qotd: Anderson and Herring on all-payer rate setting

AMA Journal of Ethics
August 2015
The All-Payer Rate Setting Model for Pricing Medical Services and Drugs
By Gerard Anderson, PhD, and Bradley Herring, PhD

In theory, the price set by a competitive market-oriented health care
system should result in efficient (and presumably ethical) rates for
hospitals, physicians, drugs, and other health care services. In
practice, however, price efficiency does not generally occur for many
health services. Because of health insurance, most patients are less
sensitive to prices than they would be if they paid the full price. In
addition, in some geographic areas, health systems with significant
market power can negotiate very high prices, while in other areas, one
or two dominant private health insurers have great power to set
relatively low prices. As a result, prices paid by individuals for the
same service can vary by a factor of 10 at some hospitals. Moreover, a
side effect of all these negotiations is that the private insurers and
health systems spend millions of dollars negotiating and carrying out
unique deals with each other—dollars that could be better spent
delivering care.

At the same time, the public Medicare and Medicaid programs in the US
have set payment rates using a totally different approach from that of
the private insurers. The Medicare program has used a diagnosis-based
prospective payment system for hospitals since 1984 and the
Resource-Based Relative Value Scale (RBRVS) payment system for
physicians since 1992. Both attempt to estimate the underlying costs of
providing a given service, resulting in a distinct amount for each of
about 750 different hospital services and 16,000 different physician
services. There is, however, wide variation in payment rates among state
Medicaid programs; the average Medicaid payment rates are comparable to
Medicare for hospitals but about one-third lower than Medicare for
physicians.

Consequences of Price Inefficiency in Health Care

The result of the wide variations in payment rates and methods among
private and public insurers can lead to access problems. When the
payment rate of one insurer is much lower than that of other insurers,
patients have access to a restricted number of participating hospitals
and clinicians. And when the premium rates of some insurers are much
higher than those of other insurers, people have difficulty paying for
health insurance. Moreover, as noted above, the complexity of numerous
insurer payment methods means that health systems have to negotiate
payment rates with various insurers and hire many people to keep track
of these different payment methods, leading to higher administrative
costs embedded in these prices. The end result is that prices in the US
are typically much higher than they are for similar services in other
industrialized countries, or, as one of us wrote years ago, "It's the
prices, stupid." In addition, when the payment methods differ from one
insurer to another, hospitals and clinicians are given mixed messages
about exactly what services to provide and whether to emphasize quality,
price, or satisfaction.

Are there alternatives?

Alternate Model: The Common Payment Method

One option is for all insurers—public and private—to use the same method
for paying hospitals, but not necessarily the same rates. This would
reduce the administrative costs associated with each insurer's
developing and maintaining its own payment methodology and each health
system's learning each new methodology. A common payment system (but not
necessarily the same payment rates) could be adopted voluntarily or
imposed through legislation.

The US has developed a variant of this approach already: the RBRVS
payment system for physicians used by Medicare since 1992. Subsequently,
nearly all private insurers have chosen to adopt Medicare's relative
value units as the starting point for negotiating payment rates to
physicians. Although most private insurers pay higher rates than
Medicare does and some pay less, nearly all insurers use relative value
units as the basis for starting the negotiation.

Alternate Model: All-Payer Rate Setting

A significant step beyond the common payment method approach is
"all-payer rate setting." In this approach, there is both a uniform
payment method and a single rate that all private and public insurers
pay for a service. In some variants, all hospitals and physicians are
paid the same rate, while in other variants each hospital and clinician
has a unique rate. An international example of all-payer rate setting is
the German system. In Germany, all insurers sit on one side of the
proverbial table and representatives for the hospitals and physicians
sit on the other side. Their objective is to negotiate a single payment
rate for each service that all health insurers and all health systems
will accept. The rates are binding on all insurers and all hospitals and
clinicians. There are no special deals for a dominant organization in a
local market.

The US attempted a number of state-specific all-payer rate setting
programs beginning in the 1970s. One program that has remained
operational is Maryland's, which was fully implemented in 1977. Until
2014, the state used prospective diagnosis-based payments for each
admission, a method similar to the Medicare hospital payment system. The
Maryland program was able to reduce significantly the rate of increase
in spending per hospital admission below the national rate of increase
in the US. However, because the admission rate increased, the program
was less successful in controlling overall hospital spending. This
necessitated a revision to the payment system. Since 2014, Maryland has
used a prospective annual global budget that requires each hospital to
monitor both the number of admissions and the cost per admission.

The Maryland program has a number of features that differentiate it from
other all-payer rate setting programs. Whereas the payment rates in
Germany result from a negotiation between payers and hospitals and
physicians, the payment rates in Maryland are established singlehandedly
by a quasigovernmental agency called the Health Services Cost Review
Commission (HSCRC). Moreover, all payers in Maryland—large private
insurers, small private insurers, the Medicare program, and the Medicaid
program—essentially pay a given hospital the same rate for the same
service. Unlike the Germany system, however, each hospital negotiates
its own rates.

The Maryland program has a Medicare waiver that allows it to set
Medicare payment rates. Much of the attention paid to the HSCRC's
all-payer hospital rate revolves around this waiver and what Maryland
must do to maintain it.

Conclusion

These models have numerous advantages and have worked relatively well in
Maryland and in other countries. However, all-payer rate setting could
be difficult to sell elsewhere in the US, inasmuch as many insurers,
hospitals, and clinicians believe they live in Lake Wobegon and receive
above-average rates that give them a competitive advantage. This makes
them less willing to accept a regulated system that would eliminate this
competitive advantage, which means that the US will continue to pay
higher prices than other countries and will restrict access to health
care for some Americans.

http://journalofethics.ama-assn.org/2015/08/pfor1-1508.html

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Comment by Don McCanne

Because of the political resistance to single payer, some have suggested
that we adopt an all-payer system instead, especially since we already
have an example of such a system in Maryland, and it has even introduced
a form of global budgeting for hospitals - a policy feature of the
single payer model. Would this be an incremental step towards single payer?

All-payer leaves in place the multitude of payers, both public and
private. It would perpetuate administrative complexity and would have
very little impact on the inequities of our system. Although the prices
public and private insurers pay would be more highly regulated, the
complex system of collecting premiums for private plans, and taxes for
public programs would remain in place.

The major advantage is that all-payer depends more heavily on government
or quasi-government control, with experience confirming the principle
that the government can do health care financing better. The major
disadvantage is that all-payer likely would be considered an endpoint
rather than an incremental step, with little appetite for moving forward
with the disruptive changes that implementation of single payer would
require. That would be unfortunate since those systems in other nations
that more closely resemble all-payer tend to be more expensive than the
OECD averages for per capita health spending.

In this article, Anderson and Herring make the point that all-payer
could be a hard sell since many insurers, hospitals and clinicians
believe they are receiving above average "Lake Wobegone" rates compared
to what they would receive in an all-payer system. As the authors state,
"This makes them less willing to accept a regulated system that would
eliminate this competitive advantage, which means that the US will
continue to pay higher prices than other countries and will restrict
access to health care for some Americans."

So we're back to the political feasibility issue. As we've stated many
times before, instead of modifying policy to match the politics, we
should advocate for optimal policy and work on changing the politics.
Instead of accepting all-payer as a compromise, let's go for single payer.