Harvard's Teaching Hospitals Rush To Adapt to a Competitive Environment

Harvard's teaching hospitals may be leaders in disease treatment and vaccine development, but they're still not immune to the sting of competition.

As national health care reform plans promise to accelerate the growth of low-cost health providers, hospitals all over the country are scrambling to meet the challenge of providing high-quality care at low prices.

Harvard's five teaching hospitals--Mass General, Brigham and Women's, New England Deaconess, Children's and Beth Israel--are no exception.

And while the immediate danger of health care mandates from Capitol Hill may have subsided for this year, hospital executives say competition in Boston and Cambridge can only increase.

"Irrespective of what happens in Washington, a lot of things built into the national program are already happening anyway," says J. Richard Gaintner, president of the New England Deaconess hospital. "It's becoming a competitive system."

The greatest danger to the teaching hospitals are health maintenance organizations (HMOs), groups of physicians who combine their services under one plan to lower their costs to customers.

In Massachusetts, managed care organizations have grown exponentially in the past few years, and will likely be a cornerstone for any Congressional health care bill that eventually passes.

The increased competition from these organizations threaten Harvard's ability to support its prestigious medical community, one of the premier networks of health care providers in the Northeast.

"We are one of the largest medical centers in the world," says Jane H. Corlette, Harvard's director of government relations for health policy. "It would really be a shame if these extraordinary organisms that do teaching, health care service and education were basically destroyed because of some shift in reimbursement mechanisms."

According to The Boston Globe, teaching hospitals are the largest private employers in the city, and also attract funds to support the city's burgeoning biotech industry.

"I can say that proportionate to their size, [Harvard's teaching hospitals] have an influence far greater than other institutions, in part because they train so many of the faculty that end up in medical schools across the country," Corlette says.

Teaching Hospital's High Costs

Circumstances unique to teaching hospitals have forced them to charge higher prices to patients.

Teaching hospitals have the costly responsibility of educating third and fourth year medical students during their clinical rounds and training the nation's interns and residents.

Students and faculty members usually engage in one-on-one mentoring relationships and work on cases together, slowing down the speed at which patients are treated.

"Having a resident do the case takes longer than an experienced 50-year-old surgeon," Corlette says. "It's a very expensive way of educating."

Moreover, Harvard's teaching hospitals specialize in providing expensive tertiary care, treating severe ailments like diabetes and heart failure with the latest equipment and techniques.

Community hospitals specialize in primary care and may lack advanced technology, so they can afford to lower their prices. Often, they refer their sickest patients to the teaching hospitals.

As a result, teaching hospitals treat a large proportion of the indigent, uninsured and homeless. Many of these patients have not had access to preventative care and enter the emergency room when their illnesses have already reached an acute stage.

Past Methods of Funding

Until now, teaching hospitals have relied on two main sources to fund its costly operations: government entitlement plans, like Medicare and Medicaid, and private insurers.

Since Medicare and Medicaid funds have been unable to cover the full cost of patients' treatments, hospitals have often charged private insurance companies or wealthy foreigners extra fees to make up for losses.

It is these higher prices which are preventing teaching hospitals from effectively competing with hospitals included in community plans.

Medicare pays teaching hospitals based on the national average cost of the operation, but since teaching hospitals' operations consistently cost more than the average, the hospitals must recoup the lost revenue by other means.

In the past, the Medicare program has recognized the higher costs of teaching hospitals and has been willing to pay more to teaching hospitals than community hospitals for the same level of care.

The Medicare program has done this by reimbursing teaching hospitals for "direct medical education" costs, which cover the salaries of interns, residents, and faculty. Medicare has often also paid for "indirect medical education" costs, which cover the inefficiencies of treating patients in a teaching setting and the high cost of treating indigent and severely ill patients.

With the rapid proliferation of HMO's, teaching hospitals will no longer be able to depend on Medicare to bear the extra costs.

As HMO's are lowering the price for many treatments, Medicare subsidies will be able to cover the high costs incurred by teaching hospitals less and less, Corlette says.

Already Harvard's teaching hospitals occasionally run deficits, and their financial margins are lower than other comparable institutions.

"The average community suburban hospitals are doing much better than the teaching hospitals, even though the teaching hospitals have the Medicare subsidy," says Corlette.

How Hospitals Face New Competition

As HMOs have increasingly penetrated the health care market in the last few years, teaching hospitals have initiated cost-cutting programs to consolidate administrative services and improve efficiency.

"We have a total quality improvement program that's been ongoing for over four years," Gaintner says.

Gaintner says the hospital began anticipating many of the changes five years ago and decided to focus on what it does best, tertiary and quarternary care, while building partnerships with other institutions to cover primary care.

"We've embarked on a set of very extensive relationships with community hospitals," Gaintner says. The Deaconess Hospital's parent corporation now includes three other hospitals, the New England Baptist Hospital, the Deaconess-Neshoba hospital in Ayre and the Deaconess-Glover hospital in Needham.

"We've also developed fairly strong relationships with three or four community medical centers," Gaintner says. "Our role in the teaching hospitals is to do those things that can't be done in the community, so we're complementary of what they do."

Affiliations seem to be a popular route for hospitals determined to survive the HMO-crowded climate.

Two of Harvard's teaching hospitals--Mass General and Brigham and Women's--have already merged into a corporation called Partners Health-Care System Inc., established formally last spring.

"The goal of Partners HealthCare is an integrated health care system, from primary care to tertiary care," says Michelle Scarlatelli, spokesperson for Brigham and Women's hospital. "We think of the two hospitals as the hub with spokes going out to the other institutions we'll be forming affiliations with."

The merger has begun to yield some competitive improvements, hospital executives say.

Consolidation of the treasury and cash management departments of the two hospitals has already resulted in a savings of $1.5 million, says Vice President Robert Scott. And two new physician groups have just joined the affiliation.

According to Gaintner, the remaining three teaching hospitals--Beth Israel, the New England Deaconess, and Children's--are also considering forming a separate alliance.

Although this association would be looser than Partners', the hospitals could greatly benefit from the affiliation.

For example, the Deaconess can specifically benefit from the excellent pediatric and obstetric services at Beth Israel and Children's, Gaintner says.

"We're talking with a lot of hospitals," says Erin C. Martin, spokesperson for the New England Deaconess Hospital. "I think that all the hospitals are looking at ways to improve the delivery of health care."

Although these affiliations seem encouraging, teaching hospitals may find it more difficult to eventually link up with HMOs, which are generally unwilling to pay for the higher priced services of teaching hospitals.

Current Plans in Congress

Most of the hospital representatives said they had not officially endorsed any particular health-care plan currently being considered in Congress.

And Gaintner says he doubts Congress will be able to pass anything truly substantive.

"I don't think very much is going to happen in Washington," he says. "Most of us are pretty skeptical."

"It's possible they might pull a rabbit out of a hat," says Corlette. "If anything, it will be a scaled down version, maybe covering 92 percent of people, but even that's hard to achieve." According to Corlette, 85 percent of the population is now insured.

The University and the teaching hospitals generally support President Clinton's push for broader insurance coverage.

"When people don't have insurance, it makes for bad health care," says Corlette. "Women who get pregnant don't go to sex doctors or get the appropriate vaccinations. We are the only Western democracy that does not have universal coverage. It does seem a shame."

But Harvard's teaching hospitals still have problems with aspects of some other Congressional proposals.

Gaintner says he is "very against" massive funds being taken away from Medicare and Medicaid. "You don't rob Peter to pay Paul," he says.

Teaching hospitals also oppose a measure in Congress requiring that 55 percent of all residents be trained as primary care physicians by the year 2001.

"We would feel that it is not reasonable for all hospitals to look like each other," says Corlette. Harvard's teaching hospitals now train mostly specialists, not primary care physicians.

Favorable Subsidies

Of special importance to teaching hospitals is their bid to levy a fee on all insurers to support their educational programs, says Corlette.

"I think probably the ideal ought to come from a combination of the government and the private sector," Gaintner says. "The private sector benefits from our activities as well."

The proposed "assessment," which has been incorporated into many of the plans being considered in Congress, will make sure that all insurers share the burden in training new physicians.

Opponents to the measure, especially from states without teaching hospitals, have increasingly assailed the "assessment" as a tax" in recent weeks.

Harvard's teaching hospitals are looking for similar subsidies to fund research and classes at the Medical School.

A powerful ally in the fight for these subsidies will likely be Sen. Edward M. Kennedy "54."56 (D-Mass.), who Corlette says "was an absolute champion of the Boston teaching hospitals and the medical schools."

But even if Kennedy wins the re-election race this year, Corlette says that none of subsidies have much of a chance of passing in Congress.

Nevertheless, at least one hospital president is optimistic about the future.

A recent market survey said that there was "high agreement" among people that teaching hospitals and the relationships in medical schools are important, Gaintner says.

"I'm optimistic that the citizens recognize the value of teaching hospitals," he says. "I think the basic function of the teaching hospitals will be preserved."

Even with reform knocking at their doors, hospital administrators seem unwilling to sacrifice their teaching role.

"We're going to obviously have to do what we have to do, but we're absolutely committed to the academic role in teaching and research," Gaintner says.

'It would really be a shame if these extraordinary organisms...were basically destroyed because of some shift in reimbursement mechanisms.' --Jane H. Corlette