Catalyst for Payment Reform

Is it Time to Throw the Book at the Health Care Market?

Is it Time to Throw the Book at the Health Care Market?

Purchasers, brace yourselves for a radical idea: the time has come for state governments to restore balance, competition and affordability to health care markets.  Recognizing that regulation is usually considered anathema – not remedial – to market functionality, how could this be?

Market-based Interventions Haven’t Delivered Enough

Purchasers and health plans have tried for decades to overcome failures in commercial health care with market-based interventions.  Initially, the answer seemed to lie in turning plan members into activated health care consumers who would shop for doctors the way they shop for toasters. Purchasers and insurance carriers pursued this goal by providing members with access to provider price and quality data, and by giving them more financial “skin in the game” through products like high-deductible health plans (HDHPs) or by making patients pay for a percentage of allowed costs (i.e. coinsurance).  It didn’t work.  Study after study shows that even when patients have access to transparency data, they rarely consult it or act on it; and instead of turning plan members into savvy health care consumers, HDHPs simply dissuade people from seeking care altogether, including the preventive and condition management services they need to stay healthy. 

But what about alternative payment models (APMs)? Did those fail as well?  The evidence from the Centers for Medicare and Medicaid (CMMI) is mixed: some models – particularly those that require providers to take financial risk on cost and quality outcomes – do seem to produce modest results. With time, there is hope that APMs will more consistently produce outcomes that are better than modest.  But the thing about APMs is that they operate on the theory that paying providers differently will change care practices and result in greater efficiency, better care coordination, and reduce waste.  That may be correct, but it’s prices, not utilization driving about 2/3 of health care cost inflation for commercial payers. 

Looking at the landscape of the commercial health care market in 2022, the view is bleak:

What we see before us is an uneven playing field, about to get rockier, and the only balancing force that may be powerful enough to countermand this trend is… government.  The Federal Government issued new laws and regulations this year, like the No Surprises Act, the Hospital Price Transparency Rule, and the Health Plan Price Transparency Rule, which (if hospitals and health plans comply) could start to shift the competitive landscape – or at least provide policymakers and other stakeholders with better data.  But states also have a unique and profound role to play in shaping health care policy.  They can tailor their policy agendas to the specific needs, conditions, and mores of their constituents; they can launch small-scale experiments that would be impractical or impossible to pass nationally; and they can use their own purchasing power – by virtue of the large population of public sector employees and retirees for whom they purchase care – to command lower prices, new payment models, and higher standards of care.

The Four Levers of State Power to Regulate Health Care

If you go to the Source on Healthcare Payment and Competition’s database of State Laws Impacting Healthcare Costs and Quality (You really should check it out – it’s a phenomenal resource!) you will find ~9,500 laws regulate health care cost and quality in effect today across the 50 United States.  That’s a lot of laws; however, you can boil the ocean of health care policies down to four basic levers of state agency:

  1. Ban or punish bad behavior: State legislatures can prevent actors within the health care marketplace from pursuing anti-competitive practices, and punish them if they fail to comply. A handful of states have passed laws that restrict anticompetitive contracting practices by providers and health plans such as anti-tiering/steering, gag clauses, and “most favored nation” clauses.
  2. Shore up competition and/or protect the market from further erosion: The most common mechanism for preventing health care monopolies is through antitrust law, most notably by preventing mergers that will significantly reduce competition. Today, the latest antitrust laws in health care look beyond hospital mergers to vertical mergers between hospitals and physician practices as well as joint ventures and other affiliations.
  3. Directly regulate provider or insurer prices: Maryland is the prime example of a state that has gone all the way on provider price regulation, instituting a mandatory blended rate for all commercial, Medicare and Medicaid payment. But states like Montana have also leveraged their role as a commercial health care purchaser to negotiate lower prices based on multiples of Medicare.
  4. Build regulatory infrastructure: perhaps the least glamorous but still extremely important thing that states can do is build transparency (e.g. through an All Payer Claims Database – or APCD) and regulatory infrastructure (e.g. through a Health Policy Commission – or HPC), which states need to monitor the health care marketplace, set goals, and raise alarm bells when a powerful actor abuses its market position.

New and Innovative State Policy Approaches

Across the country, in states that trend red, purple and blue, legislatures passed laws in 2021 and 2022 designed to put downward pressure on health care prices.  Here is just a small sampling of innovative approaches states have adopted:

  • Colorado: Passed a law prohibiting hospitals from collecting medical debt if they’re out of compliance with the federal Hospital Price Transparency Rule.
  • Delaware: Placed rate caps on hospital price growth to boost investment in primary care
  • Indiana: Launched its own APCD and granted the state’s employee health plan the right to contract directly with providers.
  • Maine: Established the Maine Care health plan to provide universal coverage to all state residents.
  • Montana and Alabama enacted legislation to regulate Pharmacy Benefit Managers (PBM), with licensing requirements, prohibitions on anti-competitive practices, and mandatory disclosures of drug rebate information to health plans and self-insured purchasers.
  • Oregon: Granted broad merger approval authority to the Oregon Health Authority (OHA – the State’s HPC), which covers any health care merger, acquisition, joint venture or affiliation among any entity that nets >$25M in revenue.

If Health Care Won’t Play by the Rules of Marketplace Economics, Perhaps it’s Time to Write New Rules

Reforming health care through legislation doesn’t necessitate a complete overhaul of health care markets – and, in many cases, may improve the functioning of markets.  Today, many powerful health systems, insurance companies, pharmaceutical manufacturers and PBMs enjoy market power, which they are largely free to exercise at will.  But employers may be warming to the idea of government intervention:  a 2021 survey found that 90% of large employers believe the cost of providing health benefits to employees will become unsustainable 5-10 years, and 85% believe that government intervention will be necessary to provide coverage and contain costs.  This doesn’t mean that every law proposed is reasonable, feasible or effective – but purchasers, as a first step, we invite you to take a look at what your state is doing to control health care prices.  Maybe it’s time to consider advocating for getting some new laws on the books.


CPR’s Director of Projects and Research, Julianne McGarry, MPP, wrote this blog post.

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