All-payer rate setting

In his Health Affairs paper that I summarized yesterday, Joe Newhouse argued is way into advocating an all-payer rate setting regime. The argument goes like this: (1) the Medicare cost curve must bend (see my post); (2) Medicare and private prices paid to providers can’t diverge too far without risk of a politically dangerous level of beneficiary access problems (as exists in Medicaid due to low reimbursement rates); (3) Some type of all-payer system would keep public and private prices close or identical.

Newhouse said no more about the specifics of the all-payer system he would advocate. But he did articulate the value of market-based price signals. I do not know enough about all-payer systems to say whether they typically include price signals or what the outcomes of those systems are. (I suppose the simplest system is just a rule that hospitals have to post and charge a single price for any given service. Another is via a bidding process. For example, payers and/or providers could submit bids for hospital DRG-based payments. Some function of the bids–the lowest, the average, whatever–would determine the all-payer rate for each DRG. Price signals are retained through the bidding process but only one price per DRG remains. Clearly I’ve left out some important details.)

I need to know more. Below is a list of some all-payer papers I found via Google Scholar, along with their abstracts. I’ll be reading them. Notice that the most recent is from 1992. That’s a surprise to me. Why is this idea not being discussed more? One reason I would normally not discuss it is that it may be a political nonstarter. However, that doesn’t typically stop academics from doing so and Joe Newhouse just did. So, it seems time to bring this idea back into the discussion.

Later: Peter to the rescue with a 2009 Health Affairs paper on Maryland’s experience.

A comparison of hospital performance under the partial-payer Medicare PPS and state all-payer rate-setting systems (Inquiry, 1989), by M. Rosko

Although the passage of PL 98-21 was accompanied by a flurry of interest in all-payer rate regulation, the popularity of all-payer systems has waned recently. This article attempts to determine if the move away from all-payer systems constitutes a lost opportunity. The performance of the partial-payer Medicare PPS is contrasted with that of the all-payer systems in Maryland and New Jersey. The analysis suggests that all-payer systems not only control costs more effectively than partial-payer systems, but also have inherent structural features conductive to limiting cost shifting and to funding uncompensated care. Analysis of data suggests that from the perspectives of payers, providers, and patients, all-payer rate-setting is more equitable than partial-payer systems.

All-Payer Rate-Setting and the Provision of Hospital Care to the Uninsured: The New Jersey Experience (JHPPL, 1990), by M. Rosko

The New Jersey all-payer prospective payment system compensates hospitals for charity care and bad debts. This study examines its impact on the provision of care to self-pay patients. Self-pay patients include two types of uninsured individuals: (1) patients who cannot afford to pay their bill and (2) more affluent patients who can afford to pay but who evade collection. Using data for the period 1979–85, the study employed a sample of seventy-nine New Jersey hospitals that entered the all-payer system during the years 1980–82. A regression equation, which included independent variables to control for the community’s pool of uninsured residents and the hospital’s share of this pool, was estimated for the number of self-pay discharges. The results indicate that the volume of care provided to self-pay patients increased when the New Jersey all-payer system was introduced. The results also show that teaching hospitals and facilities in urban areas discharge a disproportionately large number of self-pay patients. Analysis of the operating margin ratio suggests that the all-payer system helped to restore the financial viability of hospitals that tend to provide larger amounts of services to the uninsured.

Can all-payer rate setting and the competitive strategy coexist? (Health Affairs, 1992), by Paul B. Ginsburg and Kenneth E. Thorpe

The endless debate over the future shape of our health care financing system has focused on the continuum between market competition and government regulation and the question: Which is right for America? The 1980s and early 1990s marked a period when the administrations of Ronald Reagan and George Bush articulated a rhetorical commitment to competition, but it also was an era in which the federal government introduced administered pricing for hospitals and physicians in Medicare. The rhetorical struggle between advocates of the two ideologic camps continues, but in the past year, politicians at the federal and state levels have shown more inclination to propose tighter regulatory controls us their favored prescription for dealing with souring medical expenditures. Reflections of this rekindling interest are the incorporation of regulatory controls in health financing reform proposals put forward by Democrats, including Senate Majority Leader George Mitchell. State legislators also are looking more favorably at the regulatory model. The New York Times reported May 11: “After a decade in which health costs rose rapidly and many people lost access to care, state and local health officials around the country are returning to the kind of planning denounced by the Reagan Administration as a tool of heavy-handed government regulation.” in this paper, Paul Ginsburg and Ken Thorpe ask the inevitable question, given America’s penchant for compromise: Can competitive and regulatory approaches coexist in a pluralistic system that derives most of its resources from the private sector, but one that cannot be sustained financially, given its souring rate of growth?

Competition, Regulation, and Hospital Costs, 1982 to 1986 (JAMA, 1988), James C. Robinson, Harold S. Luft

We used data on 5490 nonfederal, short-term general hospitals to evaluate the relative effectiveness of regulatory and market-oriented cost-control policies on hospital cost inflation between 1982 and 1986. All-payer rate-regulation programs reduced inflation rates by 16.3% in Massachusetts, 15.4% in Maryland, and 6.3% in New York, compared with the control hospitals in 43 states with neither all-payer rate regulation nor an aggressive market-oriented strategy. New Jersey hospitals experienced a rate of cost inflation similar to the control hospitals. Given the effectiveness of its regulatory program in the 1970s, however, New Jersey began and ended the period from 1982 to 1986 with the lowest costs, controlling for wages and patient mix. California’s market-oriented cost-control policy reduced inflation rates by 10.1%. Hospitals with large percentages of patients insured by Medicare’s prospective payment system experienced cost inflation rates 16.1% lower than hospitals with small percentages of Medicare patients. Investor-owned hospitals experienced rates of cost increase 11.6% higher than private nonprofit hospitals and 15.0% higher than public hospitals.

The impacts on hospital costs between 1980 and 1984 of hospital rate regulation, competition, and changes in health insurance coverage (Inquiry, 1989), by J Hadley and K Swartz

In this paper, we report the results of an analysis of hospital expenses in 43 large SMSAs between 1980 and 1984. We found that hospital rate regulation–specifically Medicare’s TEFRA and PPS and state multi-payer systems–was the single most important factor leading to the slowdown in the rate of increase in hospital costs between 1980 and 1984. In 1984, hospital costs covered by Medicare’s PPS were 12.5% lower than they would have been in the absence of rate regulation, and in the four states covered by all-payer rate regulation, hospital costs were between 11% and 15% lower. In contrast, changes in the proportion of people either covered by employer-group health insurance or enrolled in HMOs, reduced hospital costs by less than 1%. Measures of competition suggest that hospital costs are higher where there is more competition. We also found that almost all of the effect of regulation on costs came from gains in the efficiency of producing hospital care and/or from reductions in the quality of care. It appears that controlling hospital payment rates gave hospitals a strong incentive to provide care at lower cost.

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