The 2016 election revived the national debate over how to tackle costs in the American healthcare system. Bernie Sanders pitched an idea of single-payer healthcare, a common solution to healthcare costs in progressive countries. Hillary Clinton suggested adding a public option to the Affordable Care Act and increasing regulation of pricing in the pharmaceutical industry and healthcare industry more generally. And even president-elect Donald Trump, who has said little about healthcare this election season, has touted common conservative ideas such as block-granting Medicaid and allowing insurers to sell across state lines.
There is a different solution, however, that doesn’t get much press. It is called all-payer rate setting—and it comes from the state with the slowest healthcare cost growth in the nation over the past several decades.
The basic ideas behind all-payer rate setting are price transparency and price-consistency. If a health-services provider such as a doctor’s office provides service X, she must provide that service X at a constant rate Y to any patient that comes for healthcare. Thus, all payers are billed the same rate for the same service which a hospital or doctor’s office provides. Providers would then be required to publish what these uniform rates are so that insurers and shoppers can compare prices when healthcare service is needed. With this pricing information in hand, the free market can bring about competition and bring prices down. From 1977 to 2010, the state of Maryland—the only state in the U.S. with all-payer rate setting—had the slowest growth rate in healthcare prices in the nation.
However, since insurers usually pick up some or all of the cost of care, there must be some mechanism to incentivize consumers—who are stuck with a much smaller share of the bill—to shop around for care. Insurance companies can do this by reference pricing.
With all-payer rate setting, all patients are billed the same rate for the same service which a hospital or doctor’s office provides.
Reference pricing works like this: an insurance company sets a price P at which they are willing to pay the full actuarial value of your insurance plan. Actuarial value is the percentage of medical coverage a plan is meant to cover, so if your insurance has an actuarial value of 60 percent and you are looking to have a $10 procedure done, your insurance might be willing to pay six dollars. If you find a procedure that costs less than the $10 reference price, you might be able to save some money, as the insurer would still pay the full six dollars. If you wish to pay more—like you might in order to have the procedure done by a doctor you like—your insurance would still pay six dollars.
Together, all-payer rate setting and reference pricing could work. Steven Weissman, a healthcare law expert, argues that our present system where providers can charge different prices to different customers is morally abhorrent, even going so far as to call it “institutionalized fraud”. The alternative, according to Weissman, is an all-payer rate setting system in which “every citizen would be able to search any medical procedure online and see pricing for all providers within X miles.” Weissman also envisions a market in which “consumers could shop every provider in the nation and easily determine their out-of-pocket costs. Networks will be obsolete along with the administrative burdens, tremendous costs and limitations on patient choice that they inflict.”
As perfect as it may sound, Weissman’s proposal could result in unpleasant consequences for insurers, who already work within challenging constraints, and could even harm consumers. Broadly speaking, insurance companies have few ways to manage risk as they sell insurance, and Weissman’s all-payer rate setting model could further limit these options.
“Under the current system, … billing is determined by how much can be extracted from each patient on a case by case basis … Ethically speaking, this is institutionalized fraud.”
— Steven Weissman
One lever that insurers can pull to mitigate risk is segmenting and altering risk pools—putting people into different categories based on what insurers think they will cost in the long run and then charging those in the high-risk pools higher premiums. But risk pools contradict the whole idea of health insurance , and they come with other problems. First, people with costly chronic illnesses often have insurance before they get sick in the first place, and in many cases, poor health habits are not to blame for their declining health. Charging these consumers more does little to reduce their risk or improve their health habits and could even push the chronically ill to use more expensive care like emergency rooms and ambulances as rising premiums force them to catastrophic plans. In other words, segmenting based on risk shifts costs to the costly, but higher healthcare costs can’t incentivize these kinds of consumers to become more healthy—since they already are.
Also, when an insurer begins segmenting based on risk, it can wade into dangerous waters, perhaps even evaluating people based on race, gender, and other facets of identity that can impact health outcomes and healthcare costs. But since the Affordable Care Act doesn’t allow insurers to discriminate based on gender or pre-existing condition (with the exception of smoking), risk segmentation of this kind is not a lever that insurers can easily pull.
A second lever for insurers is the level of coverage they offer—both by actuarial value and services offered. There is a certain floor that the government should (and does) set to make sure insurers are covering you and paying their fair share. But beyond this floor, insurers can tweak things to encourage people to use preventative care services and thereby lower their risk. Kaiser has done a lot of interesting work on this front, experimenting with free health classes and tele-medicine as ways to lower system-wide costs. However, in order to be able to discern which of these policies works, Kaiser must keep patients in their own networks—and doing this is a challenge with Weissman’s all-payer rate setting, which does away with networks entirely.
Not unrelated, the third lever for insurance—narrowing networks—is one that an all-payer rate setting system might put in jeopardy. To pull this third lever, insurers work closely with providers within their network to ensure that they can provide patients with quality and affordable care, while typically refusing to cover providers outside the network—and beyond the insurer’s sphere of influence. In practice, most people today can go to any doctor they want and their insurance will cover them, but one way of lowering prices and figuring out which healthcare measures work for patients is by narrowing networks.
The four levers of insurance:
- Risk pools
- Coverage levels
- Alternative pricing schemes
Consider, for example, the free classes that Kaiser offers to its members. Kaiser offers these courses so that it can save money in the long run. Kaiser’s premium-paying members cover some of the cost of these basic preventative care classes, which also helps keep Kaiser from having to fund even costlier treatments. But with all-payer rate setting, Kaiser might be forced to offer these classes to out-of-network patients for free. Weissman argues that networks like Kaiser’s would be a thing of the past if his all-payer rate setting system were implemented, but he overlooks that the demise of networks would also discourage insurers from providing free preventative care.
Another lever insurers can use to control costs is experimentation with alternative pricing schemes. Many healthcare experiences involve a lot of little procedures and dozens of different healthcare professionals. In one experimental pricing scheme called the “bundled payments” model, insurance companies would figure out a single price for one multi-part procedure—like an appendectomy—and pay one lump sum to the hospital, rather than making individual insurance payouts for every step in the procedure (pills, tests, surgery, anesthesia, etc.). Bundled payments can reduce the incentive to over-treat patients—which health-care providers will often do to squeeze more money out of the insurance companies—by rewarding efficiency. The flip side of this, however, is that providers might begin to under-treat patients, pocketing the lump sum payments while providing substandard care.
But bundled payments may not even be possible in an all-payer rate setting system, where rates are locked in place for every step of a medical operation and insurers are required to sell across all networks. The payment amounts would also be more difficult to negotiate if bundled payments remained. Under the current model of care, insurers can go to providers and negotiate for bundled payments for all of their patients. With all-payer rate setting, hospitals would set prices independent of insurers. And since insurers would not have the power to cut providers out of their networks, they would have little leverage to negotiate bundled payments.
One of the assumptions supporting all-payer rate setting is that the market forces of consumer choice will drive prices down. But consumers often don’t have market power or even adequate information to make the right choices. While in pain in a hospital bed it is a near impossibility to consider risks, benefits, and costs of two different procedures, especially when you are afraid that the wrong choice will leave you dead or disabled. Bundled agreements and narrow networks can be negotiated by insurers to make certain that care is both cost-efficient and done by trustworthy professionals, but an all-payer rate setting system would make these bundled agreements a thing of the past. But how all-payer rate setting would deal with the possibility of providers price-gouging consumers for emergency procedures is not entirely clear. Solving this problem would likely require some sort of regulation.
All-payer rate setting presents an intriguing opportunity for reform in the healthcare system. There are clear advantages to lowering cost and incentivizing transparency without compromising consumers’ ability to choose their healthcare provider. And though all-payer rate setting may limit the ability of insurers to offer narrow networks, it might also render these networks obsolete. Even with its flaws and trade-offs, all-payer rate setting deserves a place in our national discourse on healthcare reform.
 Something that states actually may allow under the ACA.
 This would be a bronze plan on the insurance exchanges
 Obviously, insurance is more complicated than this; the percent paid by the consumer usually is a mix of deductibles, co-pays, and co-insurance.
 Steven I. Weissman, “Commentary: ‘Legitimate’ healthcare pricing would slash costs 33%,” Modern Healthcare, October 14, 2016.
 Perhaps I will explore more deeply why this is the case in a future article.
 While I am not sponsored or paid in any way by Kaiser, I am currently covered by them.
Featured photo from TaxRebate.org.uk