Beyond The Affordable Care Act: Experts See All-Payer Rate Setting As Way To Control Health Costs

A new Commonwealth Fund/Modern Healthcare Health Care Opinion Leaders Survey found that most respondents support “moving toward salaried physician practice, with appropriate rewards for quality and prudent use of resources” and reimbursement methods that “use cost and quality information to foster price competition among providers and suppliers.” Interestingly, a majority of experts also said they would “favor either all-payer payment rate setting or a single system of payment negotiation on behalf of all payers”:

Currently, public and private health insurers engage in a complex and continuous process of negotiations with multiple health care providers to establish reimbursement rates for services. This increases administrative expenses among payers and providers and leads to wide variation in prices. Fifty-six percent of leaders support replacing the current system with either all-payer payment rate setting or a single system of payment rate negotiation on behalf of all payers. Twenty-three percent of respondents support letting each provider set its own prices; insurers would pay the lowest price and patients would pay the difference in cost for seeing higher-priced providers. Nine percent of leaders support keeping the current system.

The Affordable Care Act will finance new demonstration projects that reimburse providers in ways that focus on quality rather than quantity but won’t directly lead to an all-payer system in which health care providers would charge all payers (private and public) the same price for the same service (while allowing for age and risk adjustment to ensure that hospitals would be adequately reimbursed for the costliest patients).

The strategy was popular in the 1970s and 1980s, when at least 30 states 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.

As 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.”

Regulators in Massachusetts are also eying all-payer rate setting as a way to control health costs. 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 found 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.

Given the process of implementing the Affordable Care Act, however, lawmakers are years away from considering or applying this apparently popular method of cost control on a federal level, but if they do, at least some insurers may be on board. During the health care reform debate, it was rumored that the insurers would have accepted the public option if the law adopted a rate scheme under which all payers would reimburse providers at the same price for the same service.