Letter from Dr. Paul Hattis on BCH Expansion Cost

Many of you wrote into the Department of Public Health during its public comment period as part of the Determination of Need (DoN) process for the hospital's expansion application. In the coming weeks, we will be sharing some of those powerful letters. We start today with this letter from Dr. Paul Hattis, former Consumer Advocate appointee to the Mass. Health Policy Commission. 

March 7, 2016

Massachusetts Department of Public Health Determination of Need Program
99 Chauncy Street
Boston, MA 02111

To Whom It May Concern:

I am Paul Hattis, a Tufts Medical School faculty member, a lay leader in the Greater Boston Interfaith Organization, and I have just completed my term as the Consumer Advocate appointee to the state’s Health Policy Commission.

I submit these written comments to supplement my oral testimony that was given at the February 25th Hearing. As I noted at the hearing, the goal of this DON charge is to ultimately arrive at a project scope and size for Children’s Hospital capital project that supports quality in its fullest sense, as well as constrains overall health care spending for individuals, employers and taxpayers of the Commonwealth.

To my knowledge, this is the first large academic medical center DON application to come to DPH since the passage of the 2012 Law known as Chapter 224. I believe it is also the most expensive DON application to ever come forward for review. The 2012 law makes clear that the laissez-faire era where hospitals just do as they please is over—not only tied to mergers and acquisitions, but in the hospital capital building context as well. No longer can we tolerate a situation where any Massachusetts hospital simply announces to the world that they are planning a major capital project; they then build what and where they want and spend as they see fit, and then finally send ‘us’—the taxpayers and premium payers--the bill. That day is over and I read the 2012 Law to say that major capital projects need to be carefully reviewed and scrutinized to see that they are in the public’s interest.

DPH’s charge in the DON process includes helping to maintain standards of quality, as well as constrain overall health care costs. While not the main focus of my testimony on the 25th, I certainly appreciated that numerous Friends of Prouty Garden were gathered at the hearing to speak to the need for the campus environment to support healing and well-being for patients, families and the community. Given these concerns, seems to me that DPH, in coming to a community responsive decision in its DON review, needs to fully consider the important questions surrounding the loss of Prouty Garden and its negative impact on the promotion of a campus environment that supports healing and well-being.

My oral comments from February 25 and my submission today are primarily focused on the potential cost growth challenge of this application. And I do say ‘potential’ because it is fair that the now required independent cost analysis should be completed before anyone makes any final conclusions....But I am worried.

And with that worry, I want to note a few things in a bit more detail than was summarized in my February 25 testimony:

I. Waltham campus project needs to be included in this DON application:

First, this DON application covers only the Boston/Brookline campus. The media has reported that Children’s Hospital is also planning a major capital project at its Waltham campus, including the addition of inpatient beds.

Given the DON charge to see that health care services are provided at ‘the lowest reasonable aggregate cost’, the only meaningful way to judge whether Children’s Hospital’s capital expansion project is furthering that aim, is for their complete expansion plans for the array of hospital services and operations that are contemplated over the next two to three years to be before you in a single application. This is necessary in order for DPH to fully appreciate both the spending impacts (payments to the hospital for care) as well as the cost impacts (Children’s operating expenses which as noted in the discussion below are also a relevant consideration) for this application related to an examination of aggregate cost and/or service/capital redundancy.

To allow an incremental or piecemeal approach for DON review, where the Boston/Brookline expansion is reviewed in isolation from the Waltham project could result in the perverse result of granting two DON project approvals for something that would have been rejected, if submitted as a whole. (I liken this to an acquisition of a large physician group broken into a set of smaller acquisitions, where when evaluated incrementally, each new purchase has more of a marginal impact--when in fact, in aggregate, there was a substantial impact on market share, costly referrals, and for a highly paid group—total health care spending as a result of the total aggregate purchase.)

The Public Health Council should have the entire hospital capital project package before it— Boston/Brookline and Waltham. It certainly makes me wonder whether the hospital’s decision to go forward with only the Boston/Brookline campus project in its application at this time is an effort to obscure the total cost growth impact of what the hospital intend to do with its complete hospital related planned expansion over these next few years. More prudent for DPH to say to Children’s, that either it submits the Waltham project to be evaluated as part of this DON application--or that they must wait at least 3 to 5 years after the Boston campus project is completed before submitting a Waltham DON application in order to credibly make it a separate initiative.

II. Health Policy Commission Review Participation is Essential to Getting the Best Judgement About the Wisdom of this Proposed DON Application

Second, and this is a process suggestion, but one of the great things about Massachusetts is that we have a lot of talent and expertise. And in government, we have state agencies such as the Health Policy Commission (HPC) with incredible health care cost expertise—the reason they were created. In the 2012 law, the legislature gave the HPC, at its discretion, some specific roles that it can assume in a DON review.

Relevant sections of the DON Regulations read:
100.155: Health Policy Commission Participation
(A) The Health Policy Commission may review and comment upon any application or supporting documentation submitted to the Department pursuant to M.G.L. c. 111, §25C. Such comments may include, inter alia, whether the Department should request an independent cost analysis pursuant to M.G.L. c. 111, §25C(h) and 105 CMR 100.325(B).
The Commission may review and comment on any such independent cost-analysis submitted to the Department pursuant to M.G.L. c. 111,§ 25C(h) and 105 CMR 100.325(B).
(B) The Commission may transmit to the Program Director its written recommendations for each project.

DPH has already requested an independent cost analysis (see comments below), and as noted from these regulations, the HPC is free to review and comment on the independent analysis (its agreement with the contractor’s findings and/or comments on what the analysis may have missed or its analytic strengths and weaknesses) as well as offer comments about the overall project. I certainly hope the HPC decides to carry out this important role—in my mind it seems essential to HPC’s purpose and charge to help bend the cost curve in Massachusetts by helping in this way—especially when the most expensive capital project ever submitted to DPH is now under DON review.

While I look forward and am hopeful the HPC will contribute in this way, if they do, I have an additional suggestion. Specifically, I think it would be a great thing and evidence ‘good governmental interagency work’, if for this DON, the Public Health Council were to ask the Health Policy Commission to have a joint public meeting to review the independent cost analysis and HPC’s review of it, and to discuss together the findings and implications for any cost growth consequences. It is hard for me to think of a better way to assure the public that the most informed judgment about this DON application and its cost consequences will result, then having a jointly held meeting of these agencies to carry out the intent of the legislature’s DON charge.

III. The Independent Cost Analysis
Finally, as for the content of the now required independent cost analysis—here are my thoughts about what ought to be part of that review.

A. Spending Growth Concerns
First, I hope that DPH has exercises good oversight before agreeing to the Children’s Hospital identified contractor who they nominate to perform this analysis. That contractor ought to clearly be one who is truly independent, and evidences, by experience, the requisite expertise in this arena to carry out a very complicated cost analysis. Consultants and actuarial firms of the caliber of those who have worked with the HPC on their Cost and Market Impact Reviews (CMIR) would be highly recommended.

As for the content of this analysis, there are two issues I wish to raise. First, like a typical CMIR which is focused on impacts on commercial health care spending, this analysis ought to examine from both hospital and physician spending perspectives, as relevant, the potential effects on negotiated prices (fee-for-service or alternative payment), total medical expense, market share changes, movement of care from one setting to another (often accompanied by price changes), and utilization changes which can flow out of this proposed capital project which adds 71 inpatient beds as well as outpatient procedural and clinic visit capacity.

A more complete analysis may also want to examine market share and revenue flow changes (with respect to both hospital and physician services) on other competing providers. You see I worry that just as in the merger and acquisition context, a major capital project with increases in bed and clinic capacity can have very significant consequences on other providers—even destabilizing consequences. This may be especially so in a small niche market like pediatric hospital and physician services. An ongoing concern that I have had is not that Children’s Hospital cares for complex and very sick children—but that they also provide a lot of services that could (and should) be delivered in lower cost settings. Allowing this expansion may lead to even more ‘routine’ care finding its way into Children’s very expensive hospital and clinic settings leading to both more spending as well as threatening the viability of other pediatric providers.
In addition, I think it would also be useful to examine likely effects on Medicaid spending as part of the analysis—including Medicaid MCO spending.

B. Cost Growth Concerns
Let me turn to something which I believe has not been fully appreciated or explored in past examinations of DON projects—namely, the ‘cost’ side of this capital project. You see to my thinking, with providers like Children’s Hospital and its physician group, both of which have significant market leverage in commercial price negotiations, this reality can result in the following cascade of events:

Children’s Hospital and its doctors look at their operating expenses, including new ones flowing from this proposed project, add them up, and then more or less dictate to the insurers what they need to be paid pricewise so as to be able to cover these expenses...and then some. So when you add the additional staffing expenses from having new beds and more outpatient clinic visit capacity, plus the tens of millions of dollars per year of depreciation expense, and other new vendor and other operating expenses, all of this drives increases in their total costs for both running a hospital as well as physician practices. Most providers have to worry whether they can earn enough from operations to cover these things; but Children’s Hospital and its doctors can more or less just name their price. So the greater the additional expenses flowing from a project like this, the greater the price that will be named--and mind you this is already on top of a hospital and physician group pricing base with the highest relative prices among pediatric providers in the state. In fact, their high relative prices have been a consistent finding of government agency reports—and just last month, the Center for Health Information and Analysis (CHIA) published a report and data tables showing that Children’s Hospital physicians have the highest composite relative price percentile of any physician group in the state—pediatric or adult! (See CHIA Report, “Relative Price: Health Care Provider Price Variation in the Massachusetts Commercial Market, February 2016)

Now Children’s Hospital may argue that they will not fill those beds with Massachusetts patients, but instead fill them with children from other states (CH has been expanding regionally—buying physician groups in CT and NY) or from other countries where they often attract cash-paying international patients. Admittedly—serving children from outside of Massachusetts will mean that some portion of the additional spending is not coming out of either our state Medicaid program or from the pockets of our state’s commercially insured. If this were a financially struggling hospital—I could say that these generous, non-Massachusetts patient revenues are making it possible for the hospital to serve our Massachusetts children. But I ask you—for a hospital that regularly generates operating profits over $100 million dollars a year, do we ever seem to get price breaks from Children’s Hospital for our Massachusetts commercially insured children as a result of their serving kids from outside of the state? Does Children’s ever say to the state—with their strong financial position and monies from out of state patients—that Massachusetts Medicaid should redirect some of its precious dollars to those providers who are really struggling financially and may need to be protected in order to maintain viable clinical operations? I don’t see that happening.

Furthermore, caring for children from outside the state also makes me think a lot about how it is that Massachusetts residents and taxpayers bear the burden of Children’s Hospital’s tax exempt status. Think about this: Children’s Hospital takes on an over billion dollar capital project in Boston along with the resultant additional operational and depreciation expenses from this project; these expenses drive their request to insurers for higher rates; those rate requests are granted and so our premiums rise and our out-of-pockets increase (often as a way to stem part of the premium increase pressure); on top of this we bear the financial burden of foregoing tax revenues from their profits and from their property...So I ask, should we, Massachusetts residents bear the brunt of these financial burdens just so Children’s Hospital can expand its beds and clinic capacity primarily to boost its ability to take care of more children from outside of our state?

IV. Summary
I realize this DON presents a variety of difficult issues to review and consider. I raise concerns here in this submission not to suggest that Children’s Hospital should not be able to ultimately devise a plan to replace its plant and equipment. I just think it should be done in a way that promotes the interests of people from the Commonwealth—advancing issues of access, cost and quality in the fullest sense. Just as government review and oversight is exploring new paths in the mergers and acquisitions context, a new way of applying critical thinking needs to take place in the DON realm as well. The legislature clearly intended that in passage of the 2012 law.

I look forward to learning the results of the independent cost analysis and I wish DPH staff and the Public Health Council the very best in its important review of this application.

Very Truly Yours,
Paul A. Hattis MD, JD, MPH
Tufts University Medical School