AG Report: Short Term/Long Term Issues; and Short Term/Long Term Solutions

Last week’s release by the Attorney General of preliminary findings of her Investigation of Health Care Cost Trends and Cost Drivers (full report (pdf); summary press release; Globe front page story) crystallizes the need for a two-track approach to reducing health cost growth and improving care.

The report finds that the highest cost providers have geographic market dominance. This key factor influences the price of health care to insurers, and not a range of other often-cited reasons.

The report concludes that “Price variations are not correlated to (1) quality of care, (2) the sickness or complexity of the population being served, (3) the extent to which a provider is responsible for caring for a large portion of patients on Medicare or Medicaid, or (4) whether a provider is an academic teaching or research facility. Moreover, (5) price variations are not adequately explained by differences in hospital costs of delivering similar services at similar facilities are specifically NOT the major causes of rising health care costs.”

As shown in the above chart, taken from the report, “Massachusetts health care costs, which are growing by 7.5 percent annually, are mostly the result of rising prices, not patients getting more imaging tests, surgery, and other procedures.” As Georgia Maheras points out in a letter to the Globe published yesterday all too often, patients are blamed for using too many services or being too sick. This report shows that this is not the case.

The report also identified a number of contracting practices that perpetuate pricing disparities and interfere with markets, including parity agreements that tie prices between competitors, guaranteed inclusion clauses that prohibit insurers from limiting networks, supplemental payments that evade contract provisions based on service volume or cost, and growth caps that limit a provider’s expansion.

Blogger Maggie Mahar is covering this with solid analysis (see part 1 and part 2; a part 3 is to come) that concludes that Massachusetts should re-examine price setting. Mahar looks to the Maryland hospital rate-setting experience (as have we) for an example of a system that protects consumers and government against market failures inherent in an unregulated system.

We think the report highlights the urgent need to take action to correct the market distortions that result in higher and higher medical costs. The same day the AG report came out, the Health Care Financing Committee approved a bill promoted by insurers (H. 4452) that would set up a special high-deductible plan that would pay providers 110% of Medicare charges, a substantial cut from current rates. The bill appears to be on a fast track, as it was referred directly to the House Steering, Policy and Scheduling Committee, bypassing the Ways and Means Committee.

While we oppose the bill as written (why should small businesses have to buy a high-deductible plan in order to take advantage of lower rates?), the bill’s movement shows growing support for intervening to counteract destabilizing market forces.

The report suggests a two-track approach. In the short-term, some kind of circuit breaker is critical to rein in prices that cannot be controlled by the market alone. Society needs to step in and collectively prescribe a fair mechanism for setting health care prices and insurance premiums in a way that promotes the goals of affordable access to quality coverage.

Over the long term, the payment system needs to restructure its incentives to promote coordinated, patient-centered care that controls cost growth and promotes high quality. The Payment Reform Commission’s unanimous recommendations, and the QCC’s Cost Containment Roadmap point to a number of policies that are critical. These will take time to implement, and they must begin soon too in order to take effect within a few years.
-Georgia Maheras and Brian Rosman

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4 Responses to AG Report: Short Term/Long Term Issues; and Short Term/Long Term Solutions

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  4. Katharine says:

    Georgia & Brian –

    A clarification: Under H4452 providers would receive “110 percent of the Medicare reimbursement rate for those services as if they were rendered to a Medicare beneficiary not taking into consideration any beneficiary cost sharing.” The Medicare payment rate less the patient co-payment/deductible is considerably less than charges.

    My understanding is that Medicare pays well for inpatient services, particularly complex inpatient services, but less well for outpatient services. Nationally, Medicare paid 90% of all provider costs in 2008 (according to the AHA chartbook), so 110% of Medicare rates would approximate the national average of provider costs.

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