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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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Bob HertzRyan S.jdPropensityPaul Levy Recent comment authors
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Bob Hertz
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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… Read more »

Paul Levy
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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… Read more »

Ryan S.
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Ryan S.

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… Read more »

bev M.D.
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bev M.D.

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.

MD as HELL
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MD as HELL

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

jd
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jd

“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.

jd
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jd

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… Read more »

Propensity
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Propensity

“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?

Peter
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Peter

“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?

Peter
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Peter

“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.

Paul Levy
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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.

MD as HELL
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MD as HELL

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

Peter
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Peter

“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?

MD as HELL
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MD as HELL

I will not deliver healthcare with a gun to my head.

steve caputo
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steve caputo

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… Read more »