• Massachusetts rate cap wars

    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.

    • I argue over this issue all of the time. I would prefer market based solutions, but health care does not act like a normal market much of the time. People working outside of health care have a hard time seeing this, even when people publish the literature that folks like you put out. I think that market folks look almost exclusively at the consumer side of the equation. They keep forgetting that in a market there is a buyer and a seller.

    • This *is* market driven. Everyone seems to forget that in 2000, Tufts Health Plan and Partners Healthcare could not come to agreement. When Partners declared it would no longer accept Tufts customers, thousands of customers threatened to change insurance carriers rather than lose access to the Partner’s hospitals.

      I guess the public’s choice isn’t counted in the AG’s mind and report as being part of the market.

      • @Josh – No disagreement there. But when the market has a dominant provider like Partners it’s not anywhere near an efficiently competitive one. So the reaction of consumers is exactly what one would expect. It’s a market, but a broken one.

    • But is this even a free market? There is a difference between a market with freedom of choice vs. an economic feudalism where a very few people have all the resources and the rest of us are in thrall to their mercy and generosity. I say that health care right now is in the latter category. Instead of the ancient “loaf-wards”, a word that was shortened to “Lord”, we now have “health-wards”. That is not liberty and freedom, that is feudalism and tyranny of an altogether different sort, but one that must be resisted by a Republic founded to protect the liberty of its citizens. A republic is not an easy thing to be, which is why until relatively recently there were hardly any of them.

    • You write: “But if regulators can’t cap insurance prices, what’s left?”

      How a price cap can even be thought of as market-driven is beyond me. Your point about breaking up the hospitals is more salient.

      Keep it simple – more supply will reduce costs. If we can’t find a way to improve supply in healthcare then there is no reason to do all the other crap you talk about, because we will be screwed regardless.

      • @Matt C – By “market-based” I meant private provision of insurance and care. I did not say or mean to imply price caps are market based. I don’t even support them as a first solution. But are we really going to break up the hospitals? That’s not the direction we’re headed. I disagree that increasing supply will reduce costs in health care. Price may come down, but not costs. (When your doctor orders a test, do you overrule it? What if it’s even cheaper?)

    • The component of the market which is missing in health care is the price insensitivity of patients. As long as the greater cost of partners hospitals was not passed on directly and immediately why wouldn’t Tufts health plan members chose to leave rather than lose a perceived high quality hospital which had no marginal cost to them. Where costs have been passed along in a clear immediate and transparent way, such as tiered pharmacy pricing the rate of rise of pharmacy costs has moderated. But it is impolitic to suggest this more broadly. 200,000,000 million purchasing decisions will always be more efficient than centralized decision making.