• All-payer debate award ceremony

    In the advanced publication section of the Journal of Health Politics, Policy and Law website you will find a point-counterpoint debate about all-payer rate setting. It’s former executive director of the Maryland Health Services Cost Review Commission Robert Murray (pro all-payer) vs. Wharton health economists Mark Pauly and Robert Town (con). Harold Pollack is the editor and provides and introduction. All links are to ungated PDFs, so I’ll let you read the debate and decide for yourself if one side or the other makes a more compelling argument. Let’s move on to the awards for other categories.

    For my money, Pauly and Town win in the category of best paragraph. It’s the middle of three on cost shifting.

    There is still a puzzle here, we must admit. Low market power on the parts of buyers of hospital care can make hospitals that are interested in profits or in what they can do with profits charge higher prices than if there were more buyer market power. But the only way hospitals can have an ability to charge ever higher prices is if their market power is continually increasing over time relative to buyers. While the competitive positions of hospitals relative to insurers ebb and flow over time and vary across markets, we are aware of no theory and no evidence, even circumstantial, that it is ever increasing. Moreover, it is important to remember that lower prices should not be society’s objective; a buyers’ cartel can lower prices (even below what would have been the competitive level), but that does not lead to an efficient outcome. And the outcome of bilateral bargaining of oligopolists versus oligopsonists can lead to an even worse situation (Pauly 1987). The key question is which arrangement gets quantity and quality of output to settle at the efficient level (where marginal benefit to consumers equals marginal cost to producers), and there is no easy way to handicap which balance of power will do that. Only perfect competition on both sides gets the theoretical gold medal, but if we must be or choose to be away from that outcome we are lost in speculation about the second best.

    It is refreshing to see such honesty. Anyone who insists either that more or less regulation is certain to come closest to optimality is blowing smoke. As such, perhaps you can tell that Pauly and Town don’t really take the “con” side of the all-payer debate. They merely note that it isn’t necessary best, but we can’t really know. Earlier in the paper, they write,

    Both the unsatisfactory performance of markets and the past failures of limited regulatory systems are certainly cautionary. No doubt we can learn from the past, but simply stating that we need to implement the optimal rate-setting body seems to assume away some fundamental problems. To be clear, setting the “right” prices for thousands of often complex and evolving services is extremely challenging. We see no evidence that our political environment has sufficiently moved up the evolutionary chain since the 1970s to now broadly put into place the optimal regulatory structure (one that is accurate, evidence based, and insulated from political and financial pressures) that would allow it to better price hospital services than our current imperfect system.

    Of course, a lot rides on what one means by “better.”

    In the category of referencing my work on cost shifting (ungated PDF), Murray takes top prize by citing my 2011 literature review of the topic.

    @afrakt

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    • “And the outcome of bilateral bargaining of oligopolists versus oligopsonists can lead to an even worse situation.”

      What a curious sentence, for a non-economist I suppose. To propel my imagination, what would be a recent example, it if exists, of this scenario?

      If I infer correctly, two behemoths going head to head vs, one amongst many…with a worse outcome in former, yes?

      Brad

    • @Brad- In my area of PA, we have two dominant insurers, the Blues, with a couple of minor carriers, Aetna, USHealthcare, and we have two dominant health networks. You really have to drive at least 30 miles to get equivalent care for any major interventions. The result has not been lowered costs. We have seen increases, always, but in sporadic big jumps. The networks do not want to hold down fees, for obvious reasons, but even when the insurers have had the upper hand (before we completely consolidated into two networks) they still did not keep costs down.

      Also, rural facilities that are fairly isolated remain a mystery to me. They should have near perfect market power. Yet they dont. Many, if not most, struggle to get by and they usually collect the same or lower fees than their urban counterparts. SOmething besides pure market power is in play.

      Steve

    • I would disagree with Pauly and Town about their assertion that constantly increasing market power over time is necessary for market power to drive increasing prices over time.

      If hospitals are earning rents from market power, they have an incentive to adopt expensive new technologies (machines, procedures, specialists) that they would not adopt if they were being paid competitive prices. If prices are too sky high, who cares about the cost of new proton beam thingamobob, etc? Since these technologies drive cost growth, oligopolistic rents can drive cost growth even without market power increasing.