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Three ways to set payment rates

Picture 4 My suggestion last year that Massachusetts move away from the “free market” approach it uses to set hospital reimbursement* rates was not well received by the hospital world. But, this year, as people notice that their rates are being set by insurance companies in an unaccountable and unreviewable fashion (see this letter to the editor), more and more are saying, “Well, maybe. What would it look like?”

There is a range of options. Let me lay out some of them in summary fashion here, recognizing that a presentation in this forum is inherently simplistic. I would love to see a public forum in which these are debated.

One approach is that used by Maryland, with full determination of ratesfor each hospital by a rate-setting commission. Like public utility rate-setting, this involves lots of reviews and administrative procedures.

A variant of this is that we could have a state agency produce default rates (both fee-for-service and capitated) that serve as a state-wide rebuttal presumption. There could be prescribed (i.e., formulistic) add-on’s for geographic cost-of-living differences, teaching obligations, other government requirements, and the like. In this scenario, unless either the insurer or the provider made an evidentiary case for different rates in front of an administrative body, the agency’s presumed rates would apply.

Another approach that does not require a rate-setting calculation is to permit either the provider or the insurance company to request the presence of an observer from the state to sit in and witness the give-and-take during the rate-setting discussions. He or she would be permitted to ask questions of either party, have access to all proprietary information, and to make suggestions to the parties. The theory here is that the presence of an objective facilitator or mediator would help level the playing field when either the provider or the insurer has more market power.

The final requirement, which must be added to any of three concepts above, is absolute, complete transparency of payment rates. That, more than any rate-setting formula, is likely to drive all rates to the mean, eliminating the huge disparity that exists today. There is no reason not to put it in place immediately while we debate the rate-setting process.

* I remain bemused by the term “reimbursement,” when “payment” is used in every other sector of society. This is a strange carry-over from a different era. I suggest we get rid of it.

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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25 replies »

  1. It is folly to consider the healthcare system in the U.S. as a market based system. Market systems only work where the dynamics of supply and demand are still active. Our current system suffers from heavy regulation surrounding the market mechanics (not just the implementation of the services) which either increase the prices or diminish the costs to consumers (depending upon which demographic segment you occupy). Insurance companies, being the prime payer of health care bills for individuals not attached to Medicare have enormous controls over “how much for” and “what type of service”. Medicare/Medicaid being the insurance for people who cannot afford insurance also exert enormous control over those health care professionals that choose to accept “reimbursements” from them. Neither of these groups have any desire to health care systems operate in truly market-based system. Doing so would erode their control over the supply. If you are savvy to tactics and strategy in the realm of military operations, controlling the supply line is a key goal in conquering your enemy. The market base economy is the enemy of both the CMS and Insurance companies.

  2. “Your exactly right, if health insurance was mandatory, wasn’t subsidized, could only be bought before you needed it, and was paid 100% by the people using it then yes it would be much cheaper.”
    The reason it is price controlled is because it is mandatory. The reason it doesn’t have to be “subsidized” is because rates are within reach of ordinary people, claims are predictable to individuals, and buying used can lower premiums.
    As for the “competition” not being “shopped” by consumers, I’m not in your “5 year” group, yet I find NO significant difference in rates. The biggest scam is a low ball rate for year one then a jacked rate in following years – the bait and switch. In fact local agents have refused to quote me because I have either; had insurance through them and dropped it, or have not taken their quote in a couple of years. The industry finds a way to be self leveling against the interest of consumers. If anything we need a stronger DOI with a better business model.

  3. “But if insurance is based on actuarial loss ratio then how are new carriers going to make significant cuts to rates given everyone says admin costs are low?”
    Not sure what point your trying to make but insurance often is not sold based on lowest price. I forget the exact number but nationally something like 60% of auto policyholders haven’t shopped in 5 years and almost all of them could find coverage cheaper with another carrier. There is a lot more to marketing then lowest rates. In health insurance there is a lot more to sell then rates, network size, service, website, etc etc.
    ” The biggest barrier to “competion” in this state is BCBS. It is politically connected and the largest health insurer, even insuring state emplyees.”
    You just made my case and answered your own quesiton. Your state DOI increases rates by protecting BCBS…
    “I know that insurance hates mandates as they would rather carve business into smaller profitable groups, but larger groups spread the cost for individual insured.”
    This makes no sense and is totally wrong. Mandates have nothing to do with pool size and how pools are created. Larger groups don’t mean cost are spread better, the same thing can be accomplished with reinsurance while keeping a managable pool.
    ” If healthcare was run like auto insurance in this state we’d be a lot better off.”
    Your exactly right, if health insurance was mandatory, wasn’t subsidized, could only be bought before you needed it, and was paid 100% by the people using it then yes it would be much cheaper.

  4. Nate, I know in NC carriers of property insurance are required to insure at least some from all over the state and not just cherry pick safe locations, that keeps some insurers out. As for car insurance we have some of the lowest rates in the SE so I don’t know how the DOI rate review here has done nothing but help. But if insurance is based on actuarial loss ratio then how are new carriers going to make significant cuts to rates given everyone says admin costs are low? The biggest barrier to “competion” in this state is BCBS. It is politically connected and the largest health insurer, even insuring state emplyees. I know that insurance hates mandates as they would rather carve business into smaller profitable groups, but larger groups spread the cost for individual insured. I guess we’d have to argue appropriate mandates. DOIs need to be politically independent, but they follow legislated provisions. If healthcare was run like auto insurance in this state we’d be a lot better off. Recently the legislature passed a law that capped insurance loss so that wealthy coastal property owners could use the tax payer to subsidize their losses and make property insurance “affordable”. Some of these homes rent for $15,000 per week and up, yet we have to subsidize their insurance. I doubt though that making a wide open market with little DOI oversight would make things better, as it’s the healthcare industry that drives up cost.

  5. Protection of enforce carriers, usually by limiting entrance of new carriers. Sometimes they are even more crooked about it and just outright run competition out of town
    Excessive taxes and mandates, while passed by legislature these usually start in the DOI
    Compliance cost, some DOIs are terribly inefficient and technologically behind
    Politically driven rate review, see PUC rate setting, hardly anything fair or scientific about this political process, excessive allowances given cover by DOI approval

  6. “”We’re here to protect insurance consumers.” Notice they don’t say they’re there to protect insurance companies, hospitals, Healthcare CEO pay, doctor incomes. Refreshing, isn’t it.”
    Exactly not like anyone has ever been harmed by the goverment comming to help them. Didn’t public housing protect the homeless or close to be? Didn’t welfare protect the poor and hasn’t public education protected the young?
    If you look at the states with the most active insurance departments / regualations they are always the most expensive. Yes insurance commissions do an excellant job of protecting the public from affordable insurance.

  7. Each state already has an insurance commission, most probably monitor/set auto insurance rates (MD, do you disagree with that?), so using exisiting state commissions to also monitor/set/negotiate medical payments would be no big step.
    Here’s what Washington State’s Insurance Commimmission web site states, “We’re here to protect insurance consumers.” Notice they don’t say they’re there to protect insurance companies, hospitals, Healthcare CEO pay, doctor incomes. Refreshing, isn’t it.

  8. Dr. Williams;
    How would you suggest Mr. Levy perform “appropriateness checks”? That term reminds me of the endless arguments I used to have, as hospital medical lab director, with physicians who wanted to transfuse blood for a stable Hb of 10, or demanded sensitivity studies on blood culture contaminants. Not to mention all the stents that are implanted these days.
    Let we who live in glass houses be careful about throwing stones labelled “credibility.”

  9. Paul,
    What are your services truly worth and do you encourage over utilization by your failure to have appropriateness checks on what your hospital does to patients? Your credibility remains a concern.

  10. Switzerland does not have a single national payment schedule. Each canton has its own fee schedule that is negotiated between the providers and insurers of the canton and supervised by the cantonal (not federal) government.
    Similarly, the US does not necessarily need one national schedule. Each state or county could impose the type of payment rules that are appropriate for that region.
    Instead of having a government agency determine the rates, you could also have all the parties involved (insurers and providers) negotiate a global rates that apply to all insurers and providers.
    The key is that prices should be transparent and price discrimination should be eliminated or strongly reduced.

  11. Lynn,
    Just to clarify. I was suggesting that we use the Medicare payment schedule for all reimbursement. It should be noted that this payment schedule includes adjustments for regional cost of living, etc. so the the amount of payment for a particular service will vary with regional costs so no need to negotiate separate payment schedules.

  12. Laura, Medicare rates vary across the country accordingly. Such variations do not impede a national fee schedule, properly adjusted.
    MD as HELL, I don’t see how one honest and fair fee schedule would stop people from going to Medical School, unless they go there for reasons they shouldn’t be going there for. Surely, the current haggling for nickels and dimes, complete with pushing and shoving, cannot be better.

  13. I don’t know why we just don’t play “Let’s Make a Healthcare Deal” and spin the big wheel of fortune. It makes about as much sense as what we currently do. Don’t like where you land or what’s behind Door #2, just beg for a “do over.”

  14. “* I remain bemused by the term “reimbursement,” when “payment” is used in every other sector of society. This is a strange carry-over from a different era. I suggest we get rid of it.”
    You mean that strange era when medical care was affordable in all but the most sever cases and insurance premium was cheap enough it was an afterthought? Crazy idea, why not actually solve the poroblem and go back to a reimbursement system. Let some of these big name hospitals justify their billings to their patients and see where they go next time they need service.
    ” There seems to be no push to have the insurance companies be transparent with their rates.”
    This is based on what MF, the fact no one has rang your door bell and handed you a copy of all their contracts? The accurate statement is with no or minimial effort MF has not found the data, it is inaccurate to say it is not out there.
    Some, and it is getting more common insurers do share expected net cost of providers in a cedrtain area provising a service. The employee can then decide if paying twice as much is worth the name on the bill. The hold up so far has not been the availablility of the data but use by the members. We can’t spend a billion dollars on a solution no one uses.

  15. in response to Mark Spohr, I would say that since the cost of living varies wildly across the country (and, proportionally, so do salaries, etc) it’s no real surprise that healthcare rates would, as well.

  16. Not sure how public could constructively participate in pricing negotation but it should at least bring some level of honesty. While the negotiating parties would have certain financial objectives, maybe presence of public help ensure that there are some folks looking out for unintended negative health consequences of the decisions. It might also be time to demand better quality, when higher price is paid out. Do thet bring quality and outcome stats to negotation?

  17. Great. Just who will measure the effect of excellent potential doctors just not even bothering to apply to medical school? I never would today. I would go to dental school. Or optometry school. Or chiropractic school. Or just become an elected official, (I still might do that.)

  18. Love this line: There is no transparency to medical pricing. It is very opaque and it seems to be based on a model of “From each according to his gullibility, to each according to their greed”.

  19. I wonder why we need multiple states/organizations setting rates. We already have Medicare setting rates. What is wrong with using these rates? (Clearly I am naive, we need as many opportunities as possible for special interests to influence the rates.)
    For the past three years I have been living in Switzerland where there is universal insurance coverage and rates are set nationally. This is a very simple, fair system with complete transparency.
    Contrast this to my recent US experience (I’ve only been back a few months). In several medical encounters for my wife and myself, I have been appalled at the complete lack of transparency, gross over-coding and over-charging of doctors and hospitals. Since my insurance is still in Switzerland, I pay cash and then submit bills for reimbursement (this is an appropriate use of this word). The prices I have been quoted before and after “service” for various procedures and office visits have varied by more than 100% and I have been able to negotiate substantial discounts for cash. However, I am a relatively informed consumer. I have used the Medicare rates for guidance but very few people know how to find these rates. There is no transparency to medical pricing. It is very opaque and it seems to be based on a model of “From each according to his gullibility, to each according to their greed”.
    What is wrong with a single transparent national payment schedule?

  20. “Reimbursement” does perpetuate an obsolete model that hinders the public understanding of medical economics. The day of the patient “recovering” what he/she paid the doctor (sorry, “provider”) is long gone, along with the “safe in the back room” that us docs were all rumored to have in the not-so “old days.”

  21. I agree the term “reimbursement” is a poor substitute for payment or price. However, I’m not sure I would describe the convoluted way Massachusetts hospitals negotiate prices as a free market system. In a free market, consumers are price sensitive and typically pay their own bills. Price discrimination occurs but is generally reserved for volume purchasers. Sellers are free to rebundle and repackage services to find a niche or gain a competitive advantage. However, in medicine Medicare set the standard years ago and it’s very difficult for smaller insurers to deviate from that model.

  22. I’m wondering when/if we will see that elusive total transparency. There seems to be no push to have the insurance companies be transparent with their rates. Often it appears that payors with the highest insurance rates also command and receive the best prices from providers, and the converse. The providers’ prices are very often not reflective of insurance premium rates. One wonders what value provider price transparency is in those cases.

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