

But a former colleague of Balto's at the Federal Trade Commission who now consults for Blue Cross said it would be hard to prove that the Van Faasen-Thier agreement violated any law. Robert Leibenluft said it would depend on exactly what was promised and whether the verbal pledge could be enforced.

"There would be a whole lot to figure out whether there's something [illegal] to it or not," he said in an interview.

Partners officials stressed that its contract with Blue Cross in 2000 was far from unique, noting that big teaching hospitals across the country cut favorable contracts with insurers in 2000 and 2001, creating a shift in political power from the HMOs to the hospitals.

This much is plain: The generous Partners contracts of 2000 and 2001 marked a turning point in Massachusetts insurance prices after which one hospital after another demanded "Partners rates" from insurers. Partners won an even bigger rate increase from Blue Cross in 2003: 47 percent over five years. Today Massachusetts hospitals account for more than half of medical inflation, according to Blue Cross data.

Blue Cross officials say they shouldn't be blamed for the run-up in insurance prices, arguing they always cut the best deals possible with hospitals for their 3 million members. They say that they are aware that Partners and a few other hospitals get paid more than other hospitals, but that there is a limit to what they can do.

"We have to stay very attuned to the balance of the market, but we are not a regulator," said Andrew Dreyfus, executive vice president of Blue Cross, suggesting that market "fairness" is a public policy issue beyond the control of any one company.

Partners officials, too, say they shouldn't be blamed, arguing that they sought only rate increases that were necessary to cover their rising costs and to improve their system.

"I'm not being cute here," said Partners chairman Connors. "I don't ever remember anybody suggesting that if we merged, healthcare would be cheaper."

CORRECTION: 2/1/2009 Correction: Because of a reporting error, a Page One story on Dec. 28, 2008 mischaracterized the tax status of Partners Community Healthcare Inc., a physicians network. It is a not-for-profit corporation that is taxable. The same story also garbled a quote by Partners executive Peter Markell. He said: “We have two downtown hospitals. We’ve got Newton-Wellesley and we’ve got North Shore, but we have nothing in the whole south corridor.”

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