Don't Wait for Washington to Fix Health Care

Don't Wait for Washington to Fix Health Care

Democratic and Republican governors know that rising health-care costs — for public employees and those with Medicaid — are, increasingly, restricting spending on other state priorities, from education to roads and bridges. They also know a bitterly divided Washington is unlikely to provide any help any time soon. Yet there are plenty of levers governors can pull to help bring costs in line, especially by increasing competition in health-care markets.

The challenge is stark. Medicaid spending — up 14 percent last year, according to a Kaiser Family Foundation report in October — is the second largest item on most state budgets. States that expanded their programs under Obamacare will see a decline in federal matching funds beginning next year, while non-expansion states are still dealing with the influx of millions of new Medicaid enrollees prompted by the law. In addition, state employee health coverage continues to be a significant cost center for many states and cities, with the total unfunded liability for state employees’ health benefits estimated at over $600 billion.

But states are not powerless. They retain core regulatory powers over health-care services, including the licensing of doctors and nurses as well as authorization of infrastructure, including hospitals and ambulatory surgery centers. State governments can also turn some of their liabilities — for instance, large pools of very generously insured public employees — into market leverage. By embracing contracting and benefit design strategies that are common in the private sector, they can get lower prices and better outcomes for every tax dollar spent, while leveling the playing field for the entire payer community.

With these unique opportunities in mind, here are five strategies that innovative governors can use to help transform state health-care markets:

1. Incorporate reference pricing for common procedures and tests into state benefit designs. Reference pricing (RP) allows employers to set a price for a given service and then offer employees a list of providers who accept the price. California’s Public Employees Retirement System (CalPERS) used RP to correct stark price variations for knee and hip replacements, which helped reduce orthopedic surgery prices across the state. In the first two years of the program, the state saved $13.4 million. The Health Care Cost Institute estimates that as much as 43 percent of spending through employer-based coverage is attributable to potentially “shoppable” services that could benefit from tools like reference pricing.  

2. Ban anti-tiering provisions. Large hospital systems can use their leverage to prevent insurers from offering patients lower co-pays at less expensive in-network hospitals (a strategy called tiered networks). Massachusetts passed a law in 2010 that required public plans to offer tiered networks. For instance, preferred hospitals in Blue Cross/Blue Shield of Massachusetts had cost sharing of just $170, with a middle tier of $360 and $1,000 for non-preferred hospitals. Researchers at the Commonwealth Fund found that from 2009–2012, “44 percent of [Massachusetts] hospitals changed tiers, mostly from middle to preferred, and nearly all because they decreased their prices.”

3. Drive price transparency by setting up an all-payer claims database (APCD). APCDs collect information on all health-care claims paid from all payers. Pricing information allows consumers, employers, and providers to shop for the best values. In 2003, New Hampshire became one of the first states to implement an APCD. In 2007, the state launched NH Health Cost, a pricing website with provider- and insurer-specific prices. NH Health Cost spurred competition among hospitals, leading to widespread uptake of tiered benefit plans and sharp growth in high deductible health plans. 

4. Expand Access to Direct Primary Care, including for Medicaid patients. Fourteen states have legalized direct primary-care practices, where primary-care physicians set monthly fees for 24-7 physician access, along with other basic services. DPC practices don’t accept insurance, but this allows them to slash overhead costs (in some cases, by as much as 40 percent); many offer care for less than $100 per month. When DPC’s are wrapped around high deductible health plans (which Obamacare allows) and health savings accounts, consumers can get the best of both worlds: access to routine primary care at an affordable cost, with protection from catastrophic expenses in the event of a true emergency or serious illness. 

5. Repeal regulations that hamstring competition. States should repeal certificate of need laws, which protect incumbent hospitals from competition, and prohibitions on the corporate practice of medicine, which prevent for-profit companies from buying and reorganizing health care firms. 

Each of these reforms can help stimulate what health care has long lacked: a more transparent, competitive market for goods and services that attracts the best in new health-care start-ups and investment. State Medicaid programs will also benefit as well from a more innovative, value-focused health care system. Best of all, these reforms are eminently non-partisan and don’t require any permission from Washington. 

Our national debates about health care tend to focus on getting people coverage. But to make the cost of coverage sustainable in the long run, we need much greater competition in how health care is delivered and priced. Here, states are best positioned to take the lead.

Paul Howard is director of health policy at the Manhattan Institute. 

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