Commercial insurers’ high and rising prices to hospitals, physicians, and other providers are a dominant driver of US health care spending growth. Until recently, health economists and other policy experts had hoped that enhanced competition among insurers and providers could address the problem of increasingly consolidated health care markets. However, even long-term market-competition proponents have accepted the need for “light touch” price regulation to complement ongoing efforts to improve the conditions for reinvigorated competition. In this brief, we review the rationales for and the operational challenges attendant to two increasingly promoted regulatory approaches: caps on prices and price growth limits. We conclude that both approaches are desirable and feasible but require major commitments by states to manage a range of operational challenges.

WHY THIS MATTERS

The US spends almost 20 cents of every dollar in the US economy on health care, squeezing household and government budgets and preempting investment in other important areas like education and social services. For over two decades, hospitals have grown by merging with or acquiring their competitors, forming large health systems that can use their growing market power to extract high prices when negotiating with private insurers. Hospitals now negotiate payment rates that are more than two times higher than the rates Medicare sets for hospitals, with some health systems even obtaining over three times what Medicare pays.

The problem is not low Medicare rates, as representatives of the hospital industry claim; Medicare rates are set to pay close to the cost hospitals bear for delivering services. Rather, the problem is that many health systems benefit from excessive leverage in their price negotiations, often because of a lack of competitive alternatives. Recently, the Congressional Budget Office (CBO) concluded that more market-oriented approaches, including price transparency and more active antitrust enforcement, might provide a small impact on restraining price growth. In contrast, CBO asserted that limiting prices and price growth through government regulation was the only approach available to policymakers that would successfully address prices.

This paper considers the operational challenges that would have to be managed to successfully restrain prices without unacceptable negative effects.

KEY TAKEAWAYS

Price caps target the highest-priced, wealthiest providers that can negotiate payment rates that far exceed their costs. A threshold decision is whether to use commercial health insurance prices or Medicare prices as the reference against which to set the price caps. We find that using Medicare prices as the reference benchmark is the preferred approach for both conceptual and operational reasons, though still with challenges.

The challenges we reviewed include the following:

• the need to include the numerous adjustments that Medicare makes to base rates to account for the characteristics specific to each provider entity—hospitals and physician practices alike
• the need to reprice Medicare payment rates for insurers not using Medicare’s payment methods and coding so that there is an “apples-to-apples” comparison of the cap with Medicare prices
• the need to correct for numerous, well-documented distortions in the Medicare Physician Fee Schedule (prices that deviate substantially from the costs to provide the services)

Price growth limits can curtail the excessive, annual payment-level increases that providers seek. In contrast to caps, they can potentially apply to most services across all providers, not just to the highest priced, wealthiest ones. Price growth limits also avoid sudden shocks that caps might produce because price limits are implemented incrementally over time. On the other hand, price growth limits could exacerbate existing disparities in payment levels caused by differential negotiating leverage that hospitals and practitioners have with insurers. A conceptually straightforward but operationally complex solution to this would adjust the annual growth limits inversely with current prices; the financially advantaged providers would receive smaller annual price increases than those now receiving lower prices.

Caps and price growth limits, perhaps implemented concurrently, can address high and rising prices, but successful implementation would likely require more than a light touch.