Are price controls really the best solution to lower healthcare costs?
“I’m a card-carrying economist — my card may be revoked, [but] I’ll just say ‘Yes,'” said Dan Polsky, PhD, professor of health economics at Johns Hopkins University in Baltimore, speaking Monday at an event on U.S. health spending sponsored by the Robert Wood Johnson Foundation and Altarum, a health policy think tank.
“We’ve tried market-based methods,” said Polsky. “The assumptions one makes in economics class about how a market functions — none of them exist in healthcare … it’s not working. I’m all for giving price controls a try.”
Other economists agreed.
Dan Polsky, PhD, professor of health economics, Johns Hopkins University (Photo by Joyce Frieden)
“We don’t let PEPCO just run wild and charge whatever rates they want for electricity,” said Chapin White, PhD, an adjunct senior policy researcher at the RAND Corporation, a policy analysis firm here, referring to the local electric utility. “The regulation of prices follows the features of that industry. I feel like in the healthcare industry, on the Medicare and Medicaid side we’re doing price controls and — news flash — they work. They constrain spending growth … On the private side, we’ve done a massive experiment in letting private health plans and providers negotiate without price controls, and we’ve seen the result: it’s incredibly expensive, and it’s unsustainably expensive.”
The discussion continued during the question-and-answer session. “My bias is that the healthcare market is screwed up,” said audience member Bob Murray, MBA, former executive director of the Maryland Health Services Cost Review Commission, which sets payment rates under that state’s unique all-payer hospital rate system.
“The rest of the world has figured this out … if [price controls] are the conclusion we ultimately get to, where do we start? There is a range of options from setting limits to doing benchmarks, which a number of states are looking to do, or hard-core rate-setting like Maryland,” Murray said.
Chapin White, PhD, adjunct senior policy researcher, RAND Corporation (Photo by Joyce Frieden)
Well, said White, “you definitely don’t start by paying hospitals 100% of Medicare’s rates for privately insured [patients]; that [low rate] would be financially disastrous for the hospitals and the patients they serve. Start where you are and put price trends on a lower trajectory.” White said he discussed this issue via email with some officials in North Carolina recently. “The notion that made sense to me was to start by demanding that health plans pay hospitals a percentage of Medicare — set an upper limit that no hospitals can be paid more than 300% of Medicare, then start narrowing the variation and pushing the trajectory down.”
However, he added, while that plan could work for North Carolina, it would be terrible for a state like Michigan, where payment rates are quite different. “It’s very location-specific.”
The current healthcare payment system, White said, is the result of what he called the “three-legged glitch,” which he illustrated with a drawing of a three-legged stool:
- Leg 1: Bilateral negotiations between health plans and hospitals over prices and networks; hospitals can refuse to contract with a plan if they want to
- Leg 2: An uncapped obligation for the cost of out-of-network care, with “bill charges limited only by a CFO’s [chief financial officer’s] imagination,” White said
- Leg 3: Widespread “unshoppability” for hospital care due to three types of monopolies — first, a hospital’s natural monopoly because parts of the hospital such as neonatal intensive care units have to be staffed 24 hours a day by licensed personnel, which requires tremendous resources that few actors can provide; second, “human-made” monopolies, such as those that happen when all local members of a particular specialty join into a single practice, which is then bought by a single hospital system; and third, emergencies, when people have to come through the hospital doors regardless of what plan they have and whether that plan negotiated a contract with the hospital
Not all types of health insurance plans have all three “legs,” White said. For instance, Medicare Advantage has legs 1 and 3, but unlike leg 2, its out-of-network costs are capped. “The biggest problem is with private employer-sponsored plans dealing with hospitals and certain specialties — there you have a price problem.”
Sometimes people suggest price transparency as a way to solve the problem, “but price transparency by itself isn’t going to do much,” said White. For example, it’s well known that one particular health system in Boston is a high-priced system, “but what are you going to do about it? Knowing the outlines of a price problem does not fix it.”
Of those three “glitches,” the uncapped out-of-network liability glitch is likely the most easy to fix, White added. “There has been lots of attention on ‘surprise billing’ in this Congress, but that’s really just nibbling at the issue … The much bigger glitch is on the hospital side. The major hospital associations have come out very much against setting limits on out-of-network care because it hurts their bottom line.”
Despite all the reimbursement issues that doctors and hospitals face, the competition for becoming a physician hasn’t slowed down a bit, said Michael Chernew, PhD, professor of healthcare policy at Harvard Medical School in Boston.
“I have 150 students in my class and about half of them want to be doctors. We seem to have not hit low enough fees to slow down the incredible demand for medical school,” he said, adding that there are still other problems with the profession, such as trying to get more people to become primary care doctors, and getting more physicians to work in rural areas. “This gets to the core question about how the prices are set and how you think the Medicare system is doing,” Chernew said.
