The Agenda

All-Payer Rate-Setting vs. a Major Risk Pool

Many of the architects and champions of the Affordable Care Act have been pressing for new cost control efforts, e.g., last fall’s “A Systemic Approach to Containing Health Care Spending,” which included the following passage on payment rates:

Under our current fragmented payment system, providers can shift costs from public payers to private payers and from large insurers to small insurers. Since each provider negotiates payment rates with multiple insurers, administrative costs are excessive. Moreover, continued consolidation of market power among providers will increase prices over time. For all these reasons, the current system is not sustainable.

Given that the ACA encourages the consolidation of market power among providers via its promotion of Accountable Care Organizations (ACOs), its architects have if anything exacerbated this problem, which would arguably have been better addressed by tackling anticompetitive regulations that protect hospitals from specialized medical providers.

Under a model of self-regulation, public and private payers would negotiate payment rates with providers, and these rates would be binding on all payers and providers in a state. Providers could still offer rates below the negotiated rates.

The privately negotiated rates would have to adhere to a global spending target for both public and private payers in the state. After a transition, this target should limit growth in health spending per capita to the average growth in wages, which would combat wage stagnation and resonate with the public. We recommend that an independent council composed of providers, payers, businesses, consumers, and economists set and enforce the spending target.

We suggest that the federal government award grants to states to promote this self-regulation model. States could phase in this model, one sector (e.g., hospitals) at a time. To receive grants, states would need to publicly report measures of quality, access, and cost and would receive bonus payments for high performance. For providers, the negotiated rates would be adjusted for performance on quality measures, which should be identical for public and private payers.

That is, the authors call for extensive collusion among public and private payers and tight price controls that would operate at the level of state governments.

Funding for research, training, and uncompensated care — currently embedded in Medicare and Medicaid payments — should be separated out and increased with growth in the global spending target. These payments must be transparent and determined through negotiations or competitive bidding. 

This last idea sounds reasonable, and it ought to be hived off from the rest of the proposal.

The authors are calling for a version of “all-payer rate-setting,” an approach that dozens of states have tried and failed to make work, as Peter Suderman explains:

All-payer and other forms of rate setting have a long history in the U.S. Throughout the 1970s and into the early 1980s, multiple states experimented with various forms of state-driven rate setting. The Nixon administration pursued a bevy of wage and price controls, while Congress passed legislation encouraging states to set up rate-setting regimes. A federal effort backed by President Jimmy Carter failed to pass, but by the end of the decade states such as Maryland, New York, and New Jersey were all moving forward with ambitious all-payer-style price control systems.

Those systems, however, became impossible to sustain pretty quickly. For one thing, they were just too complicated: Not only did these systems attempt to set rates for every single hospital product and service, they also included provisions attempting to redistribute funds from relatively wealthier hospitals to relative poorer hospitals. The result was a labyrinthine system of reimbursement procedures and payment exceptions that confused even the public administrators who were supposed to oversee its workings.

This doesn’t necessarily mean that all rate-setting efforts are doomed. If medical providers are allowed to consolidate, it might be reasonable to allow private insurers to pool their purchasing power to negotiate more reasonable terms, though of course this might raise the prices public payers are obligated to pay. But Suderman gives us good reason to be skeptical about the viability of all-payer rate-setting initiatives.

I continue to think that something like a Major Risk Pool (MRP), as proposed by Hal Luft, could be a valuable way to drive system-wide reforms:

To control health care costs, I propose a publicly chartered major risk pool, or MRP, that will allow plans to pool risk, thereby eliminating the need for wasteful underwriting and selective marketing costs. Participation in the MRP by both providers and insurers is voluntary. It can be combined with any public option in an exchange implemented at the federal or state level; it can even work without a public option. After a brief transition period, the MRP requires no federal funds and will not be “on budget.” By allowing private plans to play a role in a transformed insurance and delivery system, the MRP can be politically attractive to a broader constituency than any of the current proposals. 

The MRP addresses a key component of comprehensive health reform: restructuring the delivery system. It is not a simple reinsurance pool that reimburses health plans for high cost claims. Instead, it creates a reformed payment system for both inpatient care and outpatient chronic care that will encourage efficiency and quality. The MRP will cover inpatient and similar short but expensive episodes, as well as chronic illness management. Its new payment approaches will achieve the efficiency goals promised by proposals for hospital medical staff-focused Accountable Care Organizations, but in an organizationally more plausible manner. Hospitals and physicians who focus on inpatient care and voluntarily form Care Delivery Teams will receive bundled episode-based payments, but the MRP will pay providers regardless of whether they belong to a Care Delivery Team, although at less attractive rates. Providers in these teams can use their bargaining power to charge the primary insurers more than the MRP pays. The MRP’s payments for monthly chronic illness management will give health plans and primary care physicians the incentives, flexibility, and information to more effectively compensate clinicians for the care they deliver and coordinate. By being publicly chartered, but independent of Congress, and by allowing options for all players, the MRP will be able to sidestep the ability of special interests to block change. 

Luft’s confidence that the MRP will be able to sidestep special interests is unwarranted. But the basic idea is an interesting one. A small number of high-cost beneficiaries account for a disproportionately large share of costs, and the idea of the MRP is to lighten the burden on private plans by covering these costs and leveraging its resulting purchasing power to drive system-wide productivity improvements. 

All-payer, or all-private-payer, rate-setting allows payers to combine their market power to force medical providers to offer more favorable rates. The MRP does something similar, albeit in a more focused fashion. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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