America’s back-Door to Single-Payer: All-Payer Rate Setting

Single-Payer healthcare has long been the political pipe dream of the left, but there’s a nearly identical system that could actually happen.

All-payer rate setting, as the system is known, shares the same goals of single-payer: it aims to increase efficiency and reduce insurer overhead in the health care system. Single payer does this by eliminating private plans for one government plan. All-payer rate setting gets there by setting one price that every health insurer pays for any given medical procedure.

“[All payer] has everything except the government-run plan,” says Mark Pauly, a health economist at University of Pennsylvania. “In all-payer systems, the government uses Blue Cross and other insurers as their agent. For consumers its the exact same except for who they write their check for premiums to.”

The big difference between the two systems is in the politics. Single payer has never gotten traction in Congress and even just failed in deep-blue Vermont. All payer has actually moved through state legislatures and is being road tested in Maryland. President Obama even said in a recent interview with Vox that he believes the central concept behind the system — giving insurers more bargaining power — “makes a lot of sense.”

Here’s a guide to where all payer is used, how it works, and whether it could be in America’s future.

1) All-payer rate setting means one price for each medical procedure

Right now, there is huge variation in health care costs at different hospitals and doctor offices. The reason is different health-insurance plans pay different prices for medical care. That means the price of an MRI scan or knee replacement surgery, for example, can vary widely, depending on how good an insurance plan is at negotiating.

Bigger plans tend to negotiate deeper discounts. Most research shows that private insurance plans pay the most, Medicare pays slightly less, and Medicaid pays the lowest rates. And even between different private insurance plans, there can be huge variation — a bigger plan with more members might be able to ask hospitals for lower prices because it can promise lots of patients.

A system with so many prices can be inefficient: each time a patient comes in for an appointment, a billing clerk has to look up what rate his or her insurance company ought to be charged. All those billing clerks’ salaries become part of the country’s $2.7 trillion health care system.

Prices are also higher than in single-payer systems where the government delivers a take-it-or-leave-it offer — since each insurance plan negotiates independently, they don’t have much clout to ask for low prices. And hospitals tend to have the upper-hand in these talks, especially those with larger networks or more famous names (places like the Cleveland Clinic or Mayo Clinic, for example).

“I’ve seen extremely high rates that hospitals charge because we consumers would think that any insurance product without that hospital is a crummy product,” says Paul Ginsburg, a professor at the University of Southern California, who has studied these negotiations.

In all-payer rate setting, all of the insurers negotiate jointly with all of the health care providers, and set on one specific price for each procedure. In that system, private insurers wouldn’t pay more than Medicaid when a patient went in for an MRI. Everybody would pay the exact same price.

2) What all-payer rate setting shares with single payer

Single-payer health care systems save money in two ways: reducing administrative costs and increasing the bargaining power of health insurers. This is true of all-payer rate setting systems, too.

First, single-payer systems buy in bulk — and can get discounts. When a government-run health plan negotiates with health care providers, they represent all of the country’s citizens and can guarantee that hospitals will get a steady stream of patients. Insurers have more clout when they negotiate together. Much like Costco drops the unit price of goods when you commit to purchasing a lot (64 ounce jar of mayonnaise, anyone?), insurers should be able to get a better price this way.

You see this in international pricing data. Americans pay way more for health-care services than folks who live in countries where the government negotiates rates.

All-payer rate setting can work similarly: when all of a country’s insurers band together they have a similarly large membership to represent.

Second, having a set price for each medical service should, in theory, reduce administrative costs. It eliminates the jobs of a whole cadre of medical billing specialists, whose whole job it is to look up what rate insurance plan A charges versus plan B or plan C. When the price is always the same, the complexity decreases. This is true in systems where there is one, government insurer — and one where there are dozens of private insurers all paying the same price.

The criticisms of all-payer rate setting are similar to those of single-payer, too. There’s worry that, in a system where hospitals earn a specific amount for each procedure, they’ll have less motivation to innovate. If the all-payer consortium refuses to pay the price of innovative new treatments, innovation may fall. And government-controlled profit margins can leave the health care system with less money for experiments.

“This has always been a challenge of these types of systems,” says Ken Thorpe, a health economist at Emory University who has studied all-payer rate setting in America. “How can you structure them to promote innovation, while also controlling costs?”
3) At least five countries use all-payer rate setting — and their health care costs are growing slower than America’s

It’s a misconception that all the countries with national health-care systems use single payer. Many like the idea of having consumers pick and choose between different private insurers so there’s competition and innovation around service, disease management, and more. But they tend to use all-payer rate setting to hold down costs.

France, Germany, Japan, the Netherlands, and Switzerland all use some version of all-payer rate setting. Between the countries, there’s lots of variation between how may different insurance plans citizens choose from. Germany, for example, had 134 competing “sickness funds” as of 2013 — whereas Japan has more than 3,500 separate health insurance providers.

Countries that have all-payer rate setting tend to have slower health-care cost growth over the past decade than the United States. One study of Japan’s all-payer rate setting program, published in Health Affairs in 2011, found that the share of the country’s economy devoted to health care grew 0.8 percentage points between 2000 and 2008. During the same time period, American health care grew 2.7 percentage points.

Germany’s health-care spending grew 0.3 percentage points over the same time period, according to data from the Organization for Economic Cooperation and Development.

There are dozens of other countries that don’t use all-payer rate setting that also have slower cost growth than the United States, too. So it’s not that this particular system is the one way to achieve slower health care cost growth — but it does appear to be, from these international examples — one potentially successful option.

4). A dozen states used all-payer rate setting in the 1980s. Now, it’s just Maryland.

Ten states set up rate-setting systems for their hospitals in the late 1970s and early 1980s, all aimed at better controlling health care costs. These weren’t exactly the same as Europe’s rate setting systems, which also include providers who work outside the hospital, like primary care doctors. But they were a step in that direction, taken by left-leaning states including New York, Washington, and Massachusetts.

These states were at least a partial success story. Harvard’s John McDonough, who has written the best history of all-payer rate setting in America, found that that these states “were able to reduce their rate of growth per discharge.” One paper found that the rate-setting programs of the early 1980s reduced the costs of each hospital visit somewhere between 12 and 26 percent. In other words: when insurers negotiated jointly, the prices of each hospital visit dropped.

In the late 1980s, all-payer rate setting began to fall apart. McDonough and others say this had a lot to do with the growth of health maintenance organizations, or HMOs, who wanted to try to negotiate even lower rates than the banded-together insurers could — and ultimately got permission to escape the system from state regulators. This all happened at a point in history when health-care costs weren’t growing especially fast, and states may have felt more comfortable deregulating their markets.

It’s was also unclear how well these systems were actually succeeding. While it is true that they held down the price of each hospital visit, it wasn’t totally clear they reduced overall health care spending. Other factors contribute to the total amount a state spends on health care, like how many times patients turn up at the hospital to begin with. And when it came to overall spending, McDonough writes that the evidence was “divided” on whether these all-payer rate setting systems were succeeding.

States began to deregulate in the 1980s and through the 1990s, until there was one state left with all-payer rate setting: Maryland.

5). Maryland still tells hospitals what prices they can charge. That holds prices down.

Maryland enacted its all-payer rate setting system in 1976. At that point, the price of a hospital admission in Maryland was 26 percent above the national average. By 2007, after three decades of the rate-setting approach, it had fallen 2 percent below the national average.

In this way, Maryland’s rate setting scheme has been seen as a success: it’s held the price of each medical admission down by bringing insurers together to negotiate en masse. “On spending per admission they’ve done really well,” USC’s Ginsburg says.

But much like the other states who abandoned rate-setting, there’s also evidence that Maryland’s system hasn’t slowed overall health care spending growth — that admissions to Maryland hospitals have grown so quickly that they negated the really slow growth in prices.

Much of this research comes from Pauly, who published a 2012 paper looking at health care cost growth in Maryland and other states. He found that per person hospital spending grew 5.1 percent in Maryland between 1990 and 2009. Over the same time period, per person health spending in the rest of the country grew by 4.7 percent.

Pauly says that “nobody knows” why hospital admissions increased faster in Maryland over this time period. It’s possible it had to do with the rate-setting system. “It’s possible if a hospital isn’t paid very much, they make up for that with more frequent admissions because you need two admissions to make up for one at the lower prices,” he says.

Or, it could be a fluke of history: “Maybe there was no connection. Maybe Maryland was just very unlucky.”

In any case, the faster-than-expected growth in health care costs forced Maryland to revamp its all-payer rate setting system in last year. The state will keep setting hospital prices but, on top of that, will layer a budget cap for how much the state spends on health care. The idea there is to use that budget ceiling to tamp down on overall growth at the same time the state also controls prices. That system just went into place this year — and will be another big experiment in how the United States can learn to control health care costs.

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