Massachusetts’ Exciting Old Cost Containment Proposal

DPatrickEarlier this week, Massachusetts Governor Deval Patrick introduced legislation giving the state insurance commissioner “authority to review and reject rates charged by hospitals, physician groups, medical imaging centers, and insurers.” The commissioner could “reject premium hikes ‘significantly higher’ than 3.2%, the current medical inflation rate, and prevent health insurers in the small business market from “raising premiums by more than 1.5 times the rate of medical inflation.”

Patrick’s proposal follows a recent report released by Massachusetts Attorney General Martha Coakley, which concluded that “insurance companies pay some hospitals and doctors twice as much money as others for essentially the same patient care” because hospitals and dominant physician groups with the greatest market leverage are “able to demand the most money.”

Deval’s new legislation tries to prevent providers (and payers) from using their leverage to artificially inflate prices and it relies on a strategy popular in the 1970s and 1980s, when at least 30 states — including Massachusetts itself — used all-payer rate setting to contain health care spending. Lawmakers established rate boards that considered “the differences in labor markets and how much a hospital pays in wages; the amount of charity care the hospital does; and whether it treats a large number of severely ill patients” and set rates accordingly.

By setting prices at the actual cost of delivering services, lawmakers hoped to reduce wasteful spending and spur efficiency — while freeing hospitals from the uncertainly of annual rate negotiations with insurers. And it worked. At least, a little. One study found that from 1982 through 1986, “all-payer ratesetting reduced hospital expenditures by 16.3 percent in Massachusetts, 15.4 percent in Maryland, 6.3 percent in New York, and 1.9 percent in New Jersey, compared with the national average.” Other studies disagreed and during the conservative revolution of the 1980s, most states abandoned the practice in the hopes that managed competition could deliver lower rates. Today, Maryland is the only state that continues to maintain an all-payer rate setting system, but the strategy is also used in France, the Netherlands, Japan, Australia and Germany.

The indispensable Maggie Mahar notes that “a review of the Maryland plan published in a recent issue of Health Affairs reports that, since 1976, state regulation of hospital rates has saved $40 billion. Had a similar system been in place over the same period of time for all states, savings would have totaled $1.8 trillion or more.” The Maryland system is “widely regarded as having created a market in which payments are predictable, transparent, and fair, and in which profits have not suffered as a result,” Mahar argues. “Providers are protected from having to negotiate rates with payers; payers, meanwhile, are shielded from the high markups attached to hospitals services in other states; and patient access to hospital care is protected.”

But it’s not clear how much money Massachusetts would save. A recent RAND study of 12 options for reducing health care spending in the state ranked traditional hospital all-payer rate setting as the second most likely tool for changing the trajectory of health care growth, but concluded that “there were no ‘silver bullets’ that, alone, would reduce the rate of growth in health spending to that of GDP.” The report concluded that, “at a maximum, hospital rate setting could reduce health spending in Massachusetts by nearly 4 percent between 2010 and 2020.” RAND warns however, that providers could try to undermine rate setting by unbundling certain services, increasing admissions or length of stay.

Patrick’s legislation reads like a very modified rate-setting proposal which, if it has support from the providers — in Maryland the hospitals actually introduced the idea — could put Massachusetts on the road to lowering costs. It’s one of many solutions the state should be considering.