The Incidental Economist

Jenn Abelson and Todd Wallack report in today’s Boston Globe that the attempt by Massachusetts Governor Deval Patrick to hold down insurance rate increases has been overturned.

In a blow to the Patrick administration, an insurance appeals board yesterday overturned the state’s cap on health premium increases for small business and individual customers covered by Harvard Pilgrim Health Care.

The three-member administrative panel — which consists of attorneys who work for the state Division of Insurance — found that rate increases Harvard Pilgrim initially sought in April are reasonable given what it must pay to hospitals and doctors.

The administration is considering an appeal. Rulings on the rate cap for other insurers are pending.

This seems like a fight between regulators and insurers–and it is. But it’s all about hospital and doctor prices. Are they reasonable or not? An economist should be tempted to say that the market tells us what is a reasonable price. Yet this is not a competitive, efficient market. Prices are strongly related to hospital market power, which is high (recall the AG’s report). The market is broken and something must be done.

I’d rather see efforts to reduce hospital market power or the effects of it. If we’re going to rely on market-based health care we should insist on a market that doesn’t harm consumers. Capping insurance hikes is an indirect and short-term approach to battling hospital clout. On the other hand, there was some evidence that insurers were reacting to lower premiums by attempting to stick it to the hospitals. Would that have worked? We may not get to find out.

If we’re not willing to break up the hospitals then price regulations are the only other solution. But if regulators can’t cap insurance prices, what’s left? I can only think of one solution, which has two components: (1) capitated payments to integrated providers to cover a long duration of care (that solves the public payment side) and (2) an all-payer rate system so large hospitals can’t dominate the market (that transfers the public solution to the private side).

Nationally, and in Massachusetts, I’ve heard a lot of talk about the first part of this two-step solution. The buzzwords are “bundling” and “accountable care organizations” (ACOs). Those are fine ideas for public payers that have the force of law to set prices and contracting arrangements. Put what are private payers–that’s the rest of us non-poor working folks via our insurance carriers–to do? There’s nothing inherent in bundled payments and the ACO model that reduces provider market power. It could increase it.

That’s where all-payer rates come in. If insurers are free to collude on price they negotiate as a block. Proponents of a public option should see something to like here. Advocates of a free market need to explain how else to address the imbalance of market power that exists. This seems to me to be about as free a market as we can afford.

Bundling payments to health care providers for all services provided during an episode of care is one of the ideas for reducing health care costs and increasing quality. This mode of payment is also associated with the accountable care organization (ACO) concept. A reader pointed me to RAND’s thorough, evidence-based brief on bundled payments, which makes for good reading for anyone wishing to understand the related issues or find relevant literature.

The particular issue that concerns me is how providers will need to organize to manage bundled payments and what the implications–particularly for market power–are of those organizational arrangements. From the RAND brief:

For example, hospitals are not typically in the position of having to reimburse physicians for services. If hospitals received the bundled payment and had to distribute it, they would have to set up contracting, billing, and reimbursement systems, all of which could require an expansion of current technologic capabilities. Further, mechanisms would have to be in place to guarantee that physicians were not being double paid (via the bundle and separate billing) for their services and that physicians seeing a patient for a problem unrelated to the bundled diagnosis were still paid appropriately.

Note, RAND has an even shorter overview of bundled payments that might be a good place to start if this is all new to you.