America's Bitter Pill

by Steven Brill

  A DOMINANT HOSPITAL GETS MORE DOMINANT

  Yet there was regulatory activity on other fronts in the late summer of 2012. It continued a trend in healthcare that was troubling or encouraging, depending on the level of cynicism one applied to the industry.

  On September 11, 2012, Yale–New Haven Hospital completed a merger with its only local competitor, the Hospital of Saint Raphael. Yale–New Haven was now a multibillion-dollar colossus. With eleven thousand employees and still growing, it was gaining fast on the thirteen-thousand-employee university that had always dominated New Haven and whose medical school is affiliated with Yale–New Haven.

  The Yale New Haven Health System had already bought the hospitals further south in Connecticut, in Greenwich and Bridgeport (where school bus driver Emilia Gilbert had been forced by its lawyers to pay full chargemaster rates); and it was rapidly gobbling up doctors’ practices and establishing satellite clinics throughout the region.

  The takeover of Saint Raphael’s had followed a long review process involving both the Federal Trade Commission and the Connecticut attorney general. Both had questioned whether what seemed to be Yale New Haven’s biggest move yet in a quest for total market domination was outweighed by the fact that Saint Raphael’s was already a struggling hospital in danger of closing. Despite claims from opponents of the merger that it was Yale New Haven’s dominance that had hobbled Saint Raphael’s, both regulators—persuaded by reams of material submitted by Yale New Haven’s powerhouse international law firm—acquiesced.

  “Based on the evidence developed during the investigation, and in light of the law applicable to these types of transactions—including taking into consideration St. Raphael’s precarious financial condition and other expected efficiencies that will be realized through the acquisition—I have decided not to seek to block the merger under Connecticut’s antitrust law,” Connecticut attorney general George Jepsen announced.

  Jepsen’s reference to the law and precedents “applicable to these types of transactions” was his acknowledgment that when it comes to hospitals, antitrust laws are complicated.

  In part, this was because healthcare is not a conventional marketplace. Sometimes maintaining competition for the sake of competition can produce inferior care. Therefore, regulators have tended to take quality care into account as much as they do pricing and choice in a way that they wouldn’t in looking at the merger of two widget companies.

  It was also because the way antitrust laws had been applied by regulators to hospitals was vague and arguably too gentle—which is what White House aides Zeke Emanuel and Bob Kocher had tried fruitlessly to address early on when Obamacare was being put together.

  Earlier in 2012, the Federal Trade Commission had sued to block the purchase by the Saint Luke’s hospital system in Idaho of the largest physicians’ group practice in Nampa, Idaho. The FTC would ultimately win that suit. But these interventions in deals in which hospitals took over doctors’ offices were relatively rare and almost never involved significant markets.

  Sometimes, the Federal Trade Commission clamped down when it looked like a hospital merger would too egregiously eliminate competition in a region. But these cases were also uncommon, in part because the hospitals could argue that a merger would cut costs by eliminating needless duplication of services. Why have two cancer care units, or two super-expensive diagnostic labs in the same town?

  Opponents of these mergers pointed out that hospitals rarely consolidated in a way that downsized their activities. On the contrary, the story of hospitals in the United States was much like the story of that other bastion of nonprofit spiraling costs: higher education. No matter how mergers were rationalized, the merged hospital chain seemed to keep building, all in the name of providing broader, more advanced care. That was certainly true—and would continue to be true—of Yale New Haven following its Bridgeport and Greenwich mergers.

  Moreover, whatever efficiencies those mergers produced by way of consolidation certainly didn’t produce lower prices. Three months prior to the Yale–New Haven merger, there was fresh evidence of that from a highly credible source. “Increases in hospital market concentration lead to increases in the price of hospital care,” reported the Robert Wood Johnson Foundation, a respected healthcare think tank that had just finished an elaborate survey of hospital pricing. The report also stated that “at least in some procedures, hospital concentration reduces quality.”

  A subsequent FTC report would find that when it came to consolidation and price increases, the nonprofit hospitals’ behavior was no different than that of the for-profit hospital chains.

  Yale New Haven had promised that it would “blend” the lower rates currently charged by Saint Raphael’s with its higher rates in a way that would result in “price neutrality.” But it made no commitments that it would not raise prices as its insurance contracts came up for renewal.

  Other evidence of the downside of consolidation would soon follow the Saint Raphael’s takeover. Yale New Haven accelerated a strategy of buying up or starting clinics around the region and turning them into outpatient units of the hospital system. Beyond the obvious consequence of eliminating competition, this mattered because under Medicare rules, hospital outpatient units can charge more than standalone clinics. The theory is that hospitals have higher costs because they have to be open 24/7, which, of course, wasn’t true of these new outpatient satellite clinics.

  Two years after the merger, a study sampling medical bills across the country would pinpoint what it called “much higher prices” charged by hospital clinics, reporting that “the average hospital outpatient department price for a basic colonoscopy was $1,383 compared to $625 in community settings.” In an echo of Scott S.’s $132,000 lab bills in Texas, the report found that “for a common blood test—a comprehensive metabolic panel—the average price in hospital outpatient departments was triple the price … in community settings.”

  In some cases, when Yale New Haven took over a clinic or the practice of some doctor group, there could now be two bills instead of one—a “facility charge” for the room where the patient saw the doctor, and a charge for the doctor. That meant not only higher bills, but also two co-pays for the patient instead of one, because the insurance company was now getting two bills.

  Then there was the overriding question of how an insurer could negotiate discounts with Yale New Haven when it could not possibly sell insurance to area residents without including the only available hospital in its network and the increasing share of the area’s doctors, whose practices were also being bought up by the hospital.

  However, there was another side.

  I know several people in the New Haven area who appreciate being able to go to a nearby Yale–New Haven satellite office after a hospital stay for a checkup or follow-up test.*15

  And there is a good argument that the brand and culture of the celebrated research and teaching institution with which Yale–New Haven is linked—the Yale Medical School—and the quality control that would seem to come with it helps to spread better care across the region when Yale New Haven takes over those other hospitals.

  Most important, these consolidated providers seem to offer the best way out of the fee-for-service trap that Orszag had articulated so well at the Baucus summit of 2008, and that he and his staff tried, with little success, to attack when Obamacare was being written. The most practical way to implement “bundled payment” billing, instead of feefor-service, was to have all aspects of care consolidated under the same roof in so-called Accountable Care Organizations (ACOs). That way, an insurer could offer to pay an ACO a set amount for the treatment of an illness, or, better yet, a set amount each year for each of its customers to be treated by the ACO whatever the patient might need.

  Put simply, Yale New Haven was becoming either a poster child for market abuse or for real reform of the healthcare economy. One man’s antitrust conspiracy was another man’s trailblazing Accountable Care Organization.

  A �
��REAL BADASS”

  By the fall of 2012, Liz Fowler was ready to leave government again. As a member of the National Economic Council staff at the White House working mostly with the Treasury Department and the IRS on launching healthcare reform, she felt elbowed out by Jeanne Lambrew. With the support of Deputy Chief of Staff Nancy-Ann DeParle, Lambrew wanted to keep control of everything. Fowler even heard complaints that Lambrew was holding up decisions on design options and other elements for the website, which was now less than a year away from its scheduled launch.

  In November 2012, just after President Obama was reelected, Fowler accepted a job with Johnson & Johnson, the giant drug and medical device and supplies company. Her title would be head of global health policy. She specifically made sure that lobbying would not be part of her responsibilities.

  What appealed to Fowler about the position was that it involved advising the company on how to deal with health issues around the world—from India’s effort to expand healthcare in its emerging economy to how J&J should position itself amid the continuing calls by the medical device industry to repeal the Obamacare device tax. (She would advise that the company not join the call for repeal, and it didn’t.)

  It was, Fowler believed, an ideal job. Interesting issues. No lobbying. And a company that she thought was several rungs above her previous private employer, WellPoint, when it came to civic-mindedness.

  Critics of Washington’s revolving door did not see it that way, particularly a journalist writing for The Guardian named Glenn Greenwald—the same Glenn Greenwald who was soon to make headlines for working with National Security Agency contractor Edward Snowden to reveal the thousands of files Snowden took when he left the NSA.

  Calling Fowler “the architect” of Obamacare, Greenwald noted that she had worked for WellPoint, the giant insurer, before rejoining Baucus’s staff to draft the law. “The bill’s mandate,” he wrote, “that everyone purchase the products of the private health insurance industry, unaccompanied by any public alternative, was a huge gift to that industry.” And now, Greenwald added, “the pharmaceutical giant that just hired Fowler” is a member of PhRMA—“one of the most aggressive supporters—and most lavish beneficiaries—of the health care bill drafted by Fowler.” Accordingly, Greenwald concluded, “It’s difficult to find someone who embodies the sleazy, anti-democratic, corporatist revolving door that greases Washington as shamelessly and purely as Liz Fowler.”

  Other news organizations soon piled on, though not as vituperatively, using Fowler as a hook for stories about how dozens of Baucus alumni, including many who had worked on healthcare, were now lobbyists. That was true, and it was good reason to be jaded about Washington, even if lobbying is protected by the Constitution and even if some of those lobbyists worked for clients, such as community health centers or civil rights groups, whom Greenwald would celebrate.

  But Fowler was not going to be a lobbyist. More than that, given the roller-coaster ride that healthcare reform took toward passage and the fact that there were never enough votes for a public option, it was fantasy that Fowler did anything more—or less—than pull together a bill that could actually be passed by Congress.

  After Greenwald became famous for helping Snowden get his leaks published, there would be debate over whether he was more an ideologue with an agenda than a journalist. That he attacked Fowler so fiercely and cluelessly—as if one Senate aide, albeit such a highly competent one, could have overcome the powers that be in Washington arrayed to protect the healthcare industry status quo—would seem to have settled that debate before it happened.

  Fowler, however, let Greenwald’s attack and the ones that followed get to her. She had thought of herself as one of the good guys.

  Her friends tried to cheer her up. “Hey, this makes you out to be a real badass,” one said. “He says you single-handedly stopped the public option. Pretty good.”

  CHRISTMAS IN KENTUCKY

  By November 2012, only fourteen states and the District of Columbia had signed up to run their own exchanges. Hoping to get more states on board, CMS extended the deadline for that decision by a month, into December. No new states took the extra time to join. CMS would now have to build and handle the exchanges for thirty-six recalcitrant states.

  Kentucky was not one of them. Governor Steven Beshear and Carrie Banahan, his choice to run their exchange, had moved quickly to find the outside help they would need following the go-ahead from the Supreme Court in late June. They immediately decided that, unlike CMS, they would hire one general contractor to pull everything together. That contractor could subcontract out pieces of the job, but it would be responsible for everything.

  Working with Chris Clark, the engineer she had pulled out of retirement, and with the state’s procurement officials, they had crashed a Request for Proposals that went to a half dozen contractors. By October 7, they had signed a contract with the healthcare services unit of Deloitte, the giant consulting and accounting firm, which had worked on numerous projects related to welfare, child support, and other benefits programs for states across the country.

  Within days, a forty-person crew from Deloitte was on the ground in Frankfort, in the warehouse space Banahan had picked as the project’s headquarters.

  The Deloitte team was lead by Mohan Kumar, fifty-two, who had modernized a child support program for Kentucky a few years back. Short and soft-spoken, Kumar had studied engineering in his native India. He was a twenty-seven-year Deloitte veteran.

  Kumar lived in lower Manhattan, but was about to make the inelegant Capitol Plaza Hotel in Frankfort his weekday and often weekend home. He would rarely see his wife and twin toddlers. The hotel didn’t matter much; he would spend most of his waking hours in the warehouse, which everyone would soon call “the shack.”

  “My wife had worked in consulting, too,” Kumar told me. “So she understood what the life was.”

  Kumar immediately presented Banahan and Clark with an agenda for the next few days. The goal was to break quickly into groups—Kumar had a Deloitte team of two hundred on the way—and make some quick decisions. By New Year’s 2013, less than three months away, they wanted to have the architecture for the exchange fully sketched out, based on a complete menu of business rules. Then they could start building. In the best of circumstances, laying out a full design and getting it approved for projects less complicated than this takes six months. They had just given themselves half that time.

  “They had their act together from the first hour,” Banahan would later recall, remembering their first days in the shack.

  “From the start, I thought the timeline was almost impossible,” Kumar later told me. “Everything had to fall into place.… But I was stunned at how quickly Carrie and her people were willing to make decisions.”

  One early decision would turn out to be crucial. Would people coming onto the exchange have to put in all of their personal information first? That way their eligibility could be verified through the hookups to the federal databases. (Were they citizens or legal aliens? Did their income qualify for subsidies, and, if so, how much? Or was their income so low that they should be sent to the Medicaid enrollment process?) Or could they simply estimate their income without putting in all those personal details, get an estimate of their subsidy, and shop around for various policies with a price popping up that took into account the estimated subsidy?

  That decision seemed obvious. Amazon didn’t make you put in all your account information before telling you the price of a book or a toaster. Why create the hurdle of filling everything out before you were sold on buying something? Besides, Beshear’s constant refrain in defending the coming exchange was that when people saw how reasonable the prices were once the subsidies were included, they would want the insurance. “Just have a look,” he would say. “You’ll like it. It’s not about me or President Obama. It’s about you.”

  Another obvious reason to let people browse before putting in all that complicated information was that it would less
en the load on the system by processing all of that personal data only from people who were actually buying.

  Banahan and Kumar quickly decided to do that. The federal government would start out taking the opposite approach.

  Having pulled a string of all-nighters through December, on the weekend of Christmas Eve, 2012, Kumar’s and Banahan’s teams got the big plan locked up.

  Also in December 2012, another team of Banahan’s people began working with a branding and marketing research firm called Reality Check, which had advised companies ranging from local favorite Jim Beam to Shell Oil. Reality Check convened a dozen focus groups across the state. With ten months to go before launch, they wanted to nail down the language and look that could sell Beshear’s exchange all across Kentucky.

  A January report on the results would declare that “most respondents—even physicians and business owners—expressed little knowledge of the Affordable Care Act and its implications.”

  On top of that, the researchers reported that there was “suspicion” about the new law and a fear of “less choice, more control”—the government takeover that Frank Luntz had told the Republicans to shout about.

  To deal with those qualms, the researchers urged that the design of the website had to “project feelings of approachability, optimism, and openness” that “respondents found comfortable, hopeful, and reassuring.”

  One design they showed the focus groups proclaimed “Kentucky” over the subheadline “Healthcare Marketplace,” all in front of a bright yellow sun rising in the background. Some respondents described its message as “A new day in Kentucky.”

  “In general,” the market researchers reported, this kind of look “visually positioned Healthcare Reform as a reason for hope, not fear,” that offered “options and choices” and that had the aura of a farmers market.