Simply put: All-payer rate setting

Simply put” is an ongoing series. See the introduction for an explanation of the series and the full list of topics that have been or may be covered. Feel free to suggest other topics in that post.

My standard talk on health care costs includes a discussion of ACOs and what they might mean for the private health care market and health care premiums. The short story is that ACOs will encourage and solidify the trend toward provider integration. More integration means more market power. More market power means higher health care prices in the private market. That means higher premiums. Thus, ACOs may be a great way for Medicare to encourage lower cost, high quality care, but it may be partially at the expense of the privately insured.

What can be done? The only solutions I’ve come up with are all-payer rate setting and single payer. The latter would be such a departure from our current system I consider it an impossibility (though Vermont and Oregon are considering it, so we shall see). The former is also hard politically, though some states have done it in the past. Maryland has an all-payer rate system today.

An all-payer system is one in which a hospital has one price for each service. Every payer (“all payers,” get it?) pays that price. It’s like shopping at a retail store. There’s a sticker price for each product. Everybody who buys from that store pays the same price. How on earth does this help combat provider market power?

Well, it depends on how those prices are set. If some entity, either the government or a consortium of insurers are participating in setting those prices, that entity can provide the counterweight to provider market power.

Take Maryland, for example. From a 2009 Health Affairs article by Robert Murray, it’s clear that one Maryland-style all-payer system is an administrative pricing one. Regulators pore over hospital cost reports and, based on them, set prices. It’s like Medicare, only in one state. The government declares the price. Provider market power is irrelevant. Fine. Simple. Done. But such an administrative system destroys any potentially useful information that a market might produce to inform what those prices should be.

A more market-based all-payer system would be different. There are two key elements. One is that prices may vary across hospitals. So there’s a little price competition in that sense. However, a single hospital cannot vary its price for a given service across payers. That’s what all-payer means.

This brings me to Reinhardt’s 2009 Health Affairs blog post on the subject. He spells it out pretty clearly.

One could also, however, have these conversion factors [prices for health services, essentially] negotiated between associations of providers and associations of insurers with a region (e.g. a state) and make them binding on all providers and insurers in the region, as is now done in some European countries — notably Germany — which operate all-payer systems within regions.

Thus, to do away with the unwieldy and unseemly price discrimination now prevalent in American health care, a physician or a hospital would charge all insurance carriers or patients the same price for identical procedures. The system would work best if there were not a large number of uninsured people and if the public insurance programs — Medicare, Medicaid, and the Children’s Health Insurance Program, or CHIP — were part of the arrangement.

Since insurers would be permitted to collude to negotiate with providers for the all-payer prices, this approach retains some flavor of the market. Prices are not set by the government. They’re negotiated, as they are today. But the insurers are collectively more powerful than they are individually. Prices would be lower for that reason.

One should not be too optimistic about what an all-payer system can do. It’s principally a system for purging price discrimination (price variation across payers) from the system, which would also eliminate cost shifting, to the extent it exists. Beyond that it would aid in the goal of price transparency, a necessary condition for a well- functioning market, and it would enormously simplify billing and reimbursement.

Is all-payer in our future? Quite possibly. But it will take a while.

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