A regular commenter here, Steve, a physician, was kind enough to leave a link to this very interesting post on the state of Maryland’s system for controlling the rise in hospital prices in comments. The post really needs to be read in conjunction with this article from last September from the Wall Street Journal, from which the graphic above was sampled. I’m surprised that I missed the original article and am grateful for having it brought to my attention.
Apparently, back in 1977 the state of Maryland, alarmed at the high healthcare costs in the state which, at the time, were 25% over the national average and were rising rapidly, determined to control the rate of increase of healthcare costs by controlling the rise of hospital prices:
In 1977, Maryland decided that, rather than leaving prices to the vagaries of a marketplace where insurers and hospitals negotiate behind closed doors, it would delegate the task of setting reimbursement rates for acute-care hospitals to an independent agency, the Maryland Health Services Cost Review Commission.
When setting rates, the Commission takes into account differences in labor markets and how much a hospital pays in wages; the amount of charity care the hospital does; and whether it treats a large number of severely ill patients. For example, the Commission sets the price of an overnight stay at St. Joseph Medical Center in suburban Towson at $984, while letting Johns Hopkins, in Baltimore Maryland, charge $1,555. For a basic chest X-ray, St. Joseph’s asks $81 and Hopkins’ is allowd to charge $155. The differences reflect Hopkins’s higher costs as a teaching hospital and the fact that it cares for generally sicker patients.
The graphic at the top of the post illustrates the percentage markup of charges over costs in Maryland compared to the nation over the third years from 1980 to the present.
There are a couple of things that I think need mentioning about the article and graphic. First, the cost of hospitals is only a weak proxy for healthcare costs. It’s a major cost component but not the only major cost component and hospital prices are dependent on another major driver of healthcare costs: wages. The Maryland system does nothing about that cost component since wages are included in the basis for determining prices.
Second, Maryland’s timing was just right. According to the WSJ article Maryland’s healthcare costs were 25% above national in 1977 and are now 2% less. That change has taken place over a period of thirty years. Maryland began its price control regime just as costs were beginning to skyrocket in 1977. States who elect to emulate Maryland will be starting from the present basis not from the 1977 basis. Adopting a similar regime of price control won’t cause costs to fall, it’ll just keep them from rising as rapidly as they have been.
Third, national hospital margins are inclusive of Maryland’s. That means that elsewhere margins have been rising somewhat more quickly than the graph would suggest.
Fourth, it’s something that genuinely hadn’t occurred to me until Steve brought the post to my attention but rising healthcare costs are undoubtedly a local problem with national implications rather than a national problem. To me that implies that local solutions should be the preferred method of attack. It is possible that price controls could be part of that attack but we should bear in mind that one of the risks that price controls bring along with them are that of shortages. My intuition is that the problem of local shortages would be a greater risk in a national system than in a state system.
Finally, I continue to question the likelihood of the federal government imposing price controls on hospitals let alone on the healthcare system, generally. It hasn’t done it so far and parsimony suggests it won’t do it in the future.
The article and post repeat a number of themes that I have been repeating for some time here and I’ll list them in bullet points rather than go through them again in detail:
- Increases in prices, i.e. just plain charging more for the same services were a significant part of the increase in healthcare costs from the mid-1970’s into the early 1980’s.
- Since then much of the increase can be attributed to regular percentage increases alone.
- The federal government is certainly not the only vehicle for changing the healthcare system and may not be the most effective.
Before closing there’s one more thing that bears mentioning. Let’s engage in a little thought experiment. Total U. S. GDP is something like $14.26 trillion and the healthcare sector is something like $2.3 trillion of it. If the economy, generally, grows at an average of 2% per year and the healthcare sector grows at an average of 4% per year, what will the economy look like in 30 years (the period over which Maryland’s experiment has taken place)? According to my calculations the entire economy will have fallen short of doubling while the healthcare sector triples in size, accounting at that point for about 30% of GDP. It will also have accounted for 45% of growth during the period. That’s pretty troubling to me, especially when you consider that you’ve got to tax the rest of the economy to pay for the majority of the healthcare system. I don’t think that’s viable so even something like Maryland’s price controls approach executed by all of the states and extended to the entire healthcare system is insufficient to solve the problem we actually have. The cost basis is too high.
Oh what a nice line of bullshit. How many times has it been said that we don’t have a well functioning market. But the market is at fault. Its like kicking your dog every time your kid misbehaves.
From the linked article,
I’m not following the writers logic here. I don’t see how the deal makes sense at least not if there is no cost shifting as is implied.
What this seems to have done, is turn hospitals into something akin to regulated utilities. Rates are set by the commission, likely with hospital and other intervener input, and a ROI is fixed. A low ROI, but there is no doubt that a hospital will get that money. If they end up short for a given year it is made up in the following years, if they make too much, it is given back (likely through reduced price increases in the future). Hell, I bet they have some sort of balancing accounts like you find for most other regulated utilites.
These accounts basically record the shortfall or excess profits and that is how rates in subsequent years are, in part, determined. Fall short, you have the balancing account, if you had money in there from previous years cover the shortage with that and keep rates “steady”.
Now, all that being said there is substantial cross subsidization for regulated utilities. The author provides a spiffy example of how Johns Hopkins is allowed to charge higher rates since it is,
1. A teaching hospital,
2. Cares for the indigent/low income at a higher frequency than other hospitals.
That strikes me as not unlike the CARE amendment to many utilities tariffs here in California.
It is like this author really doesn’t know what she is writing about. She kinda knows enough to throw around terms specific to Maryland, health care, etc., but when you scratch the surface you find nonsense underlying her arguments.
For example, if you look at her book, Money Driven Medicine you get this passage,
The part I agree with, we have a health care industry where the normal laws of supply and demand do not apply and that is one reason, if not the reason, why our health care industry is out of control (in terms of rising costs/prices). Then she turns around and writes,
Which is it? Do we have a market or not? I’d argue not, maybe a charitable description would be the market place in the second quote is that the market place is highly dysfunctional due to the reasons she notes in her book. At best its sloppy.
Thanks for covering this Dave, got home late and think you did a good job with it. There is much in this piece that rings true for me and some that does not. There is very little adjustment for acuity of care in payment by any payor, including Medicare. Adjusting for acuity makes sense. It may mean that hospitals are less likely to try to make up for shortfalls by doing more procedures. Also, one of the oddities of my practice is that I tend, with some exceptions, to make the most money on the easiest cases, meaning money per time. It sounds as though they have sorted this out a bit.
I really hope someone from Maryland picks up on this piece and responds. This price control system, which sounds a lot like what they have in Japan and a couple of other places, appears to have kept every hospital in the state financially sound, while also maintaining two outstanding, world class facilities, Johns Hopkins and their Trauma center. I generally see price controls as bad and would have predicted it might keep costs down, but would drive out the quality facilities and providers. Has Maryland seen shortages? I dont see it in the ads for jobs in my journals, but it would be interesting to know.
Your fourth point is key IMHO. I try to say this often, but maybe not as well. Whatever HCR we pass should allow for the option of local experimentation. I would prefer avoiding nation wide wholesale changes and like the idea of states or groups of states implementing some of the cost cutting experiments. Sometimes what works does not fit with what is taught in Econ 101.
Steve V-My take is that they charge Medicare and private insurers the same, all of them. While centralized price setting should, in theory, set up an inefficient pricing structure, it seems to have worked better than expected. Again, this kind of makes sense of you have ever negotiated fees for medical procedures. There really is no negotiation. Big insurers dictate to providers. Providers dictate to small insurers. Physicians in short supply should be able to demand higher fees, yet it often does not happen.
You are right that supply and demand do not work as well in medicine. I think there are a lot of reasons. Some of those reasons could be changed to take advantage of market mechanisms, but IMHO, many cannot. There is an emotion driven side that is not entirely rational. There is a huge information disparity. While I dont think we know enough from this article to make definite conclusions, this should demonstrate that we might think about something other than market mechanisms for controlling costs.
Steve
steve,
You still have not explained why it makes sense for Medicare. Do they get more than they otherwise would? Or is it less? How does the national growth rate of Medicare payments factor in, or is that something completely different?
At best its sloppy work.
And I’d include the reason why: government fiat. I saw this with a simple straight forward commodity about 9 to 10 years ago. Electricity is electricity (oh sure we can have different voltage levels, and stuff, but in the end, its a damned simply commodity) and yet the government managed to totally fuck it up and nearly bankrupt to utilities.
Which ones and why? I often get asked, “Where is your health care plan” like I’m supposed to come up with a comprehensive reform plan all myself at my kitchen table or something. So, now its your turn:
Which ones and why?
Like other purchases are not emotional? Buying a house, a car, or other large scale purchases/investments.
True, and while that can hamper markets, they also can find interesting ways around that problem. Maybe not in ever circumstance, but merely waving around the specter of incomplete information is kind of like saying an argument is fallacious therefore the answer is wrong (the fallacy fallacy).
I think its clear from my comments here and in other posts by Dave I know something about how a regulated utility works. And it is clear that this wont solve the problem of costs, at least not entirely. When a utility has a valid cost increase, that cost is passed right through to the consumers. There will be some arguing over how big the cost increase is, how long the cost recovery should be, etc. But in the end the utility gets its money. Its called establish rate doctrine and that is what the courts go by. Even if a regulatory commission wants to ignore established rate doctrine the utility will sue and almost surely win and get their money…and cost taxpayers/rate payers more money on top of it as well because all those spiffy legal costs will go right into the rate base.
So if you go in and regulate an insurance company/hospital and they say “Our costs went up by 6%, and here is all the data, so we need a 6% rate hike across the board,” and all that data is accurate. They are getting their rate hike of 6%. There is no case law for a regulated utility that says, “The investor owned utility has to drive itself into bankruptcy if the governing regulatory commision wants it to.”
BTW municipal utilities are virtually unregulated in terms of rate hikes. If the city wants a 100% rate hike, well go vote the city officials out office is you’re only alternative. The idea of preventing rate shock (something that applies to investor owned regulated utilities) does not apply to munies. They might try to follow such an idea, but they don’t have to. So that wont help you much either, IMO.
And it is unlikely to have much impact at all. While it might have an impact in terms of some of the more outrageous practices in the health care field, any legitimate cost increase will be passes along to consumers. I doubt that the high growth rates of costs in health care are due to the outrageous practices.
“You still have not explained why it makes sense for Medicare”
As written, it sounds like Medicare accepted a one time increase in payments in return for keeping increases below the national average.
“Like other purchases are not emotional? Buying a house, a car, or other large scale purchases/investments.”
When I had to walk out with my trauma surgeon and explain to a mother that we could not save her teenage son’s leg, that he was going to be on a vent for a while and we werent sure if he was gong to live, she seemed to get a bit more emotional than when one buys a house. Even the relatively benign event of taking someone’s 2 y/o away from them for a tonsillectomy seems to elicit a much stronger emotional response. So, no, I amy be biased, but I see no comparison between buying a house and sending family off for surgery, chemo or most other big ticket items.
“Which ones and why?”
Aetna used to have a sizable presence in our insurance market here. They took a hit when the local papers wrote about some of their restrictive practices. Nothing awful or egregious, they just were not paying for some semi-experimental treatments for cancer, IIRC. These are the types of treatments that cost thousands of dollars but add little to life expectancy. Aetna is still around and according to my insurance broker, they now offer all the treatments everyone else does.
When you combine information disparity with this emotional response, it overrides rational market responses. Heaven knows that there has been oodles written over the last year about how markets have not behave rationally, and they are pure financial institutions. Now, factor in people’s health, their family’s health, and you have a basic dynamic that becomes susceptible to manipulation (in business this would be called marketing) or just plain fear.
I think that where we have room for market mechanisms to work better is in areas like laboratory medicine, Radiology and, perhaps, primary care. (Sorry for the late response, been sick as a dog.)
Steve
Ahhh. Thank you.
I wasn’t arguing that they are as emotional, but that emotion is part of just about all purchases. I’d argue that seeing price tags however, can act as mechanism to keep people from letting their emotions make certain decisions in some cases.
Yes that maybe cold and even seem uncaring, but that is the problem here isn’t it? We can no longer afford to let people have any and all care that they want. That way is unsustainable, I’d argue it is the path we are currently on, and we wont sustain it. Either we change to another, more sustainable path, or we stay on this one and wait till we slam into the reinforced brick wall.
“Yes that maybe cold and even seem uncaring, but that is the problem here isn’t it? We can no longer afford to let people have any and all care that they want. That way is unsustainable, I’d argue it is the path we are currently on, and we wont sustain it. Either we change to another, more sustainable path, or we stay on this one and wait till we slam into the reinforced brick wall.”
I agree with you here. The question is how to get there. While my weakness is probably too much focus on what happens in individual encounters, I think a bottom-up analysis helps when trying to implement top-down solutions. I think that you tend to see economics more as numbers while I see it more as numbers and psychology. In areas where it seems likely to work, I also favor market approaches. In areas where it does not, I dont see how we change without significant cultural changes or by using government based solutions.
An example of this might be the price tag solution you offer. As it stands, all it takes is a couple of articles in a newspaper about an insurance company refusing to pay for dubious treatment for some cute young kid to make insurance executives tremble and pass on those costs. Insurance companies, usually portrayed as the villains, may need need governmental cover to not have to pay for treatments that do not work.
Steve