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All-Payer Rate Setting: A Response To A ‘Modest Proposal’ From Uwe Reinhardt

July 24th, 2009

Editor’s Note: In a separate post, Uwe Reinhardt proposes to move from the present, price-discriminatory system of private-sector pricing of health services toward an all-payer system that could serve as a transition to an eventual system based on bundled payments per episode of illness for acute care, or capitation for chronic care.

In his response below to Reinhardt’s post, Paul Ginsburg suggests that an all-payer system could apply pressure on providers to contain costs in a “far less radical” manner than the public plan proposed by many advocates of health reform. Ginsburg discusses the success of Maryland’s all-payer system. For a thorough discussion of the Maryland’s regulatory scheme and its results, look for the article by Robert Murray, chair of the Maryland Health Services Cost Review Commission, in the Sept/Oct issue of Health Affairs, to be released Sept. 9.

Uwe Reinhardt’s illustration of the enormous variation in what a single insurer pays different hospitals for the same services shows how the market for health care services is not even close to being a competitive market.  The variation reflects some mixture of cost variation among hospitals and market power variation.  Neither would be able to stand in a competitive market.

Although the insurer is likely working hard to pay as little as possible for these services, it is undermined by its customers’ (both employers and consumers) unwillingness to have such price differences affect patients’ choice of hospitals.  Recent site-visit interviews conducted by the Center for Studying Health System Change (HSC) document how prominent hospitals’ ability to increase rates to private insurers is growing.  When asked about the possibility of dropping such hospitals from their networks, insurance executives reply that a network lacking a prominent hospital or system would be very unpopular with consumers.

In Reinhardt’s example, Hospital F charges more for all of the procedures, and I would guess that Hospital F is a prominent hospital and the insurer has little choice but to pay those rates. In theory, the insurer could design a benefit structure that required enrollees to pay more for care at Hospital F.  But tiered networks of hospitals have never really gained traction with purchasers.  HSC interviewers were told that prominent hospitals warned insurers that they would refuse to contract unless they were placed in the “preferred” tier with the lowest consumer cost sharing.

The Likely Failure Of Consumer Incentives To Lead To A Competitive Market

I am increasingly skeptical that the nation will embrace consumer incentives to choose lower-price providers vigorously enough to produce a competitive provider market.  Managed care 1990s style remains unpopular. Advocates of consumer-directed health care have emphasized large deductibles and transparency about provider pricing and quality.  But the benefit designs that have emerged have not attempted to create meaningful price comparisons of providers, and some of the advocates seem to have as much aversion to powerful roles for insurers as they do for government.  I suspect that our nation is more likely to look to regulation when the time comes to seriously address the issue of health care prices.

The regulatory approach most relevant to the United States is all-payer rate setting, as Uwe suggests.  Under such an approach, an entity at either the federal level or state level would determine payment methods, most likely current and future Medicare methods, and would determine payment rates for each class of payer.  Although it would be better to set a uniform rate across all payers — as Maryland does — political realities probably mean that existing differentials between Medicare, Medicaid, and private insurers would have to be maintained either permanently or through a long transition.

Governance of such a process will be key to its success.  In the 1970s, a number of northeastern and mid-Atlantic states set hospital rates for private payers and Medicaid, and some received waivers to include Medicare in their systems.  When the shift away from regulation took hold in the 1980s and Medicare inpatient prospective payment was thought by many to be adequate to control hospital costs, each of the systems was abandoned except for Maryland, which continues to this day.

The Maryland System

I believe that Maryland’s staying power is a direct result of its structure as an independent regulatory agency.  The Maryland Health Services Cost Review Commission resembles what some are discussing today as the “Federal Reserve Board” model of governance for health care.  The governor appoints volunteer commissioners to long terms, and commission decisions are not reviewable by the legislature or executive branches.  The commission has also benefited from excellent leadership at both the commissioner and executive director levels. 

One can only speculate about whether these leaders could have been as effective — or would have continued their good work for as long as they have — under a different governance structure.  Robert Murray, the current executive director, recently wrote to me: “The governance here (all a function of the independence and flexibility afforded us by our enabling statute) is really the key differentiating factor between Maryland and the other rate setting states.”

Maryland’s track record appears to be solid.  According to Murray, Maryland hospital costs per discharge went from 25 percent above the national average to 4 percent below the national average over a 30-year period. The system continues to innovate.  It recently established a pay-for-performance (P4P) system, which has the potential to be more effective than others because it is an all-payer system.

It is surprising that so little attention has been given to this option as part of the health care reform debate.  Some of those advocating a public plan option point to the need to apply more purchasing pressure on providers to contain costs.  Pursuing this through an all-payer system would involve a far less radical change than introducing a public plan with the potential to dominate private plans and lead to a sharply diminished role for them.

Reforming provider payment is seen by many in the health care reform debate as one of the few concrete options to slow the rate of growth in health spending.  But all the discussion about bundled payment and accountable care organizations has focused on the Medicare program.  Although private insurers have been increasingly following Medicare payment methods in recent years, it is an open question as to whether they will be able to get providers to contract with them under new Medicare payment methods.  But if all payers used the new methods, the potential to motivate positive change in provider behavior would be much greater.

In closing, provider payment has a profound effect on the delivery of health care, and the right payment methods have the potential to encourage higher-quality and lower-cost care.  Unless the nation is ready to vigorously pursue market approaches, it needs to consider regulation.  Indeed, Maryland’s regulatory approach has always been guided by a strategy of attempting to simulate the desirable aspects of a hypothetical market model.  Discussion on broader use of this method is overdue.

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2 Responses to “All-Payer Rate Setting: A Response To A ‘Modest Proposal’ From Uwe Reinhardt”

  1. Robert Murray Says:


    The rates set by our Commission (the Maryland Health Services Cost Review Commission – the Hospital Rate Setting agency in the State) do vary by hospital. They reflect differences in the cost structures of different facilities. Once a rate is established for a particular service at a given hospital however, all patients and all-payers must pay on the basis of that rate.

    We have a statutory (and I would argue economic) requirement to establish rates that reflect underlying costs. But the Commission also is required to certify that the costs of a hospital are reasonable. So the approach we take is first to establish standards of reasonableness for the cost structure of a given facility – we generally use as a benchmark the average costs of “peer” hospitals. Once the reasonable cost standards have been established, then the Commission sets the final rates based on those cost standards, by establishing a uniform markup of about 20%. Part of that markup includes a provision to finance uncompensated care (it runs about 8% currently). Of course we have the absolute lowest markup in the US because of this – and the hospitals here cannot cost-shift.

    These rates are then for the most part just updated each and every year by an inflation adjustment (comparable to the CMS market basket – but we use our own formula). So it is a completely prospective system – we aren’t going back and re-establishing rates each year based on reported costs. We do however, re-align rates to ensure that consistent relationship of rates to reported costs.

    We also use DRGs (All patient refined -DRGs) similar to CMS to provide incentives to control utilization per case, but we use DRGs as constraints on overall hospital revenues – not for payment. We think this approach provides us with some advantages over the CMS per case payment system in the areas of patient equity (each patient pays for the services he or she uses) and also incentives (we have aligned the incentives across both payers and hospitals with this approach – both have incentive to manage utilization at the case level). We also believe that DRG constraints should reflect actual resource use so we use the Hospital Specific Relative Values (HSRV) method to establish DRG weights.

    So from the Commission’s standpoint – we believe it is most appropriate to establish rates (and DRG amounts) that reflect costs – markets work best when prices reflect cost and resources are allocated most efficiently. But you don’t want to simply pass-through costs. There needs to be some standard of reasonableness applied.

    With this approach – in Maryland at least – the rates of urban facilities are higher than the rates of rural facilities (largely reflecting regional variations in wages). Rates vary for other systematic or structural reasons as well – such as for hospitals with graduate medical education programs, hospitals who serve large number of indigent patients, etc.

    Hope that helps.

    Robert Murray

  2. Bradley Flansbaum Says:

    1) Are rates by the Maryland commission set so as to reimburse all hospitals the same amount? If yes, in a greater national roll out, how do hospitals “win or lose” based on their performance, especially if tiers are not envisioned as a marketable tool?

    2) Would paying the same rates to hospitals in rural vs urban areas be practical? Arent the costs of doing business radically different within some states, say New York City vs Syracuse to cite one geographic example. Wouldnt there have to be some adjustments, even apolitical ones?

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