The Massachusetts Experience: Controlling Medical Costs Is Essential

Much as been written about how the experience of Massachusetts is relevant to what could be expected for the country now that health care reform legislation has passed. As many of you know, the Bay State set up a program in 2006 that required all residents to be insured. To help them become insured the state provided subsidies to those who otherwise could not afford the premiums and also established an exchange or connector program where residents could purchase coverage.

As many predicted the cost of the program has exploded as premiums have continued to rise. Hearings were just conducted to find out the root causes for the increases.

Rate hikes get people's attention. And it was no different during the Massachusetts hearing, when one of the most remarkable statements was made early on by Eric H. Schultz, president and CEO of Harvard Pilgrim Health Care. Schultz said that some physicians and hospitals in Massachusetts are paid upward of 300% to 400% higher for some services compared to others.

"The variations in overall reimbursement to hospitals can also be as high as 300%, but the difference when comparing facility inpatient rates or outpatient rates can be as much as 300 to 400%," Schultz said in a written statement. "The difference in rates between the lowest reimbursed physicians and the highest can be as much as 300% for the same services. Some physician and hospital networks are paid well in excess of 200% of Medicare."

The hearing appeared to reaffirm much of what Massachusetts Attorney General Martha Coakley has emphasized in her health marketplace investigation. "Increasing reimbursement rates demanded by providers for medical services, and the trend toward providing care in more expensive settings are the primary drivers of increasing healthcare costs, increases that are reflected in premiums," she said.

So what can be done to control provider costs, particularly hospitals? Many have pointed to the unleashing the power of the marketplace by giving consumers the information on quality and cost that they need. But reliable information on quality and cost is very difficult to obtain. What if the state government stepped in to control costs? Most people would say to do so would produce terrible results. Well Maryland has had such a program in place since 1976.

In Maryland prices for all hospital services are set by seven commissioners appointed by the governor to four-year terms. When setting rates for at individual hospitals, the Commission takes into account each hospital's wages, charity care and severity of patient illnesses. Hospitals can appeal only to the commission or take the dispute to court.

A review of the Maryland plan published in a recent issue of Health Affairs reports that, since 1976, state regulation of hospital rates has saved $40 billion. Had a similar system been in place over the same period of time for all states, savings would have totaled $1.8 trillion or more .

More importantly, when the growth of medical spending in Maryland is compared to inflation in other states, Kaiser reports that from 1991 to 2004 Maryland’s total heath care bill was climbing by just 6.7% a year—right at the national average. The rate of growth in Maryland was slower than in 32 other states.

So perhaps government proce control regulation could be the answer in containing hospital costs?