Health costs may rise as small hospitals struggle

Big hospitals in Boston like Massachusetts General are putting financial pressure on community hospitals, a report says.Pat Greenhouse/Globe Staff/File

Massachusetts community hospitals are losing business to larger urban teaching hospitals, a trend that threatens to undermine the state’s campaign to curb health care spending.

In its first report on the issue, the state’s Health Policy Commission said Monday that community hospitals are being squeezed by lower payments from insurers and the choice of many patients to be treated at big Boston hospitals, even for routine medical care.

The state’s five largest health systems accounted for 61 percent of inpatient discharges for patients with commercial insurance in 2014, the most recent year for which data are available. That was up from 54 percent two years earlier, the report states.

Meanwhile, less than half of patients admitted to large Boston teaching hospitals are sick enough to require care in those higher-cost settings, the report says. The rest could receive good care in lower-priced community hospitals.

“Community hospitals are a crucial part of our health care delivery system, yet they face some substantial challenges for the future,” said David Seltz, executive director of the Health Policy Commission, a watchdog agency created in 2012 to monitor health care costs.

The report warned that as more medical care shifts from lower-priced community hospitals to their higher-priced competitors, health spending could rise statewide. The state has set a target of keeping annual medical spending growth to 3.6 percent.

“We see community hospitals as playing an important role in achieving those cost-containment goals in the future,” Seltz said.

Yet community hospitals are unsuccessfully fighting a powerful force that guides many consumers’ health care decisions: brand. Boston is home to some of the world’s most prestigious hospitals, including Partners HealthCare’s Massachusetts General and Brigham and Women’s hospitals, and Beth Israel Deaconess Medical Center. But Boston’s hospitals are also among the most expensive in the state, and as more patients choose to receive care there, overall medical spending rises.

Michael K. Lauf, chief executive of Cape Cod Healthcare, the parent company of hospitals in Hyannis and Falmouth, said as many as 500 Cape patients travel to Boston every year for heart surgery, joint replacements, and other procedures that could be handled locally.

“That’s the kind of care that can be kept in the community,” Lauf said. “The things that should stay in the community don’t, just based on brand and reputation.”

But the competition for community hospitals isn’t coming just from big teaching hospitals: It’s also from walk-in medical clinics, which are rapidly opening across the state and country.

“Urgent care, limited-service clinics are showing up down the street from community hospitals,” said Steve Walsh, executive director of the Massachusetts Council of Community Hospitals. “That, coupled with brand at academic medical centers, that has caused a bit of a perfect storm for community health providers.”

Massachusetts has 43 community hospitals, often the biggest employers in their municipalities, according to the report. Some are independently run, while others are part of larger organizations such as Partners, Steward Health Care System, Beth Israel Deaconess, and Lahey Health.

The Health Policy Commission began studying the plight of community hospitals last year after the 2014 closing of two hospitals, North Adams Regional Hospital and Steward’s Quincy Medical Center.

More closings are planned: Partners is planning to shutter its hospital in Lynn and move services to nearby Salem, while Baystate Health is planning to end inpatient services in Ware and consolidate them in Palmer.

To survive and compete, many community health care providers have sought mergers or affiliations with larger systems. Others have opened new clinics or renovated facilities to draw more patients.

But patient volume is not the only problem. Community hospitals also need higher payments from commercial insurers in order to cover their costs and invest in improvements, said Spiros Hatiras, chief executive of Holyoke Medical Center.

“In a consolidating market, market share and market power drives reimbursement,” he said. “Price variation drives everything else.”

Several state reports have noted that large health care providers, namely Partners, have used their market clout to extract higher payments from insurers, which want the competitive advantage of being able to offer their subscribers access to top hospitals.

The Service Employees International Union is pushing a bill and a ballot question that would tackle the issue by taking nearly $440 million in payments from Partners and redestributing much of it to lower-paid competitors. Hatiras said he would back the ballot question if legislators don’t come up with another solution first.

Steward, a for-profit company that owns nine community hospitals in Eastern Massachusetts, also backs the measure, but most of the hospital industry opposes it.

Partners has said that its hospitals’ higher prices reflect the costs of providing high-quality care to critically ill patients, training doctors, and conducting biomedical research.

The Health Policy Commission plans to hold meetings with hospital executives and other stakeholders in the coming months and eventually support specific proposals that could help struggling community hospitals and address price variations.