Thursday, July 23, 2009

Going full circle

The post below represents a major change in views for me, and it merits further explanation. For years, I regulated the state's utility companies, and I came to learn how regulation often impedes innovation and promotes inefficiency. I was in favor then, and am now, of permitting markets to work where they can deliver a better result for consumers and society.

I arrived in the hospital world eight years ago, and people would sometimes ask me if I thought the current unregulated facility planning and pricing regime in Massachusetts should be replaced by state regulation of hospital capital expansion and rate-setting. I would answer that the inefficiencies of regulation were likely to far outweigh the inequities and inefficiencies of the marketplace.

Having now watched the unregulated hospital system at work in this state, I reach the opposite conclusion. There is little in the Massachusetts health care environment that encourages efficiency, that encourages wise purchasing decisions with regard to expensive plant and equipment, and that enables effective competition. The current marketplace in the state is dominated by a major player on the provider side, which has leveraged its market power to achieve substantially higher reimbursement rates, enabling dramatic expansion of facilities to further expand its market reach, along with major investments in capital equipment. Other providers grub around for the crumbs that are left behind, yet also feel the need to invest heavily in expensive devices and the like to retain market share. Indeed, there is a slow decapitalization of that sector of the industry as it fights a medical arms race while trying to keep up with societal needs. Meanwhile, there is virtually no mechanism that properly encourages improvements in the quality and safety of patient care.

This is a system that is ripe for regulation. It is needed to protect the industry from itself. It is needed to protect the public.

The report of the Payment Reform Commission cited below provides the logical framework for moving in this direction. If we are moving to a system of capitated, or "global," payments and the associated close networks (accountable care organizations) that are needed to manage care, there will be an inevitable concentration of the health care industry in the state. Over time, there are likely to be two, three, or maybe four integrated networks serving the state. Given barriers to entry by other participants, that will not be enough to provide the kind of contestable market that is needed for real competition, especially if one of the networks enters the fray with rates that are much higher than the others.

If I am correct in my assessment of this situation, it is time to consider hospitals and the accountable care organizations of which they will be a part to be more like utilities. Let's reinvigorate an effective system of rate and facility regulation to provide a level playing field among these organizations, to provide a brake on unnecessary capital investments, and to encourage competition based on the right factors. Those systems that do well in the regulated environment will do so because of the quality and value they offer to society, which will be a function of how well they treat their workforce, how efficiently they organize their work, and how safely and effectively they treat patients across the continuum of care.


Ray Brown Scholar said...

Great post.

Unknown said...

Mr. Levy,

I really enjoy reading your blog and your vision for transparent quality health care. This may be a difficult question to answer because it is hypothetical, but do you think it was easier for you to realize that Massachusetts could benefit from regulation in healthcare because of your experiences at BIDMC or would you have reached the same conclusion if you were the dominating healthcare system?

Anonymous said...

How would you differentiate this concept from the Rate Setting Commission that we abandoned during the Weld years?

Anonymous said...


Where you stand often depends on where you sit. I am guessing that I might feel differently if I were the dominant provider and could get higher rates than anybody.

On the other hand, our rates are currently higher than some other hospitals in the state, and yet I am advocating for an approach that would likely eliminate that differential once capitation is adopted statewide.


I don't know enough to answer that question fully, but I think that the RSC fixed prices for specific clinical procedures (i.e., DRGs) rather than setting a global budget per person. Someone else might want to address that.

Anonymous said...

Welcome back, Paul, on behalf of "Regulators in Exile." We knew our time would come again.

Nancy T

Anonymous said...

Hah! (These things do go in cycles.) Nice to know there are still trained professionals in the field living in MA.

Anonymous said...

I suppose Partners' command of the Boston market is somewhat analogous to WalMart using its market clout to command lower prices from suppliers. The difference is that WalMart turns around and passes through those lower prices to the consumer, whereas the hospital industry uses them to build empires. The consumer doesn't care since he's not paying the price. There lies the inherent conundrum regarding "competition" (cough, cough) in health care.


Anonymous said...


I agree wit you that public regulation of the health care industry has many advantages, but let me see how far you wish to take regulation. In addition to fixing costs for medical procedures would you favor:

1) a single payer system?

2) requirements that all health care provider systems be not-for-profit or nonprofit organizations?

3) Could you accept commission rulings that limited your hospital's ability to offer certain services so as to prevent market over saturation and the expenditure of funds on capital equipment that would duplicate under utilized services of a competitor? Should a commission decide how many trauma centers or organ transplant centers a region required and limit development of these services by some providers?

If the model of a public utilities commission is to be applied to health care, it seems to me that these are clear examples of the authority that the commission needs to have. They also would represent radical changes for the health care system that I am sure would be difficult for today's providers to accept.

Bill R.

Anonymous said...

1) No. I think there can still be advantages to having some competition among health plans. There is no reason to expect that a government payer or any other monopoly payer will be characterized by innovation.
2) No. There is no inherent reason I can think of to prohibit for-profit health care providers. Just because something is an essential service does not mean it cannot be offered on a for-profit basis. For comparison, please note that most utilities are for-profit enterprises.
3) Yes, for sure.

Steve said...

Sir - I'll add my compliments on your excellent blog. If my question was asked in the past, I apologize - Do you have any thoughts on the health insurance system in Singapore? My understanding is that it splits regular health maintenance (privately managed and paid) from "catastrophic" health issues (managed by the government). Seems intuitive and data shows it is cost effective (1/7th of the US) with equal or better outcomes. I know there are huge differences in population, size, and scope, but still, do you think it could it work in the US?

Anonymous said...

I've often wodered if that might make sense here, too. Perhaps others could comment.

Jerry said...

Personally, I think that any discussion about 'competition' (in the generally-understood free market sense of the word) as it applies to health care is completely misplaced.

Do we talk about 'competition' between police departments, fire departments, the military, etc. in that context?

No, because a competitive market, as it's applied or understood in the setting of capitalism, doesn't, or shouldn't, apply to basic human services.

That's because when the providers' motivation to achieve its economic objectives conflicts with the needs of the customers, the economic objectives will prevail.

Regulation, as I understand you've described it here, will simply become another force against which the providers will push, with all of their will and resources.

I also think you're creating a false conflict between something like a government monopoly, as we'd see in a single-payer system for health care financing, and innovation.

You seem to describe the two as incompatible.

I suggest that the space program of the 1960's provides a model that undercuts such a contention. Who was competing with NASA?

Sure, most (if not all) of the actual 'work' was done by private contractors - but under whose direction and final authority?

I'm with Krugman on this one - markets don't apply to health care.

The other conceptual advantage of the single payer model is straight out of Insurance 101 - it spreads the risk among the largest available pool.

Anonymous said...

Thanks very much, Jerry. Although most of the countries in the world see it your way and have created national systems, I think there remains some advantage to having multiple insurers and multiple providers.

In my view, unless something is a "natural monopoly" (like NASA or the fire department), endowing an entity with that monopoly-like authority tends to limit the likelihood of innovation in offering the service. (Yes, NASA did fine at the start but rather quickly turned into a stodgy bureaucracy.) I don't draw the distinction you and Paul Krugman do between basic human services and other services.

When I have visited health systems in other countries or talked with people who have experienced them, they often seem quite ossified. I'd be the first to admit that our own systems has lots of room for improvement, but there is always the possiblity that one participant or another will come up with a new approach that will change things for the better. The diversification of ownership, experience, and inclination that results from NOT granting a monopoly is what I would like not to lose.

As noted, I think I am outvoted on this around the world; but I don't see a move to single-payer happening in the US -- at least on this round -- but I could certainly see a move towards greater regulation of insurance companies and their rate-setting functions.

Steve said...

I would add that other public services have a narrow scope - put out the fire in my burning house, protect the nation, demonstrate American technological might (NASA). Health care's scope is huge. There is a blurry line between care, wellness, options in procedures, etc. What is appealing to me about a split system like it exists in Singapore is that for prevention, wellness, checkups, it's personal money that's on the line. It's in my interest to ask about price and shop around for the best value services and use my funds wisely - while finding ways to extend and enhance my life. This is like elective laser eye surgery - when it's my money on the line, health care providers respond with broader choice and competitive (sometimes even sinking) costs. If I am still hit later on with a catastrophic illness - cancer for most of us - perhaps costing hundreds of thousands to treat, I can fall in a standard government safety net. *That being said* this safety net probably should only have limited options and limited scope to control costs (the dreaded, but needed "rationing").

Anonymous said...

As far as Singapore goes, unfortunately I could see a situation where the private payers would have an incentive to hospitalize the patient to get out from under high chronic-care costs. (Any hospitalization in the U.S. basically qualifies as a catastrophic event in financial terms.) That's the problem with a profit-driven system, as we saw (and are still seeing) on Wall Street - one can always find the loopholes to exploit, especially when one is trying to reform what has basically become a Wild-West profit-driven system into something more reasonable, which Europe and other countries have had for many, many years. It means changing basic attitudes and culture, and is therefore all the more difficult.


Jerry said...

Hi, Paul:

Again, there's so much here to dig into, but I'm aware of the need to limit the scope of my own response since this particular implementation of the medium is, itself, a limiting factor in too many ways.

I still challenge the quick assumption that government inevitably stifles innovation.

I'll leave it to those with a more detailed understanding of organizational behavior to either back up, or dissect, my thesis, but I suggest that your institution, and mine, and any other we could think of in the public or private sphere is as succeptible to becoming hidaebound and unresponsive as you contend the federal government is or would be.

I know you've written extensively about actions and directions at BIDMC to counter that tendency, and it is a matter of eternal vigilance and effort, but if I was a staff nurse at BIDMC, and not at the facility where I am today, I'm quite certain that I'd be able to point to numerous, perhaps even daily, instances where the 'bureaucracy' directly hinders my efforts to provide excellent patient care.

Part of it's perspective and perception, and part of it's just the nature of the beast, IMO.

So, I simply don't accept the notion that a single payer system with universal access would inevitably stifle innovation.

I suggest that it would actually help drive innovation.

Of course, the point is moot, since that option was never on the table, and its proponents were not even included in early discussion.

Which is ironic, when coupled with the first part of your response to my previous comment - what does the rest of the industrialized world know about tackling this problem that we don't, or that we refuse to even consider?

It's like that old saying, I guess - stupidity is doing the same thing over and over, while expecting different results.

Paul Schmidt said...


I didn't quite understand your post. Which governmental body do you think should be regulating the industry. It sounds like you think Massachusetts is doing a bad job. So who would regulate? If the problem is systemic, then moving from state to national regulation will make the problem worse. In fact, the founders of our nation worried about such a thing and that is why they limited the Federal government with such a restrictive Constitution, which is now being ignored, for the most part.

Paul Schmidt

Anonymous said...

I am hoping Massachusetts legislators and the Governor would choose to reinstate this kind of rate regulation, giving authority to a state regulatory agency. This existed in the past and was dismantled.