Other Options For Reducing Health Costs: All-Payer Rate Setting

Austin Frakt argues that the Affordable Care Act’s investment in Affordable Care Organizations (ACO) — which proponents believe would help improve care coordination — could increase the market power of hospitals and doctors and empower them to negotiate higher reimbursement rates with insurers and other payers. Increased market clout could translate into health care costs, as insurers would be forced to pay higher rates to keep well known providers in their networks and would then transfer those increases to beneficiaries in the form of higher premiums.

To understand the problem of provider consolidation you need to look no further than Massachusetts, where insurance companies are paying some hospitals “significantly more than others for providing similar care,” even though the higher paid hospitals are not producing better outcomes. The “highest paid hospitals had more market clout, some because of their brand names,” a state report concluded.

So what can be done to reduce provider consolidation? Frakt suggests all-payer rate setting:

An all payer rate setting system would allow associations of insurers to negotiate with each provider for a single price for each service it offers. In contrast, the way it works now is that each insurer (or third-party administrator of self-insured employers) negotiates with each provider separately. Thus, today, prices vary by insurer for the same service at a single hospital. Under an all payer system, insurers would pay one price, jointly negotiated.

By allowing insurers to, essentially, collude for the purposes of price negotiation, their individual degrees of market power are combined. It’s a bit like collective bargaining in labor. Or think of it as bulk purchasing on steroids. In economics-speak, they have monopoly power. This should drive price lower.

Indeed, according to a Commonwealth Fund/Modern Healthcare Health Care Opinion Leaders Survey from October 2010, a majority of experts actually “favor either all-payer payment rate setting or a single system of payment negotiation on behalf of all payers.” 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, “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 have also been eying all-payer rate setting as a way to control health costs. A 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.

Frakt writes that he doesn’t know if all-payer rate setting is in our future, and I tend to agree. 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.