Rate setting in health care—the system of regulating the prices hospitals can charge health care payers, such as commercial insurers and Medicaid—has lost favor over time in the United States, but in a new report Urban Institute researchers Robert Murray and Robert Berenson make the case for revisiting state-based rate setting as a way of decreasing the costs of health care without compromising market competition.
A recent report from the New England Journal of Medicine backs up their case. In 2014, Maryland began a five-year demonstration in which all health care payers pay a fixed sum that creates an annual global budget for a given hospital, rather than fee-for-service payment. Already, the results are promising. During its first year under this system, Maryland decreased per capita Medicare costs and improved quality of care. Murray and Berenson examine how rate setting has worked in Maryland and draw broad lessons that can be applied elsewhere.
What is rate setting?
Rate setting is a means of regulating hospital rates and budgets. A state authority sets payment rates for a group of payers, which can include commercial insurers, self-funded plans, or Medicaid. Rate setting intends to prevent discriminatory pricing by providers, has the potential for significant and sustained cost containment, finances uncompensated care more equitably, and assists hospitals serving a large proportion of poorly insured or uninsured patients.
In the 1970s, seven states, including Maryland, adopted rate setting, but opposition by some hospitals and insurers; the growth of managed care as an alternative means for controlling cost; instances of excessive rate setting complexity; and the growing reliance on market competition that accompanied the election of Ronald Reagan in 1980 ultimately led to the demise of most of the state rate setting systems.
Rate setting in Maryland
A few rate setting systems prevailed, however, among them Maryland and West Virginia both highlighted in Berenson and Murray’s report. While West Virginia regulates rates for non-governmental payers (commercial insurers, self-funded employers, and self-paying patients) by setting hospital revenue limits, Maryland is the only state to have created a truly all-payer system by regulating Medicare rates.
The Maryland demonstration, supported by the Center for Medicare and Medicaid Innovation, attempts to save Medicare $330 million by influencing cost-growth trends and correcting some of the problems Maryland’s system has experienced during its more than thirty years of operation. One major problem was the rapidly increasing charge per Medicare case caused by decreasing per capita expenditures because of a reduction in admissions and outpatient encounters in the 2000s. By using global budgets, Maryland hopes to provide hospitals with a predictable and stable budget, so hospitals can focus on the quality of care over quantity and are rewarded for population health investments.
Although conventional policy wisdom holds that rate setting was mostly abandoned because it failed, state-based rate setting had a fairly strong track record of controlling hospital costs in the United States—as the Maryland demonstration shows—and is still in use and effective in many countries, such as France, Japan, and Switzerland. The record also suggests that rate setting and competition among insurers and providers are not incompatible, as some critics argue.
Learning from experience
Over the past 10-15 years, escalating provider prices have contributed to health cost increases and this trend is exacerbated by increasing provider concentration that diminishes competition and skews pricing power in favor of providers. Simultaneously, a growing focus on improving access to and the quality of health care has become part of the national conversation about health reform. The history of rate setting and the promising results of Maryland’s first year of global budgets suggest that it is an effective way of addressing both cost and quality of health care without sacrificing competition.
Based on the success of Maryland’s first year using global budgets, and the decades of experience from Maryland, West Virginia, and other states, our researchers argue that rate setting offers a promising model and a few key lessons for states. An effective rate setting system should
- include the ability to limit prices to a proportion of Medicare payment,
- include the ability to adjust rates for changes in the volume of services provided over time,
- be governed by a politically independent regulating body,
- be accountable to standards of performance imposed by an external body, such as the federal government,
- be automatic and formula based in how rates are set,
- have true all-payer participation through a Medicare waiver,
- establish clearly articulated policy goals and regulatory tenets, and
- maintain an ongoing focus on patient experience and quality of care.
By revisiting rate setting as a viable solution to health care cost and growing provider consolidation, states may be able to support both price regulation and desirable market competition while prioritizing the quality of patient care.