Hospital Rate Setting Revisited: Dumb Price Fixing or a Smart Solution to Provider Pricing Power and Delivery Reform?

R E S E A R C H R E P O R T Hospital Rate Setting Revisited Dumb Price Fixing or a Smart Solution to Provider Pricing Power and Delivery Reform? Robert Murray Robert A. Berenson G L O B A L H E A L T H P A Y M E NT , LLC U R B A N I N S T I T U T E November 2015 H E A L T H A N D H E A L T H P OL I C Y A B O U T THE U R B A N I N S T I T U T E The nonprofit Urban Institute is dedicated to elevating the debate on social and economic policy. For nearly five decades, Urban scholars have conducted research and offered evidence-based solutions that improve lives and strengthen communities across a rapidly urbanizing world. Their objective research helps expand opportunities for all, reduce hardship among the most vulnerable, and strengthen the effectiveness of the public sector. Copyright © November 2015. Urban Institute. Permission is granted for reproduction of this file, with attribution to the Urban Institute. Cover image from Anne Gummerson Photography. Contents Acknowledgments v Executive Summary vi Chapter 1. Introduction 1 Background 1 Reconsideration of All-Payer Rate Systems 5 Purpose of the Report and Method 6 Chapter 2. A Primer on State-Based Rate Setting Systems 7 Impetus and Context for Development 7 Rate Setting Defined 9 Basic Design Elements of Hospital-Based Rate Setting 11 The Importance of Prospective Systems 11 The Base Rate and Adjustments 13 The Method of Updating Rates 14 The Structure of Payments and Constraints 15 Rate Adjustments 18 Compliance 20 The Rise and Fall of Rate Setting in the United States 21 State Rate Setting Experiences—A Summary 22 Aftermath 29 Conclusion 29 Chapter 3. The West Virginia Rate Setting System 31 Background 31 Rate Setting Methodology 32 The Standard Application Process 33 The Benchmarking Methodology 33 How Approved Rate Increases Translate into Annual Payment Increases by Private Payers 35 Performance and General Satisfaction with the System 38 Appraisal 40 Chapter 4. Overview of Maryland Hospital All-Payer Rate Setting System 42 Background 42 General Approach and Underlying Payment System 44 Payment Evolution 47 Program Performance and the Need for Change 51 Chapter 5. Maryland’s Model Agreement with the CMMI 52 Implications of the Approach 55 Challenges the Demonstration Will Face 56 Chapter 6. An Appraisal of Rate Setting’s Performance 60 Cost Containment 60 Equity, Fairness, and Stability 61 Uninsured Access to Care 62 Quality and Technology Diffusion 63 Ability to Accommodate Market-Based Initiatives 64 Regulatory Failure and Capture 64 Ability of Rate Setting to Develop Innovative Payment Methodologies 66 Lessons Learned for Public and Private Payers 67 Chapter 7. Final Observations and Recommendations 69 Template for Effective State-Based Rate Regulation 72 Avoiding Regulatory Failure—Administrative Feasibility 72 Avoiding Regulatory Capture 73 Characteristics of Effective Rate Setting Systems 74 Concluding Comments 76 Notes 78 References 84 About the Authors 89 Statement of Independence 90 A C K N O W L E D G M E N T S V Acknowledgments This report was funded by the Robert Wood Johnson Foundation. We are grateful to them and to all our funders, who make it possible for Urban to advance its mission. Funders do not, however, determine our research findings or the insights and recommendations of our experts. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. The authors wish to sincerely thank Emily Hayes of the Urban Institute for her invaluable editorial assistance in the preparation of this study. We would also like to thank Jack Cook, Jack Keane, and Bill Salganik for their helpful comments on the sections related to the history of rate setting and Maryland’s Model Demonstration and Mike Robbins’ comments on the description of the West Virginia rate setting system. Finally, we would like to acknowledge the work of Harold A. Cohen, the founding executive director of the Maryland Health Services Cost Review Commission, and his original thinking, profound vision, and commitment to improving the hospital financing and delivery system in Maryland. VI E X E C U T I V E S U M M A R Y Executive Summary High and increasing health care prices have long been a serious policy concern in the United States and may be for years to come. In recent years, several analyses have pointed to higher health care prices as the leading cause of health care spending increases since 2000 and as a major reason that health care in the United States is nearly twice as costly as health care in other developed countries. Although the growth in overall health care expenditures in the United States has slowed in recent years (for reasons not well understood)an increasingly concentrated provider industry and other factors that improve provider negotiating leverage, along with the diminishing effectiveness of current market-based strategies (e.g., increased cost-s