by MAGGIE MAHAR
Massachusetts has succeeded in providing health care insurance for all but 2.6% of its citizens.
Yet the Commonwealth still struggles to make that coverage affordable. Health care inflation is driving Massachusetts’ system toward a cliff. Total outlays for medical services and products are climbing 8 percent faster than the state’s economy. Unless something is done to rein in the cost of care, health care spending in Massachusetts is projected to nearly double over the next 10 years, hitting $123 billion in 2020. State officials know they must find a way to put a lid on spending so that it grows no faster than the state’s gross domestic product.
With that question in mind, The Massachusetts Division of Health Care and Policy (DHCFP) contracted with the RAND Corporation to develop a menu of cost containment strategies and options. In September RAND came back with a report that recommended 12 strategies for reducing health care bills.
Near the top of the list (right after “bundling” payments for doctors and hospitals), Rand suggested that Massachusetts set hospital prices by “establishing a regulatory board to determine appropriate rates for hospital inpatient, outpatient, and emergency department care, limiting payment to the minimum amount necessary to cover hospital operating expenses, and requiring all payers (both private insurers and Medicare) to adhere to the rates set.
In other words, Rand recommended that Massachusetts consider the “Maryland solution” (a.k.a. the “all-payer” strategy). Here’s a brief summary: In Maryland prices for all hospital services are set by seven commissioners appointed by the governor to four-year terms. When setting rates for at individual hospitals, the Commission takes into account each hospital’s wages, charity care and severity of patient illnesses. Hospitals can appeal only to the commission or take the dispute to court.
Advantages of Regulating Hospital Prices
Savings: 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 .
Two readers commenting on parts 1 and 2 of this post have suggested that while the Commission may be holding down hospital spending, “ state regulation of hospital prices “has merely pushed healthcare [and health care spending] out of hospitals. So if a hospital wants a high tech imaging center or surgical-center on its campus, it gets built on ‘unregulated space’ outside the hospital.” Thus, these skeptics argue that while Maryland may have hospital prices under control, when you look at total medical spending, it is a “high cost state.”
To test their theory, I did some research, and discovered the Kaiser Family Foundation’s “State Health Facts.” First, I looked at Maryland’s health care spending per capita, compared to per capita outlays in other states. It turns out that in 2004, Maryland was spending slightly more than average ($5,590 vs. $5,283) —but less than sixteen other states including Massachusetts ($6, 683).
More importantly, when the growth of medical spending in Maryland is compared to inflation in other states, Kaiser reports that from 1991 to 2004 Maryland’s total heath care bill was climbing by just 6.7% a year—right at the national average. The rate of growth in Maryland was slower than in 32 other states.
Another way to measure healthcare spending is to ask what percent of the state’s Gross Domestic Product it consumes. In Maryland , medical bills equal 13.3% of GDP – once again, right at the national average .
It’s surprising that Maryland’s medical bills aren’t higher. After all, Maryland is located in the Boston/Washington corridor where health care spending tends to be high; it is home to Johns’ Hopkins (a world-class academic medical center which draws some very sick patients); Maryland doctors and hospitals in the Baltimore area are serving a large very poor population who have better access to care than the poor in most states. (In some states, the poor just don’t receive much care, but in Maryland they do: see below.)
There is no evidence that state regulation of hospital prices is shifting cost to other parts of the health care system. If anything , the fact that the state has put hospitals on a budget may be making everyone more aware of waste in the system.
Indeed, according to a 2009 article by Emory University’s Elena Conis,
“The savings and financial stability engendered by the system also receive credit for granting the state the lowest health insurance premiums (as a fraction of income) in the country.”
Better Access to Care for the Uninsured
When the Commission sets prices , it takes into account how much charity care a hospital provides, raising rates to compensate for unpaid bills. Thus, as the Health Affairs analysis points out: “Hospitals therefore have a financial incentive to treat all patients. Meanwhile, the uninsured have access to all hospitals, including private community facilities and the state’s two well-known academic medical centers.”
Moreover, hospitals are not allowed to gouge the uninsured. In other states, when a patient who doesn’t have insurance pays out-of-pocket, hospitals frequently charge him prices that are far higher than the “group rates” that private insurers have negotiated. In Maryland, by contrast, uninsured patients are charged the fixed rates that everyone pays.
Better Care for Medicaid Patients
Typically, Medicaid pays health care providers roughly 30 percent less than those providers would receive if they were caring for a Medicare patient. As a result, the safety-net hospitals that care for many Medicaid patients often operate in the red; they simply don’t have the resources to give all of their patients the care they know they need. (In Money-Driven Medicine I write about how such hospitals are forced to make tough decisions: “ad hoc rationing puts enormous pressure on doctors, nurses and caseworkers who struggle to decide who should receive costly drugs and surgical procedures, who should be moved out of an expensive bed in an ICU and sent back to a nursing home, who should receive a third round of chemotherapy. . ..” )
In Maryland, Medicaid, like Medicare, pays the standard rates set by the Commission.
Financial stability for hospitals
Nationwide, hospitals are hard-pressed to plan their budgets. Typically, they find themselves on a roller-coaster—for a few years, reimbursements are high, and then they plunge, as payers decide to “get tough.” Hospitals never know when Congress will decide to change the rules for Medicare reimbursements —or how annual negotiations with insurers will turn out. Meanwhile, charitable care remains an unfunded mandate. Hospital costs and revenues can fluctuate sharply.
Government rate regulation by an independent Commission has proven far more rational and predictable then either Congress or “the market.” (As I noted in part 1, in this marketplace might makes right: if insurers have more clout, they insist on steep discounts; if large hospitals have the leverage, they demand reimbursements that far exceed their costs.)
In Maryland, prices are pretty equitable across hospitals, and the Commission seems to be paying neither too much, nor too little. On average the state’s hospitals are operating with a 2 percent surplus; for a non-profit this is a comfortable margin Indeed, Health Affairs rerpots, it is wide enough to satisfy bond-rating companies: “Maryland has consistently had the highest proportion of hospitals rated ‘investment grade’ of any state.” At the same time, “while profits in Maryland hospitals have tracked national trends” they “have averaged about 0.7 percent lower on operating and 1.4 percent lower on total margins since 1993. “
Lower administrative costs, greater transparency
In a recent issue of The New England Journal of Medicine, Jonathan Oberlander, and Joseph White argue for “system- wide” cost control, arguing that : “setting standard rules would simplify billing and reduce the related confusion and expense. The staggering price variation in the U.S. health care system would end, significantly reducing administrative expenses for providers who must now maintain costly billing systems and administrative staffs to cope with different insurers’ disparate rules. Standardization would also create more transparency for consumers, who could more easily determine what prices insurers were paying for services and thus their appropriate copayments.”
Why is Maryland the Only State That Sets Hospital Prices?
Maryland wasn’t always unique. At one time some 30 states regulated hospitals reimbursements.In many states, the strategy seemed to be saving money. In a 1991 article published in Health Care Financing Review, Gerard Anderson, a health policy expert at Johns Hopkins Bloomberg School of Public Health, observes that “the final report of the national rate setting study concludes that mandatory programs saved $36 billion dollars from 1969 to 1982 and reduced costs per discharge in States with mandatory programs 12-26 percent. When Schramm, Renn, and Biles (1986) compared six mandatory rate setting States with the non-rates setting States during the period 1976-83 they found that the annual percent change in adjusted expense per admission averaged 3-4 percentage points lower in the States with mandatory rate setting.’’ In addition “ Robinson and Luft (1988) found that, from 1982 through 1986, all-payer rate setting 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.
Yes, Massachusetts was one of the states that set rates. But then the political winds shifted– and states began to deregulate.
Writing in Health Affairs in 1997, former Massachusetts state representative John McDonough points out that most rate-setting deregulations occurred as States where Democrats were replaced with Republican or Independent leaders. He offers some examples: “In 1991 newly elected Massachusetts Governor William Weld, a Republican, made hospital deregulation a central part of his first-year agenda.
In 1995 newly elected Governor Angus King, an Independent, worked with a new Republican majority in the Maine Senate to eliminate their twelve year- old system. In 1995 New York’s first Republican governor since 1974, George Pataki, placed NYPHRM deregulation squarely on the state’s policy agenda.”
While these Republicans favored deregulation, it is worth noting that a earlier generation of pre-Reagan Republicans ushered in rate-setting: “New York’s Nelson Rockefeller presided over the implementation of rate setting in the early 1970s. New Jersey’s Thomas Kean” was also an advocate.
Maryland’s rate regulation survived in part because long-term Democratic majorities in both branches of the legislature combined with Democratic control of the governor’s office set the state apart from This.
According to the Rand report Maryland’s triumph is also due to “proper design of the rate-setting commission.” (Thanks to Igor Gorlach at “A Healthy Blog” for pointing this out .http://blog.hcfama.org/?p=3553) Gerard Anderson points to the fact that in Maryland “rates are hospital specific,” is another factor that “distinguishes the Maryland program from many other rate setting programs.”
The rise of HMOS also led to the denouement of rate-setting in many states. During the late 1980s and early 1990s, as for-profit HMOs flourished, they resisted paying prices set by the state. They hoped to negotiate discounts with hospitals eager to join their networks, and in many cases they did. (Later, hospital consolidation in many regions would give providers the upper hand when bargaining with insurers.)
States hooked on the idea of “managed care” as a way to control costs granted for-profit HMOs an exemption from the rules. So in 1982, Massachusetts chose to allow HMOs unlimited discounting authority. By contrast, McDonough notes, “regulators in Maryland have tightly and successfully limited negotiated discounts (available to all payers, not just HMOs) to no more than 4 percent, and only to insurers who provide certain consumer benefits such as open enrollment. Although payers in Maryland privately grumble, few openly call for deregulation, and none can claim to be suffering inordinately.”
To understand how Maryland hung on to its rate-setting program while other states abandoned the idea, I also think it helps to realize that, in Maryland the idea of rate regulation came not from the state legislature, but from hospitals themselves. As Emory’s Elena Conis points out in her 2009 report: “Initially, it was proposed by the Maryland Hospital Association as a solution to rising hospital costs and the growing problem of uncompensated care.” Government agreed: “Both the legislature and the state had concluded that the unregulated hospital care market was contributing to skyrocketing costs for many hospitals and an inequitable system of care.”
Maryland also recognized that “Government leadership in setting rules for medical care payments was already in place in other countries with a combination of public and private payers, including France, the Netherlands, Japan and Germany; in such all-payer systems [where all payers pay the same rates at a particular hospital] , health care costs were indeed lower.”
Conis goes on to describe a system that works because, after nearly four decades, it is perceived as apolitical and generally honest: “The HSCRC [the “Commission”] is politically independent and widely supported by hospitals, public and private payers, and legislators in both political parties. The 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. 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 (indeed, the Maryland health Care Commission says that as a result of the system, the state no longer needs public hospitals).
“As HSCRC Commissioner David Young reported in a recent statement, ‘Of all the accomplishments of the All-Payer System in its thirty-eight year history, and there have been many, nothing stands out to me more than the willingness of all participants – providers, payers, business and labor, and HSCRC staff – to put aside provincial interests in favor of producing the healthiest hospital system in America.’”
In other words, Maryland’s experiment with rate setting survived because it was a collaborative effort. Rather than focusing on their own interests, participants thought collectively. And to this day, they continue to refine how they set prices.
Paying for Quality
The one element missing in Maryland’s original scheme is that it did not allow payers to reward hospitals that provide better quality care—or penalize those that fall short. But this is changing: “In 2008, the Maryland hospital association made voluntary agreements with insurance companies not to bill for eight medical errors, including transfusions that use the wrong blood type and surgery on the wrong body part.” observes Dr Lesley Russell, an Australian who is currently a Visiting Fellow at the Center for American Progress in Washington D.C.
Jump-Starting Reform: Following Maryland’s Example
Russell suggests that that Australia might learn something from Maryland. What about the rest of the U.S.
Although some reformers have discussed the possibility of the government setting hospital rates, this idea, like so many other good ideas for reform, hasn’t gotten very far in Washington.
To be honest, I cannot quite envision the federal government assessing rates for all of the services provided by all of the hospitals in the U.S., adjusting for the cost of labor in each town, how much charity care a hospital provides, and the cost of teaching medical students.
Perhaps it could be done, but I can only imagine the complexity of the task—and the politics as Congressmen vie for higher rates for their states. No doubt the American Hospital Association would want to weight in—as would national lobbies representing insurers.
Ultimately, I believe that most healthcare reform must ultimately be done at a federal level. Our health care system is already both fragmented and inequitable; we don’t want to fracture it further. But in this case, setting hospital rates seem to me a task that might best be done by state regulators who are in a better position to know which hospitals require higher reimbursements to cover legitimate expenses such as charity care, and which hospitals have been using their market muscle to game the system –charging more without providing better care.
Just as in Maryland, a panel of state regulators would need to be protected from lobbyists and politicians. Since Medicare would be paying the fixed rates, it might set up a unit to investigate complaints of corruption or price manipulation. (Meanwhile, states interested in adopting the program would do well to investigate how the Maryland Commission has maintained a reputation for fairness.)
Yet, even with safeguards, I can foresee problems. In some states, hospitals are so powerful that they might well capture the regulators. On this score I cannot help but think of Massachusetts.
On the other hand, the Commonwealth boasts more than a few brilliant, progressive, and dedicated health care reformers. Their numbers include physicians, public health experts, nurses and hospital administrators.
At this point, I am convinced that reform can no longer wait for Washington. We need a movement on the ground. Those who want to re-shape our broken system should begin to lead the way—today. I suspect that in Massachusetts, and in many other states, a push for hospital rate regulation would have to come from within the medical culture—as it did in Maryland.
Wanted: Insider Agitators, ready and willing to call for price-setting that will help control costs; increase access to care; make fees for services equitable and transparent across hospitals, and enhance patient safety.
Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.