A Public Plan with a Twist: AHIP’s New Drink?

by Greg Pierce on July 27, 2009

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Doctors don’t like a public plan because it will reduce their fees. They’re right. The same goes for hospitals. A public plan will reduce the fees paid to a lot of healthcare providers. So I understand why doctors and hospitals oppose a public plan, if they’re worried about fees. (The impact on income is less clear: if we succeed in reform, there will be an additional 50 million people calling for appointments and ordering refills.)


What I don’t get is why America‘s Health Insurance Plans (AHIP) is still fighting a public plan. Why not simply support a public plan on the condition that private insurers also have access to the public plan’s payment levels? That would be an “all-payer” system, where each insurance company pays the same amount to a given provider. This does not mean that all providers are paid the same; just that any specific provider is paid the same amount by each health plan. Some hospitals might be paid more than others, and some physicians more than others – reflecting deliberate decisions to compensate some more than others.   The only difference between today’s world and an all-payer world is that in an all-payer world, everyone gets to have a seat at the table when healthcare prices are discussed.


Rates would be set annually, by public-private entities at the state and local level, and would apply to hospitals, physicians, and outpatient services. These Regional Healthcare Pricing Councils (RHPCs) would be governed by a balanced cross-section of purchasers, patients, and providers, and could in theory be integrated into the function of an exchange, cooperative or a public plan. The RHPCs would also be authorized to establish the underlying basis of payment, whether hospital stay, office visit, bundled service, or episode-of-care. The RHPCs would NOT be authorized to sell insurance, provide healthcare services, or engage in any business-related activity.


This would accomplish a great many good things. First, all-payer rates simplify enormously the billing and collection processes, savings tens of billions of dollars annually as health plans employ fewer claims processors and price negotiators, doctors need fewer billing staff, and hospitals’ accounting offices are downsized.


Second, all-payer rates enable the rapid implementation, modification, and refinement of payment models that encourage efficiency, quality, and care coordination, consistent with local market conditions. Under the current arrangement, doctors and hospitals face a bewildering array of payment incentives, rewards, and penalties. An all-payer system translates the Tower of Babel faced by providers into a single set of incentives and rates; regional commissions assure that local issues – struggling hospitals, an abundance of a particular specialty, etc. – are reflected in the local payment system.


Third, we’re spending too much on healthcare, and one reason we spend too much is that a “unit” of U.S. healthcare costs too much.   A day in the hospital, a visit to a doctor, and a pill each cost more in the United States than anywhere else in the world. The RHPCs will establish locally-sensitive, transparent and participatory processes to set all-payer rates, and arrive at fair — but not “too fair” — payments for a “unit” of healthcare. Providers could be differentiated using market forces by allowing plans to set differential copayment/coinsurance levels, incenting patients to seek out efficient providers


Fourth, our current system has failed the basic test of a marketplace: the ability to satisfy consumer demand. Our approach to setting healthcare prices has created huge, intractable,

and damaging shortages and unexplainable variation in healthcare spending. We have nowhere near as many primary care physicians, general surgeons, and gerontologists as we need today – much less a decade from now. It’s no accident that these are three of the least-well compensated specialties in American medicine. We have more imaging machines per capita than anywhere in the world by a factor of ten. Our current price-setting approach to setting prices has some hospitals building multi-billion dollar expansions, while others have fewer than 5 days of operating cash on hand. We’re getting irrational results from irrational prices. At this point, any change is preferable to the status quo.


Finally, our current system has left us with the worst of both worlds. On one side, Medicare manages its budget by squeezing on price, and providers have the well-documented incentive to increase volume. On the other side, private plans often lack price-setting leverage, and try to decrease volume. The provider and the patient are caught in the middle. All-payer takes the issue of price off the table, and enables the comprehensive introduction of new models to pay providers on the basis of a single, consistent payment system that rewards value over volume.


Private insurance plans continue to oppose a public plan, which is understandable if they are to be relegated to a permanent second place. From a business perspective, the argument against a public plan – even if private plans have access to the public plan rates — is that today, it would set doctor prices; tomorrow insurance premiums. Premium controls turn health plans into regulated utilities, with little incentive for profit and innovation, or so the argument goes.


It’s possible but unlikely. It’s far more likely to result in a new burst of innovation, competition, and business opportunity as the insurance sector sheds its old business model of negotiating thousands of complicated contracts and employing tens of thousands of claims processors. Look abroad in the many European states that embrace an all-payer model, and where health insurance companies compete vigorously and reap the rewards of competitive excellence.   A regionally-based, all-payer rate setting system would free doctors, hospitals, and yes, AHIP’s members, to re-direct their creativity, capital, and profit-maximizing energy to producing something of real value: a new healthcare system.


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