How Massachusetts can set hospital payment rates

My suggestion last year that Massachusetts move away from the “free market” approach it uses to set hospital reimbursement rates was not well received by the hospital world.

But, this year, as people notice that their rates are being set by insurance companies in an unaccountable and unreviewable fashion, more and more are saying, “Well, maybe. What would it look like?”

There is a range of options. Let me lay out some of them in summary fashion here, recognizing that a presentation in this forum is inherently simplistic. I would love to see a public forum in which these are debated.

One approach is that used by Maryland, with full determination of rates for each hospital by a rate-setting commission. Like public utility rate-setting, this involves lots of reviews and administrative procedures.

A variant of this is that we could have a state agency produce default rates (both fee-for-service and capitated) that serve as a state-wide rebuttal presumption. There could be prescribed (i.e., formulistic) add-on’s for geographic cost-of-living differences, teaching obligations, other government requirements, and the like. In this scenario, unless either the insurer or the provider made an evidentiary case for different rates in front of an administrative body, the agency’s presumed rates would apply.

Another approach that does not require a rate-setting calculation is to permit either the provider or the insurance company to request the presence of an observer from the state to sit in and witness the give-and-take during the rate-setting discussions. He or she would be permitted to ask questions of either party, have access to all proprietary information, and to make suggestions to the parties. The theory here is that the presence of an objective facilitator or mediator would help level the playing field when either the provider or the insurer has more market power.

The final requirement, which must be added to any of three concepts above, is absolute, complete transparency of payment rates. That, more than any rate-setting formula, is likely to drive all rates to the mean, eliminating the huge disparity that exists today. There is no reason not to put it in place immediately while we debate the rate-setting process.

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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  • WhiteCoat

    I still don’t think that the free market approach is a failure.
    Look at what’s happening now in Massachusetts. More small employers are dropping insurance coverage. More employees are getting into the state program.
    Raise rates too high and healthy people drop their coverage. With a 30+% increase, I could see a lot of healthy people just dropping coverage and then purchasing it again when they develop a health issue. The new health reform bill won’t allow refusal for pre-existing conditions.
    If the insurance companies price everyone out of the market, they won’t have any insureds.
    To remain viable, an insurance company will have to make its prices reasonable.
    If 75% of an insurance company’s insureds dropped coverage when the 32% rate increase took effect, don’t you think it would repeal the increase?

    Setting rates for a utility is a lot different than setting rates for treatment of complex medical problems. Every kilowatt hour is the same. Is every provider or every treatment?

    I think your ideas are good, but still don’t think their inherent burdens will overcome a truly free market system that has had time to equilibrate.

  • paradocs2

    Oh my God how can you still believe that medical care can be a commercial enterprise and be distributed by a commercial market. The price factor set by the market has hugely under-invested in public health and preventive measures, in family medicine and primary care, and habitually functions to place monetary barriers (co-pays and deductibles) in an ever more potent way between patients and the services the need in the service of insurance company profit. The main failures of Massachusetts’ whole plan are the absence of cost controls and inadequate institutionalization of the public interest (as in a utility paradigm).Now the whole USA is poised to follow down the same path to the sink hole.

  • Tarl Neustaedter

    And above all, *Publish* rates for all procedures. None of this idiocy where today a patient has no idea how much his colonoscopy is going to cost (either him or his insurer). Or how much it *did* cost him, after he’s gotten through the blizzard of 27 bills from at least six different corporate entities, 11 of which were duplicates, and 19 of which insurance took care of (you may detect a certain recent bitterness here).

    Post the rates in extremely public places (hell, tape it to the doors), so patients can make economic decisions rather than gambling about whether they can afford the co-pay.

    Or worse yet, the current common practice, get charged three times more than an insurance company would pay simply because he’s actually going to pay the bill rather than hand it off to someone else to pay.

    Publish, Publish, and by damn, obey the damned rates you published.

    • Primary Care Internist

      the problem is that MOST DOCTORS’ OFFICES DON’T EVEN KNOW what their payment will be. The publishing needs to be on the part of the insurer.

      But they’ll never do that, since they have widely varying payment rates to different doctors, and they covertly discriminate against small- and medium-sized practices.

      • Alina

        Insurers will not publish this data as it’s considered “proprietary.”

      • Tarl Neustaedter

        The implicit assumption being made seems to be that price is not determined by the provider setting out how much his services cost. Instead, price is determined by how much can be sucked out of the payer.

        *THAT* is the cause of economic measures not having any impact on medical prices. When price is determined by how much money can be sucked out of the patient (or his insurer), the patient has no motivation to avoid extra-expensive providers.

        Yes, it’s a broken system. I don’t care who publishes the prices – just publish them. No discounts, no sweetheart deals, no triple-whammies for people who pay out of pocket. One service, one patient, one price.

    • Alina

      Great comment.
      Hospitals often compare themselves with hotels and explain that they negotiate lower prices wih insurance companies because of the volume they receive from these customers. Do the insurance companies guarantee how many of their members will get sick in any given year or that these members will visit one hospital versus another?
      Besides publishing the prices there should also be official and auditable transparency on quality, certified by the hospital CEO under penalty of perjury. I’ve seen a lot of reports published by “consultants” whose customers are the very hospitals they publish the data on. The whole price and quality situation needs to change, especially for not-for-profit hospitals, who receive governmental incentives (e.g., tax breaks) for their status.

    • Alina

      Oh, and btw…hospitals charge uninsured such exorbitant prices so they can inflate the “bad debt” balance and get higher breaks from the government (most hospitals are not-for-profit). Who could possibly pay these out-of-control prices? By comparison for some procedures, insurance companies pay around 21% of what an uninsured would have to pay. Go figure!

  • smartdoc

    A lot of hospitals in Massachusetts are going to soon close. They just don’t know it yet.

    And the ones that remain open will be dropping lots of outstanding, but poorly reinbursed services.

  • Max Power

    The very fact that you refer to medicaid, which is by definition a socialistic endeavor, as employing a “free market” system. Demonstrates not only your bias, but your complete lack of understanding of what a market is and how it works.

    The US healthcare system is a “market” in name only for the simple reason that the consumer is rarely, if ever, directly involved in the direct purchase of the good or service in question. As a result, there is no incentive for the consumer to seek out a lower price or higher quality, thus no incentive for providers of said good/service to compete.

    Furthermore, you can fix the ‘price’ all you want. But what so many proponents of this system fail to understand is that ‘price’ is not the same thing as ‘cost’. The federal government continues to try lowering the ‘price’ by decreasing physician reimbursments. However, this has only resulted in physicians opting out of medicaid/medicare because their ‘cost’ has not decreased.

    The only thing that decreases cost is an increased supply or a decreased demand. All your unicorn and rainbow-laden dreams cannot change this fundamental economic law. Waving a wand and artificially changing the ‘price’ is nothing more than government-sanctioned theft, because the remainder of the true ‘cost’ is ultimately swallowed by one of the providers.

    • Alina

      “..there is no incentive for the consumer to seek out a lower price or higher quality, thus no incentive for providers of said good/service to compete.”
      How can the consumer seek out a lower price when the prices are not even published in the first place? About us seeking higher quality there are now some services that provide ratings on hospitals, physicians, etc – albeit not perfect. This is going to change in the near future as the consumers are deeply dissatisfied with the current state of affairs.

      You’re right about the fact that we shouldn’t look at the cost as being the same as the price, but not for the reasons you outlined. When hospitals set their prices, they don’t correlate these with the actual cost. The charge masters are based on anything but cost. The actual cost is many, many times lower than the “rack” prices.

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