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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