The Problem:
Healthcare costs in the United States are out of control, creating significant financial burdens for patients and government payers. Because many hospitals and healthcare providers have consolidated pricing power over the market, and because healthcare is so essential that most patients will pay regardless of cost, consistent year-over-year price increases have become the norm, putting pressure on both patients and public health programs.
The Solution:
States should shift to setting standard prices for certain healthcare services. One effective way to do this would be for states to adopt an “all-payer” system, under which the state government sets prices for specific healthcare services and procedures. An independent public body sets rates, and all payers, private and public, pay the same price for the same service at the same hospital. Further, hospital revenues, and the growth of health spending overall, are capped.
Another, less comprehensive solution is to cap the prices that state health insurance plans will reimburse providers. State lawmakers can establish a system called “reference-based pricing,” which pegs the maximum amount reimbursable for all inpatient and outpatient services to a certain multiple of Medicare reimbursement rates. This would set a ceiling on the maximum prices that providers would be able to charge for certain services.
Model Legislation
Maryland currently operates an all-payer system, which has increased hospital quality while effectively constraining costs, to the order of $1.4 billion in Medicare spending in its first five years.[1] Implementing such a system requires a Medicare waiver.
In 2016, Montana’s state employee health plan implemented a reference-based pricing system that set the maximum reimbursement for all inpatient and outpatient services to an average of 234% of Medicare payments. Two years after its adoption, the system saved an estimated $15.6 million, relative to if it had not been put into place.[2] State lawmakers in other states could write similar requirements into statute.
Notes
[1] Madeline Jackson-Fowl and Willem Daniel, “Understanding the Success behind Maryland’s Model,” Delaware Journal of Public Health, 34-35, December 2019, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8389156/.
[2] Julie Appleby, “‘Holy Cow’ Moment Changes How Montana’s State Health Plan Does Business,” Kaiser Health News, June 20, 2018, https://khn.org/news/holy-cow-moment-changes-how-montanas-state-health-plan-does-business/.