Here is a story by Robert Gavin in the Boston Globe about the deteriorating financial condition of Massachusetts hospitals. This is another in the now all-too-familiar type of story about layoffs of health care workers in our state, something some of us predicted several months ago.
While there are some who suggest that a move from fee-for-service to global, or capitated,* payments is the key element in solving rising health care costs, some questions need to be answered as part of the payment reform movement in Massachusetts. If the wrong answers are given, the movement will result in a simple transfer of risk and finances between and among insurers and hospitals, and between and among hospitals. This will aggravate the problem noted above and, with the creation of Accountable Care Organizations, may also lead to greater market concentration in the state.
1) Given the underpayment to hospitals and doctors by Medicare and Medicaid, what margin would private payers need to pay to provide hospitals with an operating margin consistent with maintaining and renewing physical plant and equipment and with providing proper levels of clinical staffing? (Medicare is the largest single payer for most hospitals, and the percentage of patients it covers in hospitals is growing as the baby boomers age.)
2) How is that needed margin consistent with the current actions by the state's insurers to impose rate increases on hospitals and doctors below the rate of inflation -- actions that are based in part on the decision by the state to require insurers to undercharge for small business and individual premiums?
3) As insurers move to capitated rates, do they have any intention of equalizing rates among provider groups in the state to reflect population-based characteristics as opposed to the relative market power of providers? If so, what is their timetable for doing so?
4) As insurers move to capitated rates, shifting actuarial risk to providers, will there be a commensurate reduction in capitalization requirements for those companies? Will there be a reduction in the remarkably constant 10% of premiums that goes to paying administrative costs for those companies? How and when will those savings be passed along to consumers?
5) How will the body politic deal with the inconsistency in payment models between capitated-limited network plans offered by private payers and the open choice (i.e., PPO) model offered by Medicare?
As an economist, I recognize the merits of capitation. But, if it is done with incomplete consideration of these questions, we will have traded one set of problems for another.
* On the more humorous front, the main semantic difference between "global" and "capitated" seems to be that "global" is a softer term, implying inclusiveness; whereas "capitated" brings up memories of the guillotine!