Governor’s Plan to Cap Healthcare Provider Prices Misses the Mark

The Governor filed a number of healthcare market reform proposals along with his fiscal 2018 budget. One of his proposals aimed at reining in healthcare costs would impose limits, or capitate, the prices that insurance companies are allowed to pay providers (physicians and hospitals); it appears that the capitated prices serve as an indirect way of putting price caps on provider prices.  Hmm, sounds complicated. Let us try to explain.

Background

The best place to start is with a description of the problem the Governor is trying to fix. Massachusetts has an insatiable appetite for healthcare services. According to the Health Policy Commission (HPC), the Bay State’s total spending on healthcare increased by 4.1 percent in 2015 to $57.4 billion; that outpaces the state’s statutory healthcare “growth benchmark” of 3.6 percent. The HPC also reports that insurance premiums for small businesses and individuals are once again on an upswing, with base rates increasing between 5.4 and 8.3 percent from the end of 2015 through the first quarter of 2017.[1] “Base rate” increases are only the beginning of the story for the kinds of outsized surges in premiums seen in the so-called “small group market.” To the base rates, you have to add on various ratings factors and certain taxes and transfers that insurers seek to recover in premiums. Many small businesses are seeing premium hikes that easily reach into double-digit territory. Increases of over 25 percent or more are not uncommon (and, in fact, Pioneer’s own insurer increased premiums by 25.2 percent this year). The bottom line is that after many years of attempted legislative fixes, Massachusetts still has among the highest, if not the highest, healthcare prices in the country.

While healthcare costs have grown more slowly in recent years, they are still rising at a pace that outstrips inflation and the state’s own regulatory efforts through the HPC. So, how does this happen year in and year out? Massachusetts residents have a tendency to obtain most of their healthcare at expensive downtown Boston academic medical centers. There are also some very high priced providers in central and western Massachusetts, as well as Cape Cod, areas where there is not a lot of competition. Some of these providers are among the highest cost and most well-known providers in the country. Despite these high prices, there is often no discernable difference in quality between such high-priced providers and their lower-priced competitors, leaving market power as a key factor in setting rates. This situation creates what some refer to as “unwarranted price variation.” This means that there are no differences in terms of quality outcomes that explain why, for example, an MRI at a downtown Boston hospital costs up to 500 percent more than what it might cost at a community hospital in the Boston suburbs.[2] Nor does the difference in quality explain why routine childbirth deliveries at downtown hospitals can cost up to $14,500 more than they cost at a suburban hospital.[3]

The Commonwealth has been studying unwarranted price variation for a long time but has been stymied regarding what to do about it. Some argue that the existence of significant market power among some providers to affect price setting should be subject to antitrust or fair trade scrutiny by federal and/or state antitrust enforcers. While there have been several federal and state investigations to – as antitrust enforcers say – unscramble the egg, aside from the oversight of potential mergers, there has been little appetite for such enforcements. Simply put, that just means breaking up big systems into smaller systems because in hindsight some systems have acquired too much sway over healthcare prices.

In our health system, where most people have health insurance, it is the insurance companies who negotiate prices with providers. When some larger hospital systems wield significant market power, insurers complain that they lack leverage to negotiate lower, or even simply reasonable, prices. Insurers argue that if a larger, influential system opts out of their coverage network, it will be at a competitive disadvantage compared to other insurers.

Many healthcare policy experts and stakeholders believe the problem in Massachusetts is that some providers are able to charge higher prices than they would be able to charge in a more competitive provider market. This is the problem that the Governor’s proposal on “rate caps” is aiming to fix.

The Governor’s Rate Cap Proposal

Under the Governor’s proposal, which is described only in the most general terms in a slide presentation on the website of the Executive Office of Health and Human Services (EOHHS),

1. The Commonwealth will establish a ceiling on percentage increases of payments that insurance companies contract to pay to various providers each year;
2. The Division of Insurance, in consultation with EOHHS and the state’s Center for Health and Information Analysis (CHIA), will divide the state’s providers into three tiers based on current prices. (It is unclear if this applies only to hospitals or to physician practices as well.) The lowest priced providers would be placed in tier one, where insurers would have no limits on price increases to providers. The mid-range providers would be in tier two and insurers would be allowed to increase payments up to two percent for these providers. The most expensive providers would be in tier three and insurers would not be allowed to increase prices to these providers by any amount.

The proposal, however, is notably lacking detail and provides little guidance as to how all of this is to be structured.

Carriers have to demonstrate their compliance with this plan to DOI in their annual rate filings through a newly established file and approval process. Carrier rates would be presumptively disapproved and could not go into effect without DOI’s express approval, flipping the current process where rates are allowed to be charged unless expressly disapproved, usually within 30 days of filing. There are some exclusions in the proposal, such as primary care and behavioral health providers, and insurers can increase payments to providers with “value-based” contracts up to one percent higher than the cap. The DOI is to review the growth caps and tiers in three years.

One consequence of this proposal is that the rate caps apply only to carriers who sell health insurance to employers and individuals. This means that the prices paid to providers by self-funded employers, which comprise over half of the commercial (non-public payer) market, are not affected by this proposal. Self-funded employers do not purchase insurance from carriers. Instead, these employers pay for their employees’ healthcare costs themselves. Self-funded companies hire firms known as “third-party administrators” or “TPAs ” to negotiate prices with providers and develop health plan designs for their employees. Oftentimes, TPAs are divisions of well-known insurance companies, but as TPAs they are not selling insurance to the employer, they are performing benefit and claims management services. Hence, the Governor’s rate cap proposal does not extend to a majority of the commercial healthcare market.

If the objective of the proposal is to regulate provider rates based on current market prices, the question arises as to why the Governor is taking this circuitous route of regulating health insurer rates in order to influence some provider prices. What is notably absent in the Governor’s proposal is any obligation on the part of providers. We have been told that while there is a lack of obligation for the providers, it is expected that providers will adhere to the plan in good faith. This is not the way legislation works. Either providers have a legal obligation to rein in prices or they don’t, and, under this proposal, they don’t.

Analysis

It appears this proposal is inconsistent with the Governor’s philosophy that free markets can bring about the most efficient allocation of resources and that government ought not to interfere with pricing mechanisms. (Massachusetts regulated hospital prices through direct controls until the mid-nineties, when prices were deregulated under Governor Weld. Governor Baker was Secretary of EOHHS and Secretary of Administration & Finance during the Weld Administration.) That said, it appears that the Governor may be open to a more interventionist approach because so-called “unwarranted price variation” reflects a market that is not producing healthy levels of competitive pricing.

The Governor likely sees this proposal as a short term approach to help correct the sticky pricing behavior that seems to permeate the high end of the market and is responsible, in part, for the unbridled growth in health care spending. There are also some who contend that this proposal was crafted to placate the riled up business community over the $2,000 penalty discussed in our previous blog. This perspective holds that this rate cap proposal would hold premiums down, especially for the small business market, though it’s unclear if that would happen.

Regardless of the rationale, the proposal should be seen for what it is: an indirect and circuitous attempt to hold high-priced providers in check without imposing any legal obligations on them. It is worth noting that we have already tried the “no legal obligation” route on providers through the Health Policy Commission and the state’s aspirational benchmark, and its efficacy is open to question.

Several questions immediately come to mind. If the Governor believes that a short-term intervention is needed to address prices charged by providers, why not do so directly? What is the justification for creating an entirely new regulatory scheme through the DOI that requires a complete reversal of the current rate filing process and places no responsibility on one of the parties (providers) to the rate contracts? Currently, rates are automatically approved unless they are explicitly disapproved within a certain period of time. Under this proposal, rates would be presumed to be disapproved unless they are expressly approved by the Division of Insurance. There is nothing in the proposal that would prevent a provider that disagrees with the rate increases, to which the carrier is bound, from opting out of that carrier’s network; so what happens in the case of such an opt out? In addition, there is nothing in the proposal that would prevent providers from shifting costs they cannot recover from carriers to self–funded employers, especially to mid-size employers who do not have a lot of market clout. This could be an unintended consequence worthy of attention.

What about the overall impact on healthcare spending during the three-year period? Is it anticipated that some prices will not increase but others will? The Governor’s proposal does not project what will happen to carrier premiums and provider prices, or how this will be reflected in the state’s total healthcare spending. If the goal is to slow the growth of healthcare spending through a reduction in “unwarranted price variation,” the administration has not explained how this proposal will accomplish that result.

There may also be legal issues with the application of the Governor’s proposal to existing contracts. The Contract Clause of the United States’ Constitution – Article 1, section 10, clause 1 – prohibits states from enacting laws that retroactively interfere with contract rights. The Governor’s proposal takes effect on or after July 1, 2018, and some insurer-provider contracts have terms lasting three years. Generally, under case law developed under the Contracts Clause, courts apply more scrutiny to contracts between private parties which the state seeks to alter than it does when the state is attempting to alter contracts to which it is a party.

Finally, while it is not our purpose here to recommend alternatives, it is worth asking why the administration, before trying something new, does not simply focus on whether or not the existing regulatory regimes and powers of the HPC and CHIA  are being used as effectively as possible to rein in health care prices. The state has spent hundreds of millions of dollars on the HPC and CHIA, whose collective purpose is to enforce the state benchmark, and for the HPC to address problematic healthcare pricing behavior. The HPC has not made the most of its ability and bully pulpit to publicly shame providers/insurers who fail to meet the benchmark, or to use its powers and tools to address unwarranted price variation and supracompetitive pricing behavior by individual providers. If the Governor’s rate cap proposal is intended as a conversation starter, we encourage policymakers to consider the roles and performance of the HPC and CHIA before layering on a new regulatory system.

 

[1] Lannan, Katie. “HPC Prescribes Fewer Hospital Visits, Reduced Readmissions for Healthcare Cost Woes.” State House News Service, February 8, 2017. Accessed February 8, 2017.

[2] Anthony, Barbara. Haller, Scott. “Mass Hospitals Score Poorly on Transparency…Again,” to be published March 2017, Pioneer Institute.

[3] Consumer Affairs – Episode 16. Performed by Barbara Anthony and James Roosevelt. Cambridge Community Television, 2013. Television Show.