Dislodging the anchor

A well-established technique in negotiation is to “set an anchor.” The
idea is to be the first person to put out an offer in a negotiation in
which price is the main issue. Many people think, incorrectly, that you
are better off if you let the other party make the first offer. But,
no. An anchor, once set, has a powerful impact on the negotiation,
causing the final price to settle in its vicinity — even if the anchor
has no substantive basis.

I fear that we are seeing this phenomenon happening in Massachusetts. Many of you have followed our
current controversy regarding insurance rates for individuals and small
businesses. Lots of people with these kind of insurance policies found
themselves with large premium increases this year.

The state
legislature is engaged in dealing with this problem, and one idea
pending is that the hospitals should contribute $100 million to help
alleviate these premium increases. I am not gong to comment here on
whether that source of funds is the right or wrong one. But I am going
to comment on a dynamic surrounding the current negotiations.

weeks ago, the Partners Healthcare System volunteered to donate $40
million to this problem. On the one hand, this could appear generous.
On the other hand, as noted by Boston
columnist Yvonne
, it can be viewed as less than generous.

But the
point is that PHS set an anchor with its offer, one that now leads some
legislators to think that PHS has “done its share” and that the other
hospitals should come up with the remaining $60 million. The usual
dynamic that we could expect at this point is for the remaining
hospitals to squabble among themselves as to who will pay what portion
of this. That puts individual legislators in difficult positions, as
many of the hospitals are the major employers in their districts.

real point, though, is that the PHS anchor has no legitimacy. This
collection of academic medical centers, community hospitals, and about
4000 physicians in the state has received excess insurance rates that
produced billions of dollars in extra revenue over the last decade. The
system has used those funds to recruit physicians, direct care to its
network, and build new facilities throughout the region, further
building its market influence and ability to demand higher reimbursement
rates. Who is to say that a one-time offer of $40 million is anywhere
near a fair contribution to this problem?

Another lesson of
negotiation theory is that an illegitimate anchor needs to be dislodged.
The Attorney General has prepared a
showing the disparity in reimbursements received by systems
in the state. The Legislature might consider drawing on that research
to decide if the Partners anchor has dropped in the wrong part of the
sea floor.

Paul Levy is the
President and CEO of Beth Israel Deconess Medical Center in Boston. Paul
recently became the focus of much media attention when he decided to publish
infection rates at his hospital, despite the fact that under Massachusetts law
he is not yet required to do so. For the past three years he has blogged about
his experiences in an online journal,
a Hospital
, one of the few
blogs we know of maintained by a senior hospital executive.

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3 replies »

  1. Now we know why this man is smiling and his tie is loose around the collar. Anchors are Freudian.

  2. While Mr. Levy honorably recuses himself from the discussion over whether hospitals should be responsible for alleviating these premiums, I won’t. Hospitals are not to blame for the bulk of rising costs. Rather, overutilization in the outpatient setting is the primary contributor. Instead of looking for someone to “plug up the hole,” state regulators should make a proper diagnosis themselves regarding the source of these costs and curtail them with sensible reimbursement reform. We should have seen this with the national health care bill as well- one can only imagine that similar financial woes will plague payers nationally after that kicks in.
    Please visit my blog on the business of health care in America:

  3. First of all I just want to say how exciting and vital it is to have someone in Paul Levy’s position blogging so openly and honestly about insurance costs and the health care situation in general. Who has a better perspective than someone “running a hospital”? The rest of the country is, indeed, looking at Massachusetts (if not “to” it) to see what works and what doesn’t, and of course fingers from both political bodies will be pointing at opposite results as validation and confirmation of their agendas. As for the “anchor” volunteered by Partners Healthcare System, I do agree that as “generous” as 40 million might appear at first blush, when one reflects on the depth of the situation and the weight of the anchor actually needed, their offer is lightweight and will float ineffectively above the bottom line.