Price Controls or Managed Competition? Lessons for California

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In recent years, policymakers and health reformers have focused on reducing the unit cost of medical goods and services to contain high and rising health care spending, especially in the private sector. One prominent example of this trend toward regulating prices is legislation taken up, but not passed, by the California State Legislature in 2018 that would have created an appointed commission to set commercial health care prices in the state.

The focus on direct cuts to health care prices has come to the fore for several reasons. It reflects the academic consensus that high prices, not greater utilization of services or other reasons, is the main factor that drives U.S. per capita health spending far above that of other countries. A large discrepancy has grown between what commercial payers pay for medical care and reimbursement rates from Medicare, Medicaid, and other government programs. This appears to reflect, in large part, the consolidation of hospitals and medical practices into larger groups that can negotiate higher prices from employers and health insurers.

Because companies have increased the number of employees in high-deductible plans and passed on a greater share of their health costs to employees in the form of co-payments, these cost increases are much more visible to workers. Unsubsidized buyers in ACA marketplaces are facing a similar quandary. While access to care, a previous source of anxiety for consumers during the rise of managed care, is less often on the front burner, considerable anger has built over high charges for emergency room treatment, care provided (but often not disclosed in advance) by out-of-network providers, and charges that deviate widely from regional averages.

Though efforts to regulate medical prices have been tried before, doing so in the private sector departs from the main health cost-containment ideas included in the Affordable Care Act, such as Accountable Care Organizations and bundled payments, which reforms try to redesign care delivery to reduce the provision of unnecessary or harmful care, rather than directly addressing prices.

Direct government regulation of health care prices has a long history at the state and federal level, as well as overseas. During the early 1970s, for example, around one-third of U.S. states engaged in some kind of price regulation of hospitals. Most states backed away from these controls in the 1980s as managed care and competition among health plans became more common, and because new federal regulations inadvertently undercut price controls. Medicare, through its prospective payment system to hospitals, engages in another form of administered pricing. The Clinton Health Plan included price controls, in the form of premium caps, as a fallback plan if intended competition between health plans failed to materialize. Most industrialized countries, such as France, Germany, and Japan practice some kind of rate regulation alongside global budgets and national health insurance programs.

This report examines the ongoing, mostly state-based efforts aimed at lowering health care prices: Maryland’s all payer system; Massachusetts’ health commission and its non-binding price targets; Colorado’s ballot initiatives aimed at greater price transparency, and direct contracting with providers by employers. It asks whether there are lessons California can learn from these experiments as well as limitations to importing similar practices into California and expecting the same results. It asks, finally, if reinvigorating managed competition—a “made in California” alternative that tries to reduce total health care costs while improving quality of care—has the potential both to moderate prices and avoid the drawbacks of price controls.

Turning to price controls runs against the grain of both orthodox economics and American preferences for markets. Such constraints tend to be resorted to when markets are felt to have broken down entirely (as many argue is the case in U.S. health care), or when government and other payers feel compelled for fiscal reasons to impose spending limits.

Stanford University’s Alain Enthoven, who pioneered the concept of managed competition—in which regional purchasers choose among competing managed care systems––once wrote that “the only proved method for bringing the growth in total expenditures into line with the gross national product is for government to take over most of health care financing and place it under firm global budgets.”
Nevertheless, Enthoven concluded that “in view of our historic preference for limited government and decentralization,” it would be both more prudent and more in keeping with American tradition to construct a set of private, market-based systems. The marketplaces under the Affordable Care Act are closely related to this vision.

 

This report examines the ongoing, mostly state-based efforts aimed at lowering health care prices. It asks whether there are lessons California can learn from these experiments as well as limitations to importing similar practices into the state and expecting the same results. It also explores whether reinvigorating managed competition—a “made in California” alternative that tries to reduce total health care costs while improving quality of care—has the potential both to moderate prices and avoid the drawbacks of price controls.