- Recent price increases have been much slower in healthcare than in the economy at large.
- Two healthcare economists say the long-term issue of rising prices must be addressed, and they think regulation needs to be considered.
- A possible approach to regulating prices would be for states to set caps on out-of-network payments.
- Hospital advocates have said efforts to better control healthcare spending should look at other segments of the industry.
Even as prices increase significantly more slowly at hospitals than in the overall economy, two healthcare economists are calling for hospital price regulation that promotes competition centered on care delivery.
“Prices are driving healthcare spending right now,” Robert Berenson, MD, a fellow at the Urban Institute and a co-author of a recent paper endorsing price regulation, said during a webinar. “It has been the leading cause of increased spending that results in private insurance markets with increased premiums, decreased take-home pay for workers, etc.”
For the moment, prices are less of an issue in healthcare than in other economic sectors. Newly released data show a comparatively restrained rise in healthcare prices, with the industry continuing to trail economywide inflation by a wide margin, Altarum reported in its February price brief.
While healthcare prices increased by 2.4% year-over-year in January — including by 2.9% for hospital care — consumer prices jumped by 7.5% and producer prices by 9.7%.
The gap may stem from the nature of healthcare contracts, which make prices “initially less flexible to adjust to one-time shocks in the economy,” according to the Altarum brief.
“We expect overall healthcare price growth to eventually follow economywide inflation upwards,” the report states.
The idea behind price regulation
Based on the long-term trend, Berenson and Robert Murray, MD, senior scholar at the University of California Hastings College of the Law, think consideration should be given to applying some type of regulation to hospital prices.
Berenson and Murray wrote an essay (login required) for publication in Health Affairs in which they questioned the conventional wisdom that “robust competition in U.S. commercial health insurance markets must include provider price competition.”
Other developed countries, they note, “commonly implement price regulation to support competition over important care delivery components other than prices.”
As to whether price regulation would reduce incentives to compete on quality as well as on price, Berenson and Murray wrote that such an issue would be problematic only if prices were driven below marginal costs. “Such concerns suggest that price regulators should consider setting price floors,” they wrote.
A practical approach to regulation would entail implementing “lower-intensity regulatory models that are less complex and would require less-extensive regulatory intervention,” Murray said during the webinar. Also, incorporating models at the state level would be more realistic than trying to pass such legislation at the federal level.
Total-cost-of-care benchmarks, which have been implemented in a handful of states, likely aren’t sufficient to affect spending, Murray said. “I think eventually you get to the conclusion that this is not something that can be enforced at the individual-provider level.” In addition, “You get into a myriad of technical issues” in aspects such as risk adjustment and patient attribution.
How out-of-network caps would work
Out-of-network payment caps represent a more viable solution to the pricing issue, Berenson and Murray said. The idea behind such limits would be to bolster health plans’ leverage in negotiations, thus acting to hold down rates across the board, facilitate entry of insurers into the market and spur hospitals to seek new ways to gain a competitive edge.
There is merit to the concept of such caps, Michael Chernew, PhD, professor of healthcare policy at Harvard Medical School, said during the webinar. One benefit would be the ability to set the caps at a reasonably high level to start and tighten them over the time, allowing for the impact on hospital finances and care delivery to be monitored.
Such regulation wouldn’t stifle in-network innovation, Chernew noted. Commercial payers and providers could continue to collaborate on accountable care arrangements, for example.
However, hospitals could still gain leverage in negotiations if they stated they would restrict service to out-of-network patients. “Then my sense is employers would not be so keen to have [those hospitals be] out of network,” Chernew said.
A greater degree of uniformity in contracts would bring big dividends, Miriam Laugesen, PhD, associate professor of health policy and management at Columbia University’s Mailman School of Public Health, said during the webinar.
“We just have too many transaction costs in the system,” she said. “Streamlining the process could be really important in terms of making the whole system work better.”
Why hospitals say their prices are justified
In response to a February 2021 paper in which the RAND Corporation proposed ways to regulate hospital prices paid by health plans, the American Hospital Association (AHA) said the recommendations ignored “the unique role of hospitals and health systems” in their communities. For example, the AHA said at the time, hospitals had provided $660 billion in uncompensated care since 2000 and $100 billion in community benefits in 2017 alone.
The report also overlooked “rising costs and market concentration in the commercial health insurance industry, which is earning record profits during the public health emergency while spending less on actual care,” the AHA stated.
Such areas of disagreement illustrate why Berenson and Murray suggest starting relatively small with policies to address prices. As an example of an approach that may need to wait, they also endorsed the idea of global budgets for hospitals. An ongoing model in Maryland has been found to improve hospital financial performance while offering incentives to reduce unnecessary utilization.
But realistically, they said, widespread adoption of global budgets would be farther down the road than implementation of out-of-network caps at the state level.
