• What Regulation Can Do

    In my most recent Kaiser Health News column I described the role of the ACA’s minimum loss ratio (MLR) regulation. That’s the rule that heath insurers must spend 85% of premium revenue on medical costs in the large-group market and 80% in the small- and non-group markets. I was not (am not) optimistic that MLR regulation or other rate regulation would (will) work in a market with dominant providers. I wrote that direct action on the provider side, not just regulation of insurers, is required to bend the cost curve. Am I right?

    Well, we’re getting a good test in Massachusetts right now. Remember that last month the Massachusetts Division of Insurance denied health insurance rate increases to hundreds of insurers in the state. What has been the effect? Today we learn from Liz Kowalczyk in the Boston Globe that,

    Massachusetts health insurers say they want to freeze or slash payments to some hospitals and large physician groups this year, setting up the toughest contract negotiations in memory and creating the potential for disruptions in where patients get their care. Other providers would get small increases, at most.

    Unlike in past years, insurers believe they have widespread backing from politicians, regulators, and employers to aggressively push back against large price increases, even if it means some unhappy providers drop out of insurers’ networks, forcing patients to find new doctors and hospitals.

    Notice what is happening here. Regulators are squeezing insurers on rates. Insurers, in turn, are demanding lower price increases from providers. Those providers are, of course, fighting back. It isn’t yet clear what the outcome will be, in the short or long run.

    This is a perfect test of the theory of rate regulation, isn’t it? As with many other elements of health reform, what happens in Massachusetts may alter the trajectory of health care policy and politics nationally.

    It could also prove me wrong, not that there’s anything wrong with that. Whatever works.

    • It is much easier for providers to leave a state than to leave the country so while this will yield some evidence IMO it will not be sufficient. Monopsony (which is what can allow price control) can be much more successful in a country than in a state. On the other side states do license doctors and nurses and so could lower the standards in response to too many doctors leaving might reduce shortage which is the problem with monopsony and price controls.

    • Maybe so, but docs do not move all that easily. Most of the guys in my group could have left and made 100k-200k more a year a long time ago. Family, style of practice and other factors matter too. It will be interesting to see what happens.

      My preferred outcome would be to have rates change less, but rather reduce the frequency of procedures. I doubt insurance companies will take this approach.


    • so how do we balance good coverage with happy insurance companies. you have to realize they are big business and at the end of the day don’t care about the sick (since they will drop you if you have any pre-existing illnesses or illness in your family history) and now all of a sudden they are going to give us cheaper coverage.

      it will be interesting to see how this plays out.