Rx for Health Care Reform

19. Toward Uniform Hospital Pricing

240 19 Toward Uniform Hospital Pricing In our reform model, utility insurers are not allowed to negotiate hospital prices. So hospitals would have every incentive to charge as much as they could get away with politically. Publishing their charges and quality ratings, as many politicians and employers now advocate, would have relatively little impact on prices. Most consumers pay scant attention to such information today (see Chapter 6), and they’ll never be able to understand the arcane details of hospital pricing. Moreover, the majority of people go where their doctors send them, and they don’t want to travel very far from where they live. The prepaid physician groups in this system would have an incentive to eliminate unnecessary hospital admissions, tests, and procedures that drove up professional costs. If inpatient expenses were counted in the total cost of care that determined a patient’s cost for choosing a particular group, the groups would have a reason to use cheaper hospitals. However, doctors would still have to consider geography and individual needs and preferences in deciding where to admit patients. For example, if a patient wanted to use a particular cardiac surgeon who practiced at a certain hospital, that’s where he or she would go, regardless of the hospital’s prices. And if physician groups limited inpatient utilization, some hospitals might raise their prices to compensate for the decreased volume. Consequently, there seems to be no alternative to some form of administered hospital pricing—which means that payers predetermine what they’ll pay for a service, group of services, or duration of service. While administered pricing has its own set of problems, it has the great virtue of insulating payers from the market power of any hospital system, no matter how large. The End of Cost-Shifting Historically, hospitals have tended to shift costs from public payers, which don’t negotiate with them, to Toward Uniform Hospital Pricing 241 private payers, which often do. According to the American Hospital Association, in 2003 hospitals had an aggregate cost-to-payment ratio of 95 percent on Medicare business and 92 percent on Medicaid. That means that they lost 5 percent on Medicare and 8 percent on Medicaid. Partly to compensate for this shortfall, they induced private insurers to pay them 22 percent above cost.1 (Hospitals also pass on uncompensated care costs equal to about 4 to 5 percent of their revenues to private payers; but that should go away with universal, comprehensive coverage.)2 In the utility insurer system, there would no longer be any cost shifting . While each insurer would maintain separate pools for Medicare patients and people under sixty-five, it would pay every hospital the same risk-adjusted amount for each service, case, or duration of stay. So there would be nowhere for the hospital to shift costs, except to its outpatient department, a subject taken up in a later discussion. The key challenge would be to figure out how to merge the current public and private payment systems. To understand how that could be done, it helps to know a little about the history and the approach of each system. History Lessons The federal government and the states have taken different approaches to administered pricing. A few states have adopted “all-payer” laws specifying what hospitals could charge insurers. From 1983 to 1996, for example, New York set rates that were supposedly high enough to cover the hospitals’ costs and provide them with a slim profit margin. But the law backfired, because it punished well-run hospitals by lowering their rates, while rewarding inefficient hospitals with higher rates.3 New Jersey passed an “all-payer” law setting hospital rates for all health plans in the 1970s. According to Terrence French, executive vice president of Newark’s Cathedral Healthcare, the legislature did this to “stabilize hospital over-capacity.” In other words, no hospital was allowed to go out of business, so hospitals had no reason to become more efficient . After the state ended rate-setting in 1992, some hospitals began to encounter serious difficulties. By 1999, even the state hospital association was saying that twenty-five facilities needed to be closed. The Centers for Medicare and Medicaid Services (CMS) has used a different method to fix hospital prices. Since 1983, Medicare has paid 242 Rx for Health Care Reform fixed prices for “diagnostic-related groups” (DRGs) of services. This “prospective payment system” (PPS) covers...