Summer Journal Club, Week 9: Prices, prices, prices

by Allan Joseph

Welcome to Week 6 of Project Millennial’s summer Journal Club. Previous posts can be found here. This week, we focus on the prices charged in the American healthcare system.

It seems like healthcare costs are a really complicated problem, and in many ways, they are. But if you zoom out a bit, it all comes down to a pretty simple equation:

cost = price x quantity

At he most basic level, there are only two things you can try to change. And one of those is the price paid for the services provided.

Sounds simple, right? Well…


Seriously, American healthcare prices are a total mess, an issue we mentioned back in Week 6. There are two major problems with pricing in healthcare: first, list prices for the exact same procedure can vary immensely between hospitals/providers, and second, the price of a procedure can vary widely at the same provider, depending on who’s paying, with bigger insurers generally having the leverage to pay lower prices. This, especially #2, poses real issues, because good price signals are one of the keys to maintaining well-functioning markets. (Hint: this is one of the reasons healthcare is not a well-functioning market at all.)

So what can be done about it? That’s a much trickier question. The catch-all term is “all-payer rate setting,”  which Karan has touched on before, but the term can refer to two different policy “flavors”. Let’s go through them, and see what we know:

Administrative pricing: A number of American states experimented with administrative all-payer systems in the 1970s, and while most of them have since left the system behind, Maryland has continued to implement it, seeing a fair amount of success. In this model, every year, a group composed of providers, patient representatives, and insurers gets together to put together a master list of prices for every procedure at every hospital across the state. If Hospital A receives $10,000 for a pacemaker surgery, so will every other hospital in the state that year, no matter who’s paying. Versions of this system abound around the world, in part because every single-payer system also necessarily uses this system — when there’s only one organization paying for healthcare, there’s only one price.

The nice thing about this policy is that it makes it very easy to control costs — Maryland’s system only applies to hospitals, and it’s saved billions of dollars thanks to the policy. In addition, payers and providers generally like the simplicity they get from having simple billing policies, as they save lots of money on billing departments and negotiating contracts. The policy can even be tweaked to allow adjustments based on other factors (for example, boosting payments to teaching hospitals or letting the payment vary by region) if policymakers so desire. What’s the problem? Well, by making it illegal for hospitals to charge prices other than the ones set by the central commission or for insurers to pay different prices (and, yes, that commission includes hospital and insurer input), many people see it as little more than Communist price controls ripped straight from a Soviet Five-Year Plan. In the end, this is a price control system, and it’s centrally planned.

That’s one of the reasons many states abandoned their administrative all-payer rate-setting systems in the 1980s, during a general trend towards deregulation across all levels of government. Another big problem with those systems — and a reason Maryland’s still continues — was that the commissions tasked with setting the rates were too vulnerable to political pressure, while Maryland insulated its commission from political input. Finally, the systems of decades ago relied on much less reliable data and were thus much less trusted than one today might be — but the political concerns are serious, and outside of Maryland, probably insurmountable.

Provider-set pricing: If you can’t force everyone to charge the exact same price (fixing both problem 1 and problem 2 we mentioned above), can you at least fix the second problem? It’s not so hard to imagine a system in which that’s possible, and in fact, some European countries do something similar now. In a provider-set all-payer policy, doctors and hospitals can charge whatever they want — the catch is that they have to charge every payer the same price for the same procedure, a model of “uniform pricing.”

The positive of this system is that it allows hospitals and doctors to compete on prices and set prices however they’d like, while still adding significant transparency to the marketplace. The negative, of course, is that it’s not as effective in controlling healthcare costs, which isn’t all that surprising, as we know there’s a tradeoff between free markets and cost control in American healthcare.

In many proposals of both administrative and provider-set pricing, Medicare and Medicaid would still pay a different rate than private insurers — but that’s not necessarily the point. The key here is that private insurers would all negotiate as one entity, giving them more leverage for keeping prices down, and increasing transparency with uniform prices.

There are probably some other, smaller steps towards price transparency that can be taken — for example, the federal government recently took one by releasing what hospitals charge Medicare for different procedures, but none of them would come anywhere close to the effect some version of all-payer rate setting would have. That’s a big political lift, which is why prices haven’t been the focus of many health reforms — the other half of the equation, quantity, has been. That’s what we’ll discuss in next week’s Journal Club finale.

Next week: Incentives, quantities, and the end of the 2013 journal club.


Allan Joseph is a first year medical student at the Warren Alpert Medical School of Brown University, where he is pursuing an MD/MPP. You can follow him on Twitter @allanmjoseph.

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One thought on “Summer Journal Club, Week 9: Prices, prices, prices

  1. Matt Burke says:

    It is important to mention the prices Medicare and Medicaid pay in Maryland are often more than what the programs would pay otherwise.(The state is in the process of reapplying for their waiver from Medicare payment methodology). This is a reason critics of the model see it as a subsidy for private insurance, under the premise privates should pay more.

    Nonetheless, the Maryland model makes a lot more sense than what we have now. Why doctors and hospitals aren’t demanding it on a broader scale but instead spends all kinds of time negotiating year-to-year contracts with sometimes dozens of insurers is maddening.

    Thanks for the great post.

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