When the Health Care Market Cannot Regulate Itself

When making health care decisions, few patients with health insurance have to consider the overall costs of their treatment. Instead, they are able to focus on their recovery. What most patients don’t realize, however, is that they benefit from a system of negotiated prices and under-paid procedures, which often leaves uninsured patients to shoulder the costs.

Vermont is now taking steps to address problems that can arise from this opaque system, including rising health care costs. The state will soon implement an “all-payer” health care plan that requires Medicare, Medicaid, and private payers to reimburse health providers at the same rate, based on performance and patients’ recovery.

Like most health care markets, Vermont currently uses a fee-for-service model. The Green Mountain Care Board, the state agency responsible for regulating health care in Vermont, is overseeing the transition to the all-payer system. According to the Care Board, the fee-for-service model is the most common compensation system in the United States. However, because that model operates by paying providers for each health care service performed, the Board explains that “it is widely recognized as a significant driver of health care spending growth.” Because providers are compensated for each service, the fee-for-service model rewards providers who deliver a larger volume of health care services, without taking into account patients’ medical outcomes. Under the fee-for-service model, if a patient does not recover from a procedure effectively, that patient will then have to pay not only for the procedure but also for necessary treatment during recovery.

Health care costs in Vermont were projected to increase almost seven percent annually under the fee-for-service model. The all-payer system seeks to cut that in half.

Under the all-payer system, health care providers will voluntarily join an Accountable Care Organization (ACO), which will create standards for quality and cost. Providers will be compensated based on their achievement of certain targets. For example, doctors would receive extra compensation for a high percentage of patients receiving blood sugar tests or recovering fully from surgery without re-admittance. Some supporters have characterized the all-payer system as a “pay-for-performance” model because of these features that encourage providers to focus on patient outcomes.

One potential barrier for implementation under the all-payer system is that provider participation in ACOs is voluntary. To encourage providers to join the ACOs, Vermont and Center for Medicaid Services (CMS) have said that participants could qualify to receive an Advanced Alternative Payment Model payment—a five percent bonus for participating in the program.

The Chairman of the Care Board estimates that the all-payer system will save Vermont $10 billion over the next ten years. Vermont’s Governor Peter Shumlin also claimed that it will reduce health care costs. Governor Shumlin warned that the current fee-for-service system “if left unchecked will bankrupt our state and Vermont families.”

Many health care professionals argue that Medicare pays too little in a fee-for-service system. In 2013, hospitals reportedly lost $51 billion because of underpayments from Medicare and Medicaid. The average hospital charged $54,000 for joint replacements—the most common cause of hospitalization—but Medicaid paid less than $15,000.

Carolyn Engelhard, a health sciences and public policy professor at the University of Virginia, has voiced support for an all-payer system. Engelhard argues that traditional market regulation—in which prices are set through supply, demand, and competition—does not work in health care because the underfunding shifts the costs of these negotiated prices to uninsured persons. Prices are usually hidden from the consumer, she explains, with only a few patients paying hospital list prices that are three times higher than the Medicare rate. Most private insurance companies are also able to negotiate discounts off the list price.

Citizens, hospitals, and health care providers weighed in on the all-payer proposal during a three-week public comment period hosted by the Care Board. Vermonters could also attend public hearings on the proposed system.

After receiving feedback, the Care Board identified three goals that would be served by focusing on payment for performance rather than payment per service: improving access to primary care; reducing deaths from suicide and drug overdose; and decreasing the prevalence of chronic disease. The Care Board argued that there is a strong consensus that Vermont can reduce health care costs by improving access to primary care, because it is less expensive to prevent a disease than to treat a disease. Expensive treatments can include surgeries as well as other interventions, such as pharmaceuticals that can lead to dependency and abuse.

The forecast for the all-payer system remains unclear. The implementation of the all-payer system will fall to the newly-elected governor, Phil Scott. Still, Vermont is not the first state to attempt to regulate the health care industry by setting rates. Ten states implemented similar rate regulation programs to reduce the growth of spending thirty years ago. Maryland is now the only state still using a similar rate-setting program for hospitals. The state experienced a slowed rate of hospital spending within the first year of implementation, and in 2014 the program saved Medicare $116 million.

The Affordable Care Act (ACA) encourages new health care regulatory models like the all-payer system. The ACA created the Center for Medicare and Medicaid Innovation, which provided grants to six states—including Vermont—for alternative payment model testing. CMS will provide $9.5 million to support the implementation of Vermont’s new system, which a CMS Chief Medical Officer hailed as “historic in terms of its scope.”