Tuesday, June 08, 2010

Three ways to set payment rates

My suggestion last year that Massachusetts move away from the "free market" approach it uses to set hospital reimbursement* rates was not well received by the hospital world. But, this year, as people notice that their rates are being set by insurance companies in an unaccountable and unreviewable fashion (see this letter to the editor), more and more are saying, "Well, maybe. What would it look like?"

There is a range of options. Let me lay out some of them in summary fashion here, recognizing that a presentation in this forum is inherently simplistic. I would love to see a public forum in which these are debated.

One approach is that used by Maryland, with full determination of rates for each hospital by a rate-setting commission. Like public utility rate-setting, this involves lots of reviews and administrative procedures.

A variant of this is that we could have a state agency produce default rates (both fee-for-service and capitated) that serve as a state-wide rebuttal presumption. There could be prescribed (i.e., formulistic) add-on's for geographic cost-of-living differences, teaching obligations, other government requirements, and the like. In this scenario, unless either the insurer or the provider made an evidentiary case for different rates in front of an administrative body, the agency's presumed rates would apply.

Another approach that does not require a rate-setting calculation is to permit either the provider or the insurance company to request the presence of an observer from the state to sit in and witness the give-and-take during the rate-setting discussions. He or she would be permitted to ask questions of either party, have access to all proprietary information, and to make suggestions to the parties. The theory here is that the presence of an objective facilitator or mediator would help level the playing field when either the provider or the insurer has more market power.

The final requirement, which must be added to any of three concepts above, is absolute, complete transparency of payment rates. That, more than any rate-setting formula, is likely to drive all rates to the mean, eliminating the huge disparity that exists today. There is no reason not to put it in place immediately while we debate the rate-setting process.

* I remain bemused by the term "reimbursement," when "payment" is used in every other sector of society. This is a strange carry-over from a different era. I suggest we get rid of it.


Brenda said...


I agree with you on this one. I think the free market is failing the health care system. We can't keep up with the rapid increase in rates.

As for your 3 options, I like #1 and #3. I am always a little skeptical of a single objective observer or mediator. The negotiations still happen, and we can end up with something like the 20% raises the firefighters are getting. I like the idea of treating these payments like utility payments. If our gas and electricity rates were based on the free market, I think we would be in bad shape. I am sure health care systems could survive such a regulation very nicely.

And as always, I am right there with you about transparency.


pnschmidt said...

While I agree that the economic incentives of healthcare are misaligned, rates for reimbursement are set in a classic free-market model: wholesale pricing. Having regulators participate in rate-setting agreements or requiring the rate setting to be transparent is NOT free market, but rather regulated.

We need to either (a) align the financial incentives with the desired outcomes or (b) move away from a free market system. The problem with the current system is that it is a free market, but one where the patient is a pawn in a transaction between wholesale sellers and buyers of healthcare.

Andrew Schutzbank said...

I am not entirely sure how anyone could describe our current health care system as free market. It is not, wholly owned and operated by the government, but there is nothing free about a market in which rates and prices are centrally determined by committee. I also agree with ditching the reimbursement mentality.

#1 Dinosaur said...

Regarding your footnote: That's what I've been saying for years.