Minnesota hospitals helped create the stress they operate under today

by Kip Sullivan

Counterpoint Minnesota

Kip Sullivan has been featured at Angry Bear over the years. Kip is known for his promotion of Single Payer healthcare, the costs of it and the benefits of it to healthcare providers and patients. His topic today is HMOs and how they have impacted MN hospitals. HMOs prospered through the advertisement of managed care and the benefits of it as long as it had healthier patients. Think Medicare Advantage tactics.

The results being the underpricing of hospital care leading to consolidations of hospitals to rival the HMOs in negotiations. This instead of asking for new legislation restricting HMO and working with politicians bin identifying why HMO tactics can neither lower costs nor improve quality.

There once were 33 hospitals in the Twin Cities. “By 1992 almost all hospitals in the Twin Cities were owned by one of four multi-hospital systems.”


I felt some sympathy for nonprofit hospitals as I read the April 30 counterpoint by Dr. Rahul Koranne, the president and CEO of the Minnesota Hospital Association (“Nonprofit hospitals and health systems are not predatory”). Koranne sought to rebut criticism of hospitals for attempting to collect debt owed by their patients.

He characterized hospitals as victims of a “broken system.” But the sympathy I felt was akin to the sympathy we feel for a friend who responds to challenging circumstances with bad decisions. We sympathize with friends who have to deal with stress imposed upon them by forces beyond their control, but we also experience frustration with them if they respond to the stress with behavior that not only fails to address the problem but causes toxic side effects.

Minnesota’s hospitals experienced a new form of stress in the 1980s. The stress came from a newfangled form of health insurance called the “health maintenance organization.” HMOs had just started to spread in the metro area. They were seizing market share from traditional insurance companies by keeping their premiums slightly below those of the traditional insurers. They did so at first using tactics that by 1985 were collectively called “managed care.” These tactics included enrolling healthier people, limiting patient choice of doctor and denying services (many of them necessary).

By the latter half of the 1980s Minnesota’s HMOs had become large enough to deploy one more tactic — extracting huge discounts from hospitals. As two HealthPartners executives put it in a book published in 2003 (George Halvorson and George Isham, “Epidemic of Care”), HMOs “negotiated deep discounts — 30 to 50 percent discounts in many cases. The one-sided price negotiations turned providers into enemies … . [T]he deep discounts strongly encouraged providers to consolidate into larger organizations to create their own negotiations leverage.” The stress this predatory behavior imposed on Twin Cities hospitals caused George Morrow, CEO of Physicians Health Plan (one of Minnesota’s first HMOs), to resign in early 1988. “In Minnesota, we’ve built a managed care industry on the backs of the hospitals,” Morrow stated to CityBusiness at the time.

Minnesota hospitals should have responded to the stress imposed upon them by the spread of managed-care tactics by using their considerable political and market power to educate legislators and other policymakers about why those tactics can neither lower costs nor, on balance, improve quality. But rather than contest the groupthink that induced Minnesota policymakers and employers to promote HMOs as the solution to rising health care costs, they competed with each other to curry favor with the HMOs, and they succumbed to merger mania. They merged with each other and, in some cases, with HMOs, and they bought up clinics to create market power commensurate with that of the HMOs. As the federal Office of Technology Assessment noted in a 1994 report to Congress,

“In 1976 there were 33 hospitals in the Twin Cities … . [B]y 1992 almost all hospitals in the Twin Cities were owned by one of four multi-hospital systems.”

Merger mania among the hospitals intensified merger mania within the insurance industry. The result was an unprecedented acceleration of consolidation throughout the entire Minnesota health care system in the early 1990s, and that plus rising administrative costs generated by managed-care tactics drove Minnesota’s per capita health care costs through the roof. According to the Centers for Medicare and Medicaid Services, in the latter half of the 1990s Minnesota’s per capita health care spending rose from roughly even with the national average to 10% above it. Our spending has remained at about that level ever since 2000. Insurance companies responded by raising premiums and deductibles, and denying and delaying payments to hospitals.

I wholeheartedly agree with Dr. Koranne’s description of our health care system as “broken.” He correctly identified several symptoms of our very sick system, including insurance companies that “don’t pay for the care patients receive” and the rising rate of “underinsurance” (having insurance that leaves patients exposed to bills they can’t afford to pay). I also endorse his call for “an honest and urgent discussion about the challenges facing nonprofit health care in Minnesota.” But an honest discussion of those challenges must include a discussion of the significant role hospitals played in creating our inefficient health care system, and the role they continue to play. Hospitals didn’t start the HMO craze, but they enabled the spread of HMOs, and they aggravated merger mania.

Kip Sullivan is a member of the Legislative Policy Committee of Health Care for All Minnesota.