Voluntary cost control: What’s old is new again

Not surprisingly, a group of hospitals and insurers in Massachusetts want to control health care costs themselves rather than be subject to whatever scheme might be imposed on them by the state. WhiteCoatNotes blogger and Globe reporter Liz Kowalczyk has the story:

The group wants a commission of “independent experts’’ and “stakeholders’’ to oversee the transition to a less expensive health care system — rather than a commission heavily comprised of government officials.

[The] group wants the commission to monitor medical spending at first, with the goal of keeping annual spending increases to about 5 percent after three years and 4 percent after five years. During the first three years, the commission would develop enforcement mechanisms for providers and insurers that don’t reach the targets. […]

[T]he Massachusetts Association of Health Plans raised questions about it. Spokesman Eric Linzer said it appears to include loopholes that would allow the highest-paid hospitals and doctors groups to continue to charge higher prices than many competitors for providing similar care.

Will this work? I don’t know. Something similar was attempted in the late 1970s and early 1980s, called the “voluntary effort.” Its failure set the stage for greater government control of Medicare hospital prices. Rick Mayes wrote about it in his paper The Origins, Development, and Passage of Medicare’s Revolutionary Prospective Payment System (ungated PDF here).

[Government c]aps and price controls were rejected in favor of renewed pledges from hospital representatives that they would “clean up their act.” Their voluntary effort failed. Hospital cost inflation jumped 13% in 1980 and 18% in 1981. The hospital industry’s political credibility plummeted as the failure of its second Voluntary Effort embarrassed even its closest political allies. The voluntary effort “was tremendously successful in its first year,” argues the AHA’s McMahon, “partially successful the second year, and then really fell apart in about its third year when nobody paid attention” anymore. Looking back on this period as one of “treading water,” McMahon noted that the hospital industry “began to hear a message from the federal and state governments and, increasingly, from business, a thoroughly powerful message that said, ‘Okay, if you don’t like government price controls, figure out something to do.’ The pressures were there, and so ‘treading water’ pretty soon turned into a movement toward finding a new system of incentives.” The stage was now set for a radical transition in hospital reimbursement. Yet it did not come from the private sector.

Maybe things will be different now and in Massachusetts. An industry driven cost-control scheme, backed up by a threat of government intervention, may be the last stop before more state control of the health system.

(H/t to Jon Oberlander for refreshing my memory on the voluntary effort.)

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