Will an All-Payer System Lower Health Care Costs?

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Maryland’s global budgeting scheme for hospitals may be a model for controlling rising health care prices.

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“It’s the prices, stupid.”

This has been a leading critique of the U.S. health care system since 2003, when a major study found its prices higher than those in other developed nations. The study found that even though the United States spends a considerable amount of its gross domestic product on health care, its population consumes fewer health care services than other developed nations. In a new study, the authors of the 2003 study have confirmed that this disparity in prices still persists.

Many Americans are concerned about the rising costs of health care. Recent proposals from the political left for a single-payer system—often called “Medicare for all”—not only propose to expand access to health care coverage, but also control the prices of health care through a federal system of rate-setting. The prospect of a single-payer health care system has proven divisive, not just between the political left and right, but among members of the political left itself.

But there may be another way to control the prices of health care without moving to a system of single-payer health insurance: an all-payer system.

In an all-payer system, a state may regulate health care prices by rate-setting. All health care payers—the government, private insurers, and self-insured employer plans—pay similar prices for services rendered at a certain hospital. Alternatively, all-payer systems may take the form of global budgets, in which a state sets a monetary limit for a period of time on total hospital spending.

In the United States, prices for health care services vary among providers and payers. The Medicare and Medicaid programs set regulatory limits on what they will pay for care, and these limits are usually below the value of the hospitals’ costs for providing that care.

For private payers, however, prices are often negotiated with individual hospitals and providers at values well above Medicare and Medicaid. A recent paper found that private payers could pay anywhere from 11 to over 200 percent of Medicare’s rates for health services. An all-payer system seeks to reduce the gaps in pricing not only between the public and private sector, but also among private payers.

All-payer rate setting systems are not a new innovation. During the 1970s, nearly 30 states regulated hospital rates. Regulatory approaches to rate setting varied from voluntary public price disclosure and review to formal rate-setting by a state-level administrative body. States implemented these measures to address rising health care costs and improve price competition among hospitals.

During the 1980s, however, with the rise of health maintenance organizations and other managed care entities, the states largely abandoned all-payer regulation in favor of leaving price control to the private market.

Today, Maryland remains the only state that regulates health care prices through an all-payer system. Although Maryland’s all-payer system originally involved rate-setting, since 2014 the state has shifted to a system of all-payer global budgeting, which essentially limits what hospitals can generate in annual revenue. Under this system, the Maryland Health Services Cost Review Commission places caps on hospitals’ growth in reimbursable per capita spending each year.

Maryland’s shift to an all-payer global budgeting system, rather than a straightforward rate-setting system, is based in the greater movement toward what is known as value-based care, which reimburses providers based on patient outcomes. Pure rate-setting may have encouraged hospitals to increase the volume of services in order to make up for any lost revenue that they would have otherwise received from charging higher rates to private payers. By capping hospitals’ budgets each year, the Health Services Cost Review Commission encourages hospitals to make more deliberate spending choices and better coordinate patient care, leading to better outcomes like lower rates of hospital readmission.

According to health care policy experts, Maryland’s all-payer global budgeting system works. A 2017 study found that the program created net savings in the amount of $319 million for Medicare in its first three years. On average, global budgets have generally increased by about two percent each year since 2014—far less than the original goal of 3.58 percent, which represents Maryland’s historical rate of gross domestic product growth.

Opponents to all-payer schemes, however, argue that the government ought not interfere with the free market. Longstanding arguments against all-payer systems include increased shortages of medical services, decreased quality, and rationing. The free market, the opponents argue, is in a better position to provide prices that adequately reflect the value of medical services.

Opponents also point to the fact that all-payer systems, once popular among states, have largely disappeared. When lawmakers in California recently tried to introduce legislation to establish a rate-setting commission, the health care industry fought back. The California Hospital Association argued that governmental rate setting would lead to losses of over $18 billion and lead to over 175,000 lost health care jobs. About a month and a half after the legislation was introduced, it died in committee.

Despite California’s recent failure to implement an all-payer system, supporters of health care reform may still consider all-payer systems a valuable policy position. Pete Buttigieg, Mayor of South Bend, Indiana and a current 2020 Democratic candidate, has expressed support for using an all-payer system as a way to control health care costs before moving to a single-payer system.

Others think that state all-payer systems are more politically palatable than single-payer schemes like the one advanced under Senator Bernie Sanders’ (I-Vt.) “Medicare for all” proposal. Although both all-payer and single-payer systems incorporate regulation of hospital prices or budgets, all-payer systems do not eliminate the private insurance industry.

With more Americans supporting the prospect of single-payer health care, it remains to be seen whether politicians on the left will still consider all-payer systems as a viable alternative. In the meantime, it appears as though the fate of all-payer care might depend ultimately on Maryland’s experience.

Simone Hussussian

Simone Hussussian is the Editor-in-Chief of The Regulatory Review and a student at the University of Pennsylvania Law School.

This essay is part of a 12-part series, entitled What Tomorrow Holds for U.S. Health Care.