Price Controls Do Not Work

Paul levy

If there is anything about economics that has been proven over and over, it is that price controls do not work. The unintended consequences are usually worse than the problem that led to the solution in the first place.

Massachusetts legislators, feeling the frustration of higher insurance premiums, are now considering a bill to limit doctor and hospital reimbursement payments to 110% of Medicare rates, or perhaps some other percentage of Medicare rates. The problem with this is that Medicare rates are not fully compensatory to doctors and hospitals and have contributed to the increase in private insurance company rates. This was one of the conclusions reached by the Attorney General in her extensive investigation of these matters.

An unreported fact in Massachusetts is that Tufts Health Plan, at the request of the Group Insurance Commission (the agency that manages the state employees’ health plan), recently sent out a request for proposals for a new insurance contract for the tens of thousands government employees covered by the GIC. The main provision was that the doctors and hospitals would have to agree to rates set at 110% of Medicare.

The result: It was a bust. Hospitals and doctors did not express interest in the contract because they knew that they could not cover their costs with it — even though they could have been included in a limited network and have an effective monopoly to serve this large group of customers.

If today legislators adopt price controls over hospital and doctors’ rates, tomorrow they will have to deal with layoffs and closures in the Commonwealth’s strongest economic sector. These organizations are not for-profit enterprises with shareholders who can absorb losses.

It is interesting to me that a state in which many people decry the idea of rate-setting would consider the idea of picking a certain price target by fiat for the medical sector. If we are going to move towards government supervision of reimbursement levels, please instead set up a regulatory body to determine the appropriate level of rates based on best medical practices and true underlying costs of hospitals. Anevidentiary hearing in which all those factors are considered by qualified administrative law judges would do more to provide a sound basis for determining rates than the price control approaches being raised.

Paul Levy is the President and CEO of Beth Israel Deconess Medical Center in Boston. Paul recently became the focus of much media attention when he decided to publish infection rates at his hospital, despite the fact that under Massachusetts law he is not yet required to do so. For the past three years he has blogged about his experiences in an online journal, Running a Hospital, one of the few blogs we know of maintained by a senior hospital executive.

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28 replies »

  1. These are difficult issues, and all that I have read from Paul Levy suggests that he is a humane person.

    However he is fighting a losing battle.

    If you read Joseph White, tbe best writer on health care reform, what you find is that other industrial nations rely bargaining sessions between healh care providers and a single payer.

    The single payer says, ” We have $200 billion to spend on hospitals. (or wherever the budget is set).” The hospital knows that balance billing is not permitted, and there are no private insurance companies to gouge for higher payouts.

    The single payer and the hospital eventually come together on a fee schedule. It might be $1500 a day, or something similar (with minor adjustment factors.) There are no extra fees for ICU care; there are no extra fees for doing 5 blood gases and three EKG’s. $1500 is it!

    This does require:

    1, An actual set of meetings between payors and hospitals;

    2. A national fee schedule that both can live with.

    Instead, America is still in the Wild West that Uwe Reinhardt has described so well. Hospitals bill insurers and the uninsured for whatever they can, and the hospitals go home with whatever they are paid.

    If we paid fire departments this way, America would go crazy.
    (We did pay fire departments more or less this way in the 19th century,
    as described in the movie Gangs of New York.)

    We need someone to say that hosptials are public utiliies, not private entrerprises, and conduct ourselves in that fashion.

    All hospital bills in excess of the national fee schedule would be null and void and complety uncollectible.

    Any hospital exec who hired a vulturous collection firm would be driven from his job.

    People who were uninsured would get Medicare assistance for their fixed price hospital bills.

    Hospitals would be registered as essential community institutions, If they had a shortfall of patients, they would get an operating subsidy from Medicare. This amount would be paid by general revenue.

    No hospital executive whose institution needed government funds would be paid more than a civil service salary.

    Prof. Robert Evans of Canada has been advocating this kind of system for years. User fees are barbaric!

    Bob Hertz
    Directror, The Health Care Crusade

  2. To Peter, regarding this point: “Paul, thanks for joining the discussion, but it is 19 comments late and very short.”
    I was not informed that this one post from my blog out of many was reprinted on this blog. I therefore didn’t even know there was a discussion going on over here until a friend pointed it out. (Matt, maybe in the future, you can send a note when you reprint a posting, ok?)
    Regular readers on my blog know the context for this particular post in the MA political environment — which it was what it was all about — and they are also familiar with my general views about the dysfunctionality of the health care system and the recalcitrance of many it to focus on process improvements, enhancing safety and quality, and offering a transparent view of the clinical outcomes in their facilities. If you have time to go over to my blog and check a few postings, you can get a better sense of all of that. That’s how I can best address the points raised in these comments. (If you don’t want to, I understand, but I think it would be silly to repeat months of my blog posts over here.)
    Here’s the url: http://www.runningahospital.blogspot.com.

  3. I find it interesting that Mr. Levy arbitrarily selects a symptom, low Medicare reimbusement rates, and excludes the cause of high prices, which the same Massachusetts report concludes is market leverage of providers over certain geographical areas. A quid pro quo that promises doctors a monopoly is unnecessary in a health market that already has monopolistic providers. Obviously approaches that set universal reimbursement rates are not a long term fix, but that own boston globe article he cites indicates they are only a short term transition to establishing global budget schemes, which do provider a financial incentive for doctors to use evidentiary based approaches. With the title and these glaring errors in mind, it just seems like another corporate statement that attempts to save its skin by diverting attention from the real problem, which is provider consolidation.

  4. MD as HELL;
    I once knew a resident who was delivering ER care when the patient arose and put a knife in the resident’s back. Then there were 2 patients.
    But I digress – I will (and do) pay for the care that you provide, but I reserve the right to refuse the total body CT scan you order on me to preserve yourself from the malpractice lawyers, instead of doing a physical examination because it takes more time. After all, I am paying for it, and the physical is cheaper.

  5. i do want demand controls, by making the patient the purchaser of the care he values and therefore will buy.

  6. “I will not deliver healthcare with a gun to my head.” –MD as HELL
    I hate to point this out, but one circumstance I can pretty well guarantee you will deliver healthcare is with a gun to your head. But then, no one is putting a gun to your head or contemplating doing so. Medicare is not mandatory. Your participation in any insurance scheme is not mandatory. You can always drop out.

  7. Peter is being harsh but he is basically right.
    Paul Levy is more reform-minded than most in the hospital industry, but as CEO he has obligations to look after the short term interest of his institution and employees, making him a natural incrementalist to minimize stresses on his institution as it undergoes change. That’s fine, and we can interpret his incrementalism in context.
    What was not fine in his post was the misleading title that “price controls don’t work.” They certainly can, as he acknowledges elsewhere. Not only can they work in MD, but as someone else pointed out, in Germany, France and dozens of other nations.
    What also wasn’t fine was the repeated insistence that we need to make rates conform to the present cost of supplying care, with no mention that one of our core problems is the present cost of care. This is what we need to change! Our utilization by and large is not worse than other nations. In fact, for hospital inpatient care, our utilization is actually substantially lower. It is the unit cost of care that is wildly out of control. Rather than respect this and take it for granted, it needs to be brought to heel. (Of course, when you aren’t writing on a blog and want to get it done in the real world, you have to say that much more nicely and build consensus.)
    Now maybe Mr. Levy didn’t mean to say we should take the current cost structure for granted, but that is how the post read, and so it was fair for Peter and others to respond as they did.

  8. “Our goal is to be the low cost, high quality provider in the Boston market.”
    What does this mean, exactly? Can your professionals accomplish this goal, whatever it is, when they spend many minutes either complaining about your CPOE system or focussed on the terminal instead of the patient?

  9. “It is really interesting to see how badly misinterpreted my comments have been.”
    Paul, thanks for joining the discussion, but it is 19 comments late and very short. I’d be interested in knowing what you include in the cost of care. And when you want to be “low cost, high quality” does that mean that your patients’ co-pays and deductibles are lower than with other hosptials? Do you give better prices to the uninsured? Or is the low cost/high quality related to investor returns?

  10. “Do these countries control costs with price controls or demand controls?”
    MD, aren’t you always the one who says it’s the patients fault, they are the ones “demanding”? Don’t you want “demand controls”? I figure each of those countries has demand controls through universal budgets, you know, like your personal budget that controls demand based on what you can afford, but which also prioritizes what you buy and what you don’t.

  11. It is really interesting to see how badly misinterpreted my comments have been. I was suggesting that legislatively determined pricing is not a good idea, especially when tied to an index that does not reflect the cost of delivering care. I have, however, been in favor of a public determination of appropriate reimbursement rates, like in MD or W. Va.
    Further, if people want to know what we have been doing to cut costs and improve quality, they can check my blog. Our goal is to be the low cost, high quality provider in the Boston market.

  12. Peter,
    Do these countries control costs with price controls or demand controls?

  13. “Is health care a right or not?”
    It doesn’t have to be either to enable reasonable access and cost.
    “Medicare is unable to pay market rates for most of what they “purchase” on behalf of its beneficiaries.”
    Well steve, if you think they’re “broken” now just what do you think they’d be if they paid “market rates”?
    steve, is the U.S. military going “bankrupt”? If not why not?
    If price controls were wrong for Russia are they wrong for Japan, UK, Germany, Holland, Taiwan, Canada, France and every other country able to provide decent healthcare for half the cost?

  14. Everyone can agree that our government is dysfunctional and irresponsible. Most of Washington DC is filled with elected officials who are failing miserably at their jobs, as is clearly seen in the Obamacare escapades.
    Our elected officials primarily, and especially President Obama, primarily need to engage the public in making two decisions. Is health care a right or not? I understand their are constitutional grounds to say that it is not and I understand humanitarian reasons why it could be. The public understands that both Medicare and Medicaid are broken systems. They are based on price controls since the late 1980’s, which in the history of our great nation have never been an answer for anything and stand for what was basically wrong with Soviet Russia. Price control schemes are doomed to fail and guess what? Medicare is unable to pay market rates for most of what they “purchase” on behalf of its beneficiaries. Congress has had over 30 years to fix that system and what have they done? Not a thing. So why should we trust them now to create a new “system?”
    If we, as a nation, want everyone to have healthcare insurance and never be denied coverage then we need to make another decision about insurance. It would necessarily be logical to convert insurance companies back to non-for profit corporations or make them a public utility. My understanding is the majority of Americans want to be guaranteed the ability to purchase affordable health insurance. If that is what we want than why not tackle this single, large issue first? If done well it will at least demonstrate to the country our elected officials want to be responsible, irrespective of their personal positions on the myriad issues that are currently included, and treated poorly, in both the Senate and House bills.
    These two basic issues need to be resolved before we try to make other, significant changes to health care. If our representatives chose to do otherwise, then shame on them. And shame too on President Obama.

  15. Bev, regardless of the different positions JHM and Beth Israel it remains that faced with payment caps JHM worked to lower costs related to those caps. So price controls do work.

  16. Tim, I guess you’re covered for all your healthcare needs, independent of cost?

  17. Yes, Mr. Levy is exactly right, price controls don’t work except in Germany, Japan, Switzerland, Taiwan, … So other than the rest of the insured western world, price controls don’t work.

  18. It’s “cutting costs” when it’s somebody else’s grandmother. When it’s your grandmother, it’s “why won’t the nurse answer the call button?”
    Geniuses. Social-engineering geniuses. Someday you’ll all be the head of your own Federal acronym.

  19. Peter;
    Your points are well taken but do not change the basic fact that Mr. Levy is simply behaving like any hospital CEO would given the situation facing him. Why would he stick his neck out and behave any differently? Expecting otherwise is naive.
    I didn’t read Dr. Miller’s post for the same reason you are skeptical about Paul Levy. I live in Md. and did part of my residency at JHH. Johns Hopkins owns half of Baltimore, has an endowment in the gazillions, has a cancer care center that looks like the Taj Mahal, AND, if he neglected to mention this point, is in Maryland. The only state where hospitals are reimbursed by state-determined rates, the only state with a Medicare waiver. Have no doubt, his Priority Partners or whatever it is is set up to benefit Hopkins as much as possible under the system he has to work in.
    So now we’ve both shot messengers. (:

  20. “Mr. Levy has to play by the rules of a flawed reimbursement system,”
    Bev, Mr. Levy is profiting by a flawed reimbursement system. Would Mr. Levy have been any happier if MA had cut doc and hospital costs first before covering all of it’s citizens? The only “messenger” that Mr. Levy may be is the one that wants his profit system preserved while expecting others to carry the heavy loads and reductions.
    We read an earlier contribution by Edward Miller of Johns Hopkins who said:
    “Priority Partners operates under a capitated system—that is, it receives a set payment per individual per month from the state. Over time, we’ve developed the ability to manage the care of these individuals in a way that is both cost effective and that provides them with quality care. We’ve done it by tapping into our extensive delivery system, which includes four hospitals, a nursing home, the largest community-based primary care group in Maryland, and much more.
    We’ve hit above-national benchmarks on all clinical quality measures for our dialysis patients, reduced monthly costs for patients with substance abuse and highly complex medical needs, and 70% of our patients tell us they’re satisfied with our care.”
    Why can’t the Paul Levys in the system also reduce costs when faced with a take it or leave it price structure? Dr. Miller said it was a learning curve, but until you’re forced to learn, these changes won’t happen.

  21. Although I would be the last one to defend hospitals’ charges, I think spike and Peter’s comments are a bit simplistic. Mr. Levy has to play by the rules of a flawed reimbursement system, which we all agree incentivizes neither doctors nor hospitals to cut costs. (See the example of Virginia Mason in Washington, who cut costs in a quality improvement program, only to lose money on Medicare).
    The system in Massachusetts is particularly problematic in that they put in a new program which covers most of their population by insurance, only to, predictably, find out it is costing them more money! Now, again predictably, they are trying to find a quick and dirty method to cut costs. The whole process was bass-ackwards. I can’t comment on the analogy between their process and the current federal health care bill,since I don’t know what, if any, cost controls were originally included in the Mass. plan. But at the very least, it should give the feds pause about how adequate THEIR health cost control ideas will be.
    Don’t shoot the messenger.

  22. “These organizations are not for-profit enterprises with shareholders who can absorb losses.”
    You don’t need shareholders do absorb revenue loss. You can always reduce costs. Something the rest of the economy has had to deal with for the last few years.

  23. Lack of interest in looking at your costs is what got us into this mess in the first place, Paul. If hospitals had any interest in curbing costs, healthcare as a whole would be in better shape.
    You won’t do it yourselves, so someone else is going to have to do it for you. I bet a hospital as prestigious as Beth Israel Deaconess would figure out a way to live off less revenue.

  24. “The problem with this is that Medicare rates are not fully compensatory to doctors and hospitals and have contributed to the increase in private insurance company rates.”
    “The result: It was a bust. Hospitals and doctors did not express interest in the contract because they knew that they could not cover their costs with it..”
    Does Paul Levy ever try to get his hospital’s costs down for his patients or is he just one of the present healthcare elite who think billings are the way to balance budgets and any cost controls are only for distribution to his “investors”? Paul, why are price controls working in every other industrialized country providing healthcare to it’s citizens? Are you for say, price controlling insurance rates? Maybe you’re for price controlling jury awards? Tell me what “not fully compensatory” and “not fully cover their costs” means?
    Paul Levy is just another self serving “it’s not my problem” contributor.

  25. You have to find a way to curb the patient.
    No encounter, no charge.
    No test, no charge.
    No patient, no encounter, no test, no procedure, no charge.
    No patient, no encounter, no test, no procedure, no mistake, no liability, no lawsuit, no charge.
    Of course ther is always:
    No doctor.

  26. I am not a big fan of price control, but this post seems to have a fundamental logical flaw. The fact alone that “(…) Medicare rates are not fully compensatory to doctors and hospitals” does not prove at all that price control could never work WITH A CORRECT FEE SCHEDULE. In other words, one may want to adjust the medicare fee schedule, or design a different one.
    As a side note, I do believe that a fair medicare fee schedule (that is, pay the doc for time, stress level and level of expertise for a given service, with option for adjustment) could cure a significant share of our health care woes (curb overutilization of overly well reimbursed procedures).