In a September 3, 2019 article in Health Affairs, Michael E. Chernew, Maximillian J. Pany, and Richard G. Frank make the argument for market-based price caps to address soaring health costs. “The gap between prices in the US and other countries, the large price-cost margins in the commercial sector, and the wide variation in prices within and between markets suggest that market failures are contributing to our unsustainable rate of health care spending growth.”
Included in their article is an interesting take on whether the current state and federal focus on reigning in surprise medical billing is misplaced.
Although market failure is widespread, current health care proposals in the House and Senate solely focus on reducing surprise billing by capping out-of-network prices charged for select services by physicians practicing at in-network facilities. While undoubtedly an important problem on the forefront of many patients’ mindssurprise bills represent only a small portion of the pricing problem. According to our analysis of 2016 data from three large national health insurers (insuring almost 43 million people), about 8.8 percent of these carriers’ spending on health care professionals for those younger than age 65 was for out-of-network care, of which less than two-fifths (3.2 percent of total professional spending) was associated with surprise billing. Of this spending on surprise bills, 58.2 percent was due to prices above national service-specific, in-network median prices. In other words, if all surprise billing above the national median in-network price would have instead occurred at the in-network median, these insurers would have saved about 1.9 percent of total spending on health care professionals. In considering either the narrow problem of surprise out-of-network billing or the broader set of market failures, the question should not be if the government should intervene, but how.
The authors cite a lack of competition in the health care market as one of the sources of the high cost of medical care. “One set of possible government actions to address this market failure is to adopt strategies that promote competition. Yet, stakeholders have found it difficult to find mechanisms that effectively promote competition. Transparency initiatives aimed at increasing patient price-shopping have been largely ineffective, while broader initiatives to publicly release prices have raised concerns that such transparency will alter negotiation dynamics, reducing the willingness of payers to give discounts and, paradoxically, leading to higher prices.”
The solution advanced by the authors are price caps on out-of-network prices, caps set at a multiple of a low base rate. “We favor basing the percentile on prices in the local market, as opposed to allowing insurer-specific prices. Otherwise policy makers risk exacerbating the advantage that insurers with large market shares (and thus lower fees) have over smaller competitors. However, this creates an operational issue about how data on such prices would be obtained and who would perform the calculations. Moreover, broader markets may be needed in situations with a dominant in-market insurer or provider.”
Three concerns are noted with respect to using Medicare rates as the base. “First, any distortion in Medicare prices due to challenges in setting prices administratively (political capture, unresponsiveness to changes in the cost of production, and so forth) will get amplified in the commercial market. … Second, Medicare fees are set based on the estimated cost of serving Medicare patients. Analogous costs for commercial patients, generally younger and with fewer comorbid conditions, may differ, particularly for services not commonly delivered to Medicare beneficiaries, such as childbirth. Finally, to the extent that Medicare prices are transmitted (with a multiplier) to the commercial sector, there will be greater political pressure to raise Medicare prices, causing program expenditures to rise.”
We too think that the legislative efforts to reign in surprise medical bills are misplaced, although we do not advocate legislatively imposed price caps. We see two issues with the draft legislation we have reviewed. First, efforts to set prices for out-of-network medical services would almost always result in materially higher costs than those incurred by the self-funded reference-based plans we represent. Because our patient advocacy has reduced the cost of the balance bills referred to us by more than 98%, almost any measure greater than the repriced amount would be more unfavorable to the plans and patients. Second, those bills which propose some form of arbitration deprive the patient (our client) of the patient’s most effective weapon to challenge any balance bill, the right to a trial by jury. Jurors’ ingrained hostility to insurers and high medical bills are the patient’s best friends.