An alternative to the public option

[Greenbeard]

Which state has the best hospital in the country (for the 20th year in a row)? Which state has the lowest health insurance premiums as a percentage of median household income? Why, it's Maryland.

As you may have heard, some House Democrats have introduced a bill trying to create a public option. The point of the public option, as I've pointed out in multiple posts, is to pressure providers to stop extorting ever-higher reimbursements from insurers (which in turn leads to ever-increasing premiums). As I explained a bit in this thread, providers have gotten very good at using market clout to drive costs up, often charging different rates of different payers for the same service. To steal a bit from that other thread, here's an example from Massachusetts:

Massachusetts insurance companies pay some hospitals and doctors twice as much money as others for essentially the same patient care, according to a preliminary report by Attorney General Martha Coakley. It points to the market clout of the best-paid providers as a main driver of the state’s spiraling health care costs.

The yearlong investigation, set to be released today, found no evidence that the higher pay was a reward for better quality work or for treating sicker patients. In fact, eight of the 10 best-paid hospitals in one insurer’s network were community hospitals, which tend to have less complicated cases than teaching hospitals and do not bear the extra cost of training future physicians.

Coakley’s staff found that payments were most closely tied to market leverage, with the largest hospitals and physician groups, those with brand-name recognition, and those that are geographically isolated able to demand the most money.

The same thing has been happening in California and, no doubt, other states. The public option gives private insurers the leverage they need to go toe-to-toe with providers and force them to stop exploiting their market clout with higher and higher markups of their services. But that's an indirect way of getting at what we're after--it's an attempt to try and harness market forces to work in favor of lower (or at least less rapidly rising) premiums instead of higher ones. In some circles, however, the public option remains controversial and in other threads some have expressed concerns that the introduction of a public option is some nefarious plot to build a single-payer system.

Which brings us to Maryland. They don't have a public option, yet they achieve directly what the public option is supposed to achieve in a roundabout way (providers playing nice with insurers). They're the only state in the country that currently has what's known as an all-payer rate setting system. I'll let the guy who administers that system explain it:

Since 1971, Maryland has maintained a unique hospital payment system in which all payers—public and private—pay the same rates for the same service at a given hospital. This approach was enacted by the Maryland legislature following a period of rapidly rising hospital costs and serious financial losses by hospitals treating large numbers of uninsured patients. The legislation also established the Health Services Cost Review Commission (HSCRC), a government agency with broad powers of hospital rate setting and public disclosure. The HSCRC believed that hospitals should operate under consistent payment and so, in 1977, negotiated a waiver with the federal government to require Medicare and Medicaid to pay Maryland hospitals on the basis of rates approved by the HSCRC. As a result, the HSCRC exercises full rate-setting authority for all payers and all general acute hospitals in Maryland—the only arrangement of its kind in the U.S. This system has enabled Maryland to implement a number of innovative payment and access initiatives while avoiding "cost-shifts" that have occurred in other states, whereby hospitals charge higher prices to private insurers and the uninsured to make up for shortfalls from public payers.

The Wall Street Journal had a nice article on the Maryland system last year with a pretty striking graphic:

As that article notes,

The system has largely reined in hospital costs. In 1976, Maryland hospital costs were 25% more per case than the national average; by 2007, the latest year for which data are available, Maryland's costs were 2% less than the national average. Maryland also saw the nation's second-slowest increase in hospital costs during the same period, said Robert Murray, the commission's executive director.

On average, Maryland hospitals charged patients 20% above the cost to treat them in 2007, compared with a national average of 182%, according to the American Hospital Association.

Now, Maryland may be the only state to have all-payer rate setting today but other states have tried doing it in the past and abandoned those systems, mostly because their schemes weren't built quite as well as Maryland's. But Maryland shows that a well-designed all-payer rate setting system (in which all payers--even public payers like Medicare and Medicaid--pay the same rates for the same services, under the watchful eye of an independent commission) can keep costs in check and prevent providers from running the show.

I'd like to see more states try this, which would quite possibly eliminate the problem the public option is intended to address.