California Considers Medical Price Controls

It’s not single payer or bust for California. Photo: John Paul Armstrong/Getty Images

Most progressive health reform proposals are advertised as focusing on improving access to care, partly by subsidizing its costs to consumers and partly by preventing discrimination against the poor and sick. Some efforts like Obamacare maintain private health insurance markets while regulating the terms under which they sell policies. Others like the various single-payer plans aim at universal coverage in public health care programs.

More subtly but pervasively, reform initiatives also aim at holding down health care costs for individuals, insurers and those who pay insurers, including employers and taxpayers. Single-payer’s most obvious cost containment feature is the abolition of private insurance profits and administrative costs. But by consolidating purchasing power in one public-sector “payer,” single-payer also (in theory at least) increases government’s ability to negotiate — or compel — lower prices for medical procedures and supplies.

Absent this sort of indirect avenue to health care price controls, a more direct and blunt instrument for holding down health care costs is necessary. And it’s interesting that the same Democratic-controlled state that is flirting with its own single-payer system is on a separate track considering legislation to impose price controls on the portions of the health care system that are not paid for by government.

As Vox’s Sarah Kliff explains, California is seriously looking at a version of what is known as an “all-payer” system:

The California proposal would give a new state board authority to regulate the prices that health insurance plans charge for anything from a doctor visit to a knee replacement. It would use Medicare prices as a baseline, setting prices as a percentage of what the federal program that covers elderly Americans currently charges.

A true “all-payer” system would set prices for services paid for by Medicare and Medicaid as well. But since the Trump administration’s cooperation would be necessary to do that, the proposal instead pegs privately insured costs to whatever the federal government decides to provide via Medicare.

While medical price controls are highly controversial in this country (mainly because the providers most affected — hospitals, doctors and drug companies — are very powerful), they are common in other countries, as Jonathan Cohn points out:

Germany relies more heavily on negotiations between the government and industry groups; Japan relies more on data to establish fees. The end result is always the same: much lower spending. And it’s not like those countries end up with terrible health care. On the contrary, many of them outperform the U.S. on access and quality, according to the best available data.

“They are very pleased with their systems and they have better access than we do,” Gerard Anderson, a health policy professor at Johns Hopkins University and a widely cited authority on health care systems abroad, told HuffPost.

Proponents of medical price controls in California argue that government intervention is necessary to counter the anticompetitive market power of key providers, who have themselves worked hard to increase their leverage:

[C]onsolidation among hospital systems and physician groups have led to fewer providers taking up more concentration in the healthcare market, giving them leverage to negotiate higher prices with health plans, unions and other purchasers.

Californians have felt the sting of high costs. From 2002 to 2016, premiums for those who get insurance through their employer have gone up more than 240%, according to the California Health Care Foundation. Overall inflation went up about 40% during that time.

As Cohn points out, most states used to set hospital fees, and one holdover jurisdiction, Maryland, still does, using a commission very similar to the one proposed in the California legislation, and also covering hospital rates for Medicare- and Medicaid-insured serviced as well. Under a five-year agreement with the federal government’s Center for Medicare and Medicaid Services (CMS) enacted in 2014 aimed at measuring savings from its system, Maryland has registered some impressive results:

[P]reliminary results showing significant progress towards the five-year goals with both large Medicare savings and improvements in quality measures, such as the frequency of avoidable complications. As of February, the state has saved CMS $429 million, far exceeding their goal with two years to go. 

It probably matters that both Maryland and California are heavily Democratic states where discussion of health care policy leans left. Republicans, of course, also like to talk about health care cost containment, but their “solutions” typically involve privatization of public benefits, fewer mandated services, looser restraints on competing insurers and providers, and so-called tort reform to reduce medical malpractice insurance costs. Maryland’s Republican governor Larry Hogan is something of an outlier. He not only supports Maryland’s price control system for hospitals, he favors its expansion to include other providers being paid by Medicare.

The California proposal (Assembly Bill 3087) will get its first test in a committee of the state legislature’s lower chamber next week. It is supported fiercely by unions and consumers’ groups, and opposed just as fiercely by doctors and hospitals. One important variable is whether single-payer advocates view price controls as unwelcome competition for their own ideas, or support them as an alternative. Many eyes will be on the largest state’s approach to health care costs.

California Considers Medical Price Controls