Our good friends at Health Care for All were quick to jump on remarks made by State Senate President Terry Murray at the Greater Boston Chamber of Commerce and make a pitch for a return to rate regulation of health care in the state. First, to be clear, the Senator did not advocate this policy. Indeed, she had a number of very thoughtful comments about the underlying structural problems in the health care system in Massachusetts, to which I return in a moment.
I responded to HCFA:
Sorry, but rate regulation does not control costs. As a person who was intimately involved in rate regulation for years — of electricity, gas, and telephone companies — I know from experience that rate regulation generally creates a cost-plus environment for those companies subject to such supervision. This is because the legal framework for rate regulation makes it difficult for the regulator to second-guess costs incurred by the regulated entity. So, ironically, it is the high-cost, low-efficiency organizations who benefit relative to the low-cost, high-efficiency organizations.
To expand on this, regulated companies that have the greatest core competence in accounting and legal representation before the regulatory agency do the best under rate regulation. In contrast, those who develop the managerial and organizational skills to improve quality and cost efficiency find themselves relatively unrewarded.
If rate regulation is re-introduced, it will be those entities who enter the newly regulated environment with the highest base of costs who will start out with higher revenue streams. If some type of efficiency-based regulation is put in place, those higher cost organizations will have more to gain from future efficiency improvements than the ones who start out as lower cost providers. In short, regulation produces perverse incentives.
In earlier comments, I addressed the issue of the growth of costs in this state and offered a menu of options for dealing with this. Senator Murray offers her own sensible list of actions that could be implemented or encouraged by state government action. Some of these overlap with the ones I raised. Others are additive. Between these two lists, we pretty much cover the waterfront. Here is her list:
Increase our workforce capacity of nurses and primary care physicians.
Realign payment structures so that our primary care doctors are compensated at or near the same rate as specialists. We should also boost primary care services by carving out a larger role for Nurse Practitioners.
Support the creation of limited service clinics.
Require more public information and transparency. (This would include a public process to document the need for premium increases in excess of 7% in any given year.)
Expand our use of new technology that will streamline administrative functions and reduce the duplication of services.
Readjust the financial incentives that are the foundation of the current system and make smarter use of the money we are already spending.
Redesign the “determination of need” process that is supposed to provide statewide and regional planning for significant health care services.