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As value-based efforts lag, push for price regulation gains momentum

For many years, the battle cry of healthcare cost warriors was, “Eliminate all those wasteful services.”

More recently that evolved to, “Pay providers based on value rather than volume.” But there were always those who insisted the real problem was, “It’s the high prices, stupid.”

Now policymakers and experts who favor attacking price increases have gained momentum, with both congressional Democrats and the Trump administration pushing price-setting proposals. Their arguments are buttressed by growing research showing that rising prices for hospital and physician services and drugs are a major driver of increasing healthcare spending.

“We pay more for our healthcare in the U.S. because we pay our providers more,” said Christopher Koller, president of the Milbank Memorial Fund and a former Rhode Island health insurance commissioner. “We have to put the whole system on a diet and let them figure out how to live with it.”

Such proposals face powerful opposition, however, from industry groups, which have balked even at making their prices more transparent to the public.

Last week, the CMS Office of the Actuary reported that nearly half the projected 5.5% average annual growth in healthcare spending over the next decade will be due to price increases, while just a third of the spending growth will result from greater utilization and intensity of services as the huge baby boomer generation ages.

That 5.5% healthcare spending growth will outpace overall economic growth, resulting in healthcare making up 19.4% of the nation’s gross domestic product by 2027, up from 17.9% in 2017.

Other analysts say, however, that a better way to reduce prices is through policies that boost competition among providers, insurers and drugmakers, such as stronger antitrust enforcement and drug patent reform. Echoing healthcare industry groups, they warn that price regulation threatens quality of care and patient access.

“Not long ago we were being told there was a massive amount of unnecessary care being provided,” said James Capretta, a conservative health policy analyst at the American Enterprise Institute. “The argument now is, ‘Who cares as long as the price is low?’ I would caution against one or the other. It’s pretty obviously both high prices and unnecessary care.”

But such warnings are not curbing growing enthusiasm for approaches like Medicare or Medicaid for all, public plan options, all-payer systems, global budgeting, regulating what insurers pay providers, government-negotiated drug prices, and pegging drug prices to lower prices in other countries.

These proposals would directly target how and how much public and private insurers pay providers and manufacturers, rather than relying solely on market competition.

Advocates argue that rate controls are needed as providers, insurers and manufacturers become larger and larger. “We can’t make the market work better in consolidated markets,” Koller said.

According to the CMS, annual price inflation for healthcare goods and services is expected to average 2.5% over the next decade, compared with 1.1% from 2014 to 2017. That includes a 2.8% average annual hike for outpatient prescription drugs, 2.6% for hospitals and 1.8% for physicians.

Prices will rise at least partly because of the weakening of restraining factors such as patient cost-sharing, selective contracting by insurers, and improvements in productivity in physicians’ offices, the CMS report said.

“It’s still the prices, stupid,” said Gerard Anderson, a health policy professor at Johns Hopkins University who co-authored a famous 2003 Health Affairs article making that argument.

Adding fuel to the push for rate-setting are studies showing sharply rising hospital charges, particularly in consolidated markets. A Health Affairs study published in February found that from 2007 to 2014, hospital prices paid by employer health plans for inpatient care grew 42%, while physician prices grew by only 18%. Other research shows that some large hospital systems command prices exceeding 300% of Medicare rates.

The Health Affairs authors concluded that policymakers should consider stronger antitrust enforcement and hospital rate-setting, while private payers and physicians should more actively steer patients to the most efficient hospitals through reference pricing and other value-based models.

Hospitals counter that their prices go up for reasons beyond their control. Prices are directly related to the cost of caring for patients with complex conditions and are driven by wage increases and a tighter labor market, said Aaron Wesolowski, the American Hospital Association’s vice president of policy research. Escalating drug prices and shortages also boost costs, he added.

Other research has found that physician prices are also an important factor in increasing healthcare spending. A new study by the USC-Brookings Schaeffer Initiative for Health Policy found the median out-of-network charge paid by private insurers to anesthesiologists and emergency physicians is nearly five times the Medicare rate, while insurers paid cardiologists and orthopedic surgeons about 2.5 times as much.

Some experts say value-based payment, consumer incentives to select cost-effective providers, and other market-based models need more time to bite into prices and wasteful services. “I don’t think it’s because value-based purchasing doesn’t work, but rather that we just haven’t done very much of it,” said Katherine Baicker, a health policy professor at the University of Chicago.

But those who favor regulating prices are impatient with the slow progress, particularly on the private payer side. Democratic proposals on Medicare for All and public plan options would pay providers at Medicare prices, which are significantly lower than private insurers rates. Other proposals, such as a voluntary Medicaid buy-in bill in New Mexico, would pay even lower prices.

“The cost trend will make it easier to fund a Medicare for All or public option plan, because the price differential between what Medicare and the private sector pay allows you to save money by paying Medicare rates,” Anderson said.

Still, he and other experts say projected spending growth over the next decade—which is sharply less than the 7.3% average annual growth from 1990 to 2007—may not be sufficiently alarming to spur politically thorny policy changes.

That sentiment is echoed in the reaction of price-regulation opponents, who argue that various public and private efforts over the past decade seem to be moderating cost trends.

The projected growth rate “is still higher than overall economic growth, and that’s troubling because it’s not sustainable,” said Steve Wojcik, vice president of public policy at the National Business Group on Health, which represents large employers. “But we are nowhere near the kind of growth we had from 1990 to 2007.”

His group opposes having the government negotiate or set prices out of fear that will push providers and manufacturers to charge private payers higher rates—even though research generally has not found that lower Medicare and Medicaid payments produce a cost shift.

While a politically gridlocked Congress may not be able to pass any rate-setting policies over the next two years, Democrats are promising ambitious action on medical and pharmaceutical prices if they gain control of the federal government in the 2020 elections.

There is the potential, however, for Congress to pass a bipartisan proposal this year to cap out-of-network physician charges at a percentage of Medicare rates. That’s making provider groups nervous.

Meanwhile, experts see greater potential for action in the states. In New Mexico and other Democratic-led states, bills are advancing to establish public plans or voluntary Medicaid buy-in programs, which would pay providers Medicare or Medicaid-type rates for a larger population of patients. Vermont is implementing an all-payer system like Maryland’s.

State regulators increasingly are considering setting price caps as part of green-lighting hospital mergers, as Massachusetts recently did in approving the tie-up between Beth Israel Deaconess Medical Center and Lahey Health.

Rhode Island remains the only state that regulates the prices private insurers pay hospitals, though other states like Colorado are eyeing that approach.

Beyond that, many states and private-sector groups want to increase the amount of price and quality information available to purchasers and consumers through all-claims databases.

That effort suffered an important recent setback, however, when UnitedHealthcare and Humana decided to pull out of a payment data-sharing arrangement with the Health Care Cost Institute that has produced important research about prices.

Even experts open to price controls say they must be used with caution. “Now we’re doing too little to reduce prices, and we have to room to run,” said Matthew Fiedler, an economist at the Brookings Institution’s Center for Health Policy. “But inadequate prices can threaten access to care, and there are limits to how far you want to go.”