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Is it Time for All-Payer Rate Setting?

Iowans – heck, all Americans – are tired of exorbitant medical costs that equate to receding take-home pay due to runaway health premiums. Mainstream media, including a recent CBS News’ three-part series on ‘Medical Price Roulette,’ demonstrates national outrage about medical costs. Add in surprise medical bills, a complex health system impossible for patients to coherently navigate, predatory pricing by greedy actors who can get away with this egregious behavior, and we find a full-blown mess of a problem that is sucking the life from all budgets.

Contrary to arguments made by the medical establishment that bloated healthcare equates to more local jobs and serves as a multiplier-effect for local economies, growing our medical industrial complex just does not fit the true narrative of having thriving economies.

The frustration for this writer is that it is much simpler to describe the ill-effects of a bad healthcare ‘system’ than it is to offer up actual solutions to remedy it. However, I would strongly argue that anyone who claims to have a ‘silver bullet’ solution for an exceedingly complex Rubik’s Cube, is most likely the new, 21st century version of PT Barnum. Yet, repeating the over-used phrase, “Healthcare is complicated,” shouldn’t be an excuse to not pursue viable solutions. Opaqueness in healthcare happens not by accident – but deliberately – it is working as intended. Any remedy to fix this, however, is wrought with both intentional and unintentional consequences.

The Problem

Through a government rate-setting method, Medicare controls what it pays to hospitals, physicians, and other providers by using 745 hospital diagnostic-related groups (DRGs), over 8,000 HCPCS/CPT codes, and many other categories of service to keep medical costs manageable. However, Medicare does not control what providers charge for non-Medicare patients covered by a private plan – which include employer-sponsored health plans, and individual (non-Medicare and non-Medicaid) coverages. Private healthcare markets have clearly failed in reining in extraordinarily-high medical prices, beckoning some type of involvement of price regulation by government authorities.

The problem for private payers? According to a 2019 report by RAND, they pay more than double the amount paid by Medicare for identical healthcare services. Much of this occurs due to cost-shifting – providers charge more to commercial insurers to make up for ‘low rates’ paid by government payers. How much is due to cost-shifting is debateable, however.

As the ‘true’ purchasers of care, employees and their surrogates (employers), use third-party contractors – better known as insurance companies – to negotiate the best ‘deals’ with the provider community. These ‘deals,’ however, are secretly-negotiated without the true payers knowing what the arrangements entail. Insurers often remind purchasers about how ‘deep’ these discounts are off of highly-inflated hospital chargemasters. But that discussion is disingenuous, as chargemasters are irrelevant to the true cost of care.

All-Payer Rate Setting

One strategy to help contain and equalize the pricing arrangement between medical providers and ALL payers – including Medicare, Medicaid, private commercial insurance companies and large self-insured employer plans – is to implement an all-payer rate approach.

“All-payer” rate payments are the same for all patients who receive the same service or treatment from the same medical provider.  All-payers include private health insurance plans, large employer self-funded plans, and Medicaid and Medicare (under an approved waiver from the federal government). Uninsured patients can also possibly be included under the all-payer rate method.

There are two types of all-payer rate programs, state-determined rates and provider-set rates. As mentioned, for Medicare to be included, the state must seek a waiver from the federal government.

  1. State-Determined Rates

Under this arrangement, a state authority will set rates, most often for hospital services. This process is somewhat akin to public utility regulation.

  1. Provider-Set Rates

This approach allows providers to set their own rates, but requires rates to be the same for all payers. In this way, the state can establish rate-setting parameters but does not set the actual rates.

The intent of both approaches is to contain healthcare costs by fostering price competition and reducing or eliminating the cost to negotiate and administer multiple reimbursement schedules with multiple payers. When it comes to dominant health provider concentration, primarily resulting from mergers and acquisitions, the all-payer rate setting can help address adverse consequences derived from large providers in local markets. Dominant insurance companies may also pose different risks to unsuspecting purchasers – such as controlling how their products are distributed within the markets they serve.

Due to a myriad of payers requiring a multitude of quality metrics for doctors and hospitals to comply (costing around $15 billion annually to report results to the government), quality improvement must attack the ‘appropriateness’ of care, whether that particular care was needed in the first place.

Maryland is the only state with an all-payer system of hospital services, which is overseen by its’ state-based Health Services Cost Review Commission. In 2018, Maryland Gov. Larry Hogan signed a contract with the federal government to establish an all-payer health care model, hoping to create incentives to improve care while saving money. This new contract is expected to provide a total $1 billion of savings by the year 2023. Whether this plan works, however, remains to be seen.


Strategies to curb rising health costs and make them more transparent over time is not impossible, it just requires the grit to succeed. Secret negotiations that portray the ‘best’ deals is no longer in vogue, and rightfully so. The inability (or unwillingness) of the private markets to ‘right the ship’ in costs and make them more transparent continues to nudge enthusiasm for various payment initiatives, such as ‘Medicare for all,’ public-plan options, all-payer systems (Maryland), global budgeting (Massachusetts), regulating what insurers pay providers, as well as other approaches.

A warning to those who support the ‘status quo’ in our current healthcare ‘system’ – look for more transparent opportunities to reveal true healthcare prices and make the system less onerous for patients, providers and budgets. Otherwise, stand aside, and be prepared to become this century’s version of the buggy whip.

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