POLITICS
04/20/2018 05:46 am ET

The Big New Idea For Reducing Health Care Costs Is Actually Really Old

Price controls are getting a serious look in California.

If you think the country needs dramatic, even radical action to stop medical care from getting so expensive, pay close attention to what’s happening in California.

Next week, a committee in the state Assembly will vote on legislation to create a permanent, nine-member commission on health care costs, quality and access. But instead of simply proposing different ways of paying for medical care, like so many other commissions have over the years, this one would have real power ― the power to set legally binding limits on what hospitals, drugmakers and the rest of the health care industry can charge private insurers and individuals.

The bill could bring government control of health care spending to the biggest state in the country, and it might not stop there.

Government control of health care spending, in one form or another, is an essential ingredient of many national reform schemes, including the “Medicare for All” plan that Sen. Bernie Sanders (I-Vt.) has long championed. The idea of government-regulated prices, even as a stand-alone reform, has recently gotten favorable attention in the pages of The American Prospect and Washington Monthly, two publications that serve as policy incubators for liberals in Washington, D.C.

To be clear, the short-term political prospects for California’s bill are mixed at best. But a huge fight over it is already underway, with proponents saying that only government has the power to get health care spending under control and opponents warning about disruption, facility closures and long waits for treatment.

It’s a preview of a debate that could play out nationally very soon and is arguably long overdue.

The Same Old Problem, A New Political Environment

The idea of using the brute force of government to hold down health care spending is hardly new. The majority of states once had mechanisms for setting hospital fees, and the health care plan President Bill Clinton tried to pass in the 1990s even envisioned an overall cap on national health spending.

But the concept has largely fallen out of fashion in the last few decades. One reason was a genuine belief among a wide variety of experts, representing viewpoints from the political right to the center-left, that freer competition ― among both the providers and producers of care, as well as the insurers paying for it ― would ultimately restrain spending in ways that achieved the best combination of price and quality.

Shifts in raw political power reinforced that thinking. Starting in the 1970s, business groups started lobbying much more aggressively to roll back or eliminate rules on how they operate ― winning support from some Democrats and nearly all Republicans. Most states dropped their price-setting regimes during the 1980s, when the Reagan administration was in power and making deregulation of corporate America one of its top priorities.

But that consensus seems to be eroding now. Thanks in part to reporting by journalists like Steven Brill, Sarah Kliff, and Elizabeth Rosenthal, patience with the high and wildly inconsistent prices of medical care in the U.S. has worn thin, even among jaded experts. In California, hospitals charge anywhere from $1,529 to $182,955 for an appendectomy, according to one study that appeared in the Annals of Internal Medicine in 2012.

Disappointment and frustration with the Affordable Care Act is part of the story too. The law’s architects wanted to “bend the curve” on health care spending ― not through a government takeover, as critics charged, but with financial incentives designed to reward efficiency. An example was a penalty, within Medicare, for hospitals with high rates of costly and preventable readmissions.

Although some of these efforts appear to be working, some don’t. Even the most promising ones are going to make only a modest impact, as even the law’s supporters have long conceded.

Meanwhile, just as politics were shifting to the right toward the end of the 20th century, they may be shifting back left now, at least within the Democratic Party, where the appeal of Medicare for All was arguably a major reason Sanders came as close as he did to winning the 2016 nomination.

Back in September, nearly every Democratic senator thought to be contemplating a 2020 run for the presidency endorsed the most recent iteration of his proposal. Since then, the Center for American Progress, a think tank closely aligned with the Democratic Party’s establishment, has introduced its own plan to enroll large numbers of Americans in a version of Medicare. That plan also envisions using government pressure to bring down prices.

Learning From Europe, And Then From Maryland

The easiest defense of this approach comes from overseas. In nearly every other developed country, government holds down health care spending through some combination of setting overall budgets and then fixing individual fees.

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.

The giant, essential caveat, as Anderson is quick to note, is that those countries have different medical and political cultures. The negotiations over health care prices in Germany, for example, look a lot like the cooperative, sectorwide negotiations between business and labor unions that also take place there. No such environment exists in the U.S., and it’s not clear how negotiations over health care prices here would proceed.

A more useful example may come from here in the U.S. ― specifically, Maryland, the one state that held on to its hospital pricing system even as the rest of the states dropped theirs. For a long time, hospitals made up for fixed fees by simply churning through more patients. In 2010, Maryland officials upgraded their system by giving each hospital or hospital system an overall budget.

A commission comes up with the budgets and updates them each year, using a formula that accounts for factors such as how much revenue the hospitals get already and whether their patient mix has changed for one reason or another. The commission also watches quality measures, to make sure hospitals haven’t been economizing in ways that would hurt patients.

It will take more time and more research to know for sure what effect the initiative is having, as Austin Frakt noted recently in The New York Times. One recently published recently published study did not find significant evidence of savings. But it focused on the program’s early years, when it applied only to a small group of rural counties. Another study that included more recent data, when the program had expanded to the rest of the state, determined the savings were real. 

Hospitals, for their part, have complained about tighter budgets. But overall their finances haven’t deteriorated, according to that most recent study, and neither has quality. Some hospitals are actually trying to improve follow-up care in order to avoid costly readmissions, although it’s not clear how real or big a trend that is.

California’s Twist on the Idea

If California’s scheme were to become law, it would be both more and less ambitious than Maryland’s. It would affect doctors, drugmakers and hospitals, thereby getting its hands on every major producer and provider of care. Maryland’s does not, although officials there are already working to expand theirs as well.

But California’s proposal would only address what private insurers and individual consumers with private coverage pay for care. It would not alter what Medicare or the state’s Medicaid program pay for services ― and, critically, it would not set an overall budget. Instead, it would simply set the private payment rates at a percentage above what Medicare pays. That omission is a nod to political reality: Setting new rates for Medicare and Medicaid would require agreement from the Trump administration, which would likely be skeptical.

Uncertainty over exactly where the commission would land on rates is one reason the state’s providers are full freak-out mode. Because they rely on private insurance to make up for what they lose on Medicare and Medicaid patients, providers say, lower payments from private insurers would force them to make severe cutbacks ― the kinds that could mean hospital workers losing their jobs and patients waiting a lot longer to get care.

“It will unravel our health care system,” Jan Emerson-Shea, a spokeswoman for the California Hospital Association, told HuffPost. She cited as proof the organization’s in-house estimate that the bill would suck $18 billion out of the state’s health care system each year, although she declined to provide much detail on how it reached that conclusion.

The measure’s advocates, which include prominent labor unions and other progressive organizations, call such concerns baseless.

The governor and the Legislature would appoint seven of the nine members, with the secretary of health and the director of California’s public employee benefits program taking the other two spots. That introduces accountability, advocates say, because elected officials are not going to appoint members who would cut spending irresponsibly. Besides, advocates say, providers would have the right to appeal for higher rates if they don’t like the commission’s decisions. 

Not that advocates are ready to concede much. They very much want to clamp down on what they see as profiteering, especially by hospital systems with local monopolies. Their favorite example is Sutter Health Care, the hospital network now facing a state lawsuit over allegedly anti-competitive practices that have driven up prices in Northern California. Sutter says it has engaged in no such behavior. 

“We have a system where the price of health care is unrelated to the cost of providing it, or outcomes, but rather to the relative power of hospitals and medical groups in the region,” said Anthony Wright, executive director of Health Access, a consumer advocacy organization that is one of the bill’s major supporters.

The Debate to Come

A national debate over government regulation of health care spending, as part of a single-payer proposal or simply on its own, would likely spark similar arguments. It would also raise questions about money for research ― specifically, whether having government dictating so many fees could stunt innovation or at least steer it in the wrong direction.

The potential effects on innovation are particularly worrisome to some economists who fear that the impact might not be apparent for many years, if at all, making it impossible to undo before the damage sets in. “People don’t think enough about that long-term trade-off, because it’s not readily observable ― you don’t see the drug that’s not developed,” said Craig Garthwaite, an economist at Northwestern University’s Kellogg School of Management who specializes in the pharmaceutical industry.

Advocates respond that health care innovation in the U.S. really has more to do with government funding anyway, and that, to the extent competition drives innovation, it does so poorly. An example would be the pharmaceutical industry’s focus on new drugs that don’t really offer new clinical benefits, but that they can successfully promote with television advertising.

The key with any proposal, whether it’s for setting prices or global budgets or both, is the details. A lot depends on who is making the decisions, what criteria they use, how quickly spending levels change, and what else is happening in health policy at the same time. 

But the ultimate factor in whether more proposals like California’s go forward, at either the state or federal level, may be just how exasperated Americans have become with rising costs. If the frustration is high enough, they may be ready for some dramatic changes.

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