Medicare rates and capping payments to hospitals

If there is anything about economics that has been proven over and over, it is that price controls do not work. The unintended consequences are usually worse than the problem that led to the solution in the first place.

Massachusetts legislators, feeling the frustration of higher insurance premiums, are now considering a bill to limit doctor and hospital reimbursement payments to 110% of Medicare rates, or perhaps some other percentage of Medicare rates. The problem with this is that Medicare rates are not fully compensatory to doctors and hospitals and have contributed to the increase in private insurance company rates. This was one of the conclusions reached by the Attorney General in her extensive investigation of these matters.

An unreported fact in Massachusetts is that Tufts Health Plan, at the request of the Group Insurance Commission (the agency that manages the state employees’ health plan), recently sent out a request for proposals for a new insurance contract for the tens of thousands government employees covered by the GIC. The main provision was that the doctors and hospitals would have to agree to rates set at 110% of Medicare.

The result: It was a bust. Hospitals and doctors did not express interest in the contract because they knew that they could not cover their costs with it — even though they could have been included in a limited network and have an effective monopoly to serve this large group of customers.

If today legislators adopt price controls over hospital and doctors’ rates, tomorrow they will have to deal with layoffs and closures in the Commonwealth’s strongest economic sector. These organizations are not for-profit enterprises with shareholders who can absorb losses.

It is interesting to me that a state in which many people decry the idea of rate-setting would consider the idea of picking a certain price target by fiat for the medical sector. If we are going to move towards government supervision of reimbursement levels, please instead set up a regulatory body to determine the appropriate level of rates based on best medical practices and true underlying costs of hospitals. An evidentiary hearing in which all those factors are considered by qualified administrative law judges would do more to provide a sound basis for determining rates than the price control approaches being raised.

Paul Levy is the former President and CEO of Beth Israel Deaconess Medical Center in Boston and blogs at Not Running a Hospital. He is the author of Goal Play!: Leadership Lessons from the Soccer Field and How a Blog Held Off the Most Powerful Union in America.

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