News Release

Reforming Provider Payment—The Price Side of the Equation

NEJM Perspective: Unless Public and Private Payers Send Providers Consistent Signals on Both Price and Quantity, They Risk Working at Cross Purposes

WASHINGTON , DC—Unless public and private health care payers send consistent signals to providers through payment reform about controlling both the price and quantity of care, they risk working at cross purposes, according to a perspective by Paul B. Ginsburg, president of the Center for Studying Health System Change (HSC), published online today in the New England Journal of Medicine.

Traditionally, public payers have focused more on constraining prices, which they set administratively, while private payers have concentrated more on controlling the quantity of medical care through increased patient cost sharing and utilization management, according to the perspective.

“But price is becoming a bigger headache for private payers as dominant health care providers, especially large hospital systems, have been using their market power to command increases in payment rates that exceed increases in unit costs,” according to the article by Ginsburg, who also serves as research director of the nonprofit, nonpartisan National Institute for Health Care Reform.

While slowing the growth of Medicare and Medicaid spending is key to long-term federal deficit reduction, payment rate reductions alone could just shift costs to the private payers where dominant providers with negotiating leverage can command higher payment rates.

“Although many private payers share the enthusiasm for reforming provider payment, they realize that attempts to encourage hospitals, physicians, and other providers to integrate and align to improve care coordination are likely to lead to greater consolidation among providers, increased market power, and higher prices,” the article states.

While provider consolidation is often cited as a key factor that allows providers to increase prices for private payers, another important aspect is consumer preference for broad choice of providers, according to the article. Before the managed care backlash of the mid-1990s, “…insurers held the balance of power because they could credibly threaten to exclude high-priced providers from plan networks. But in response to the managed care backlash, health plans broadened their networks, typically incorporating most local hospitals and large physician practices. So-called must-have providers—those that were particularly valued by consumers either because of their reputation or as an important source for a particular specialty service or geographic area—amassed extensive leverage and the ability to obtain much higher prices than other providers.”

Provider leverage can be countered by market or regulatory approaches, or elements of both, according to Ginsburg. A market approach involves designing health benefits to encourage consumers to choose lower-cost providers, while a regulatory approach might involve rate setting. “Since rate setting addresses only the price side of the cost coin, a key consideration is whether it would advance or hinder broader provider payment reforms that address not only price but the quantity or mix of services,” according to the article.

“Nevertheless, the unchecked market power of some providers promises to become increasingly problematic for private payers. And if market approaches prove insufficient to solve a problem of this magnitude, regulatory intervention becomes more likely. But public and private payers alike should keep their focus on payment reforms that address both the price and the quantity of health care and avoid inadvertently working at cross purposes,” the article concludes.

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The National Institute for Health Care Reform (NIHCR) is a nonpartisan, nonprofit 501(c)(3) organization created by the International Union, UAW; Chrysler Group LLC; Ford Motor Company; and General Motors. Between 2009 and 2013, NIHCR contracted with the Center for Studying Health System Change (HSC) to conduct high-quality, objective research and policy analyses of the organization, financing and delivery of health care in the United States. HSC ceased operations on Dec. 31, 2013, after merging with Mathematica Policy Research, which assumed the HSC contract to complete NIHCR projects.