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Lost in the Noise: An All-Payer System

August 27, 2012 By Lucas Smith, Undergraduate Research Fellow

Since 2008, health care reform has been the subject of contentious political debate. Everybody has a fix, be it a public insurance option, the individual mandate, or health savings account. Sometimes we get caught up in the noise of the debate and lose track good policy ideas. One such policy is the “all-payer system.”

For decades, we counted on the profit motives of insurers to keep costs down, but it failed. The problem was that we miscalculated the power that health care providers (e.g. hospitals) would have. The system that has developed allows hospitals to charge each insurer a different price for the same procedure (See table). In economic parlance, it’s called being able to price discriminate

[ chart: click title to view in browser ]
Source: Uwe Reinhardt @ Health Affairs Blog

Hospitals can price discriminate because, within their region, each insurer has a different number of people on their plans. Insurers with lots of people are able to negotiate better rates from hospitals because hospitals need access to that pool of possible patients. If the insurer is small, hospitals do not need it as much and thus charge it a higher rate in order to compensate themselves for the deals they had to give the larger insurer. This price discrimination only serves to increase the system’s administrative complexity. To be clear, hospitals are not to blame, rather, they are caught within the system.

An all-payer system would address this problem head on by establishing uniform pricing for all health care providers. Essentially, it would require every hospital in the state to charge the same price to all insurers for something like appendectomy, unlike what is happening now. You might think this idea is unfounded or crazy, but it is actually a reasonable solution.

In fact, as part of a legislative mandate from 2008, the Minnesota Department of Health conducted a study that partially dealt with a uniform claim system (an idea that is conceptually similar to an all-payer system.) David Haugen, the Director of Center for Health Care Purchasing Improvement, participated in the study and worked with stakeholders to determine the consequences of implementing a uniform pricing system.

According to Haugen, the study participants were unable to definitively determine the effects of implementing a uniform pricing system. “There were a lot of questions about the theory and practice,” he said. The problem was compounded due to a small budget that prevented them from doing a more comprehensive analytical study.

Since then, the debate has changed, Haugen said, “We are operating in a totally different health care reform environment.” The passage of the Affordable Care Act has provided some direction for state reforms and has shifted some of the focuses. Haugen points out that the “interest in per-unit-pricing has been superseded by a focus on the total cost of care.”

One state that has had success with an all-payer system is Maryland, which implemented it 40 years ago. The system works a lot like the Federal Reserve (although it is probably easy to understand). The Maryland Health Services Cost Review Commission sets prices for all of the state’s hospitals. Robert Murray, the former executive director of HSCRC, told Paul Ginsburg: “The governance here (all a function of the independence and flexibility afforded us by our enabling statute) is really the key differentiating factor between Maryland and the other rate setting states.”

The board consists of commissioners appointed by the executive branch to long terms that have the ability to set prices per procedure that hospitals can charge private insurers, Medicaid, and Medicare. Each year, hospitals and the Commission negotiate what the prices for each procedure will be, but it does allow hospitals to charge a different price than other hospital depending on their unique situation. For example, Johns Hopkins is a teaching hospital and serves an older population and is allowed to charge a little bit more than other hospitals. The Commission is guided by the belief that hospitals should be allowed to garner a profit, but at the same time that profit should not be excessive.

The Commission has been pretty effective. According to Murray, a hospital’s cost per discharge in Maryland went from 25% above the national average to 4% below. The system has saved $43 billion since 1976. At the same time, Maryland has been able to test out new payment innovation, like pay-for-performance.

The transition has not been easy for the hospitals. While other hospital profit margins are growing, Maryland hospital’s profit margins are relatively stable. The financial stability provided by the all-payer system makes it possible to budget for the future. Averaging about a 2.5% to 3% annual profit margin can be hard, but Maryland’s hospitals make do. Raymond Grahe, a vice president of finance for Meritus Health, told Healthcare Financial Management, "It's a mixed bag. You don't have as much profit. You really have to prove yourself to get money and rates. But if you can do that, and run an efficient facility based upon the monies that are given, then you can still do those things that make the most sense for your community. ” 

At first look, one might think that the limited profit hospitals are able to garner makes it impossible for them to invest in new technologies and facilities. But, that has not been the case. Each year, when renegotiating the prices, hospitals can make their case for the ability to raise their prices to make those purchases. This puts pressure on hospitals to think critically about what they invest in and prevent frivolous investments. The Healthcare Financial Management article provides multiple examples of hospitals, either through a negotiated price increase or bonds, that have been able to invest in new facilitates and technology. It points out that despite the price controls the esteem of Maryland hospitals, like Johns Hopkins, have grown in reputation.

While implementing an all-payer system is a long-shot for Minnesota, it's elements of leveling the playing field and bringing more predictability and transparency to health care pricing should be part of the discussion as the Dayton Administration implements the Affordable Care Act.

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  • Bernice Vetsch says:

    August 28, 2012 at 4:07 pm

    This is an excellent idea.  It only requires hospitals (and other providers) to consider that, no matter how many large or small insurers there are, the risk pool for the hospitals is the entire population of the state.

    The price needs to be such that even the smallest insurers make a profit but large enough to cover hospitals’ expenses, plus a small profit.