News & Events

A bitter health care pill

By Robert C. Pozen

TO CONTAIN ever-rising health care costs, a commission established by the state recommended a year ago that Massachusetts replace the traditional payment model in which each doctor is paid for delivering each medical service, with the “capitation’’ approach in which a group of doctors is paid an annual fee for providing a patient with all healthcare. However, the Legislature recently put a hold on the commission’s proposal because it would be too complicated and contentious to implement.

Short of transforming the medical payment system, can we bring down health care costs by feasible fixes? Yes, by reducing the number of services that must be covered by every insurance policy and requiring higher copayments for patients using the highest cost providers.

Massachusetts has one of the longest lists of mandatory insurance coverages of any state. There is no option for forgoing any mandatory coverage and paying a lower premium. The total incremental cost of mandatory benefits in Massachusetts was over $300 million during 2004-2005.

For example, chiropractic services are on the mandatory coverage list. Despite the much debated value of chiropractic services, all state residents must pay premiums for these services.

Similarly, Massachusetts requires all residents to buy insurance for infertility services. This includes the expensive process of in vitro fertilization.

Moreover, when the state adopted its individual mandate, the Legislature included all mandatory coverages in any new insurance policies issued under the new system. In other words, if someone did not have health insurance, and then was required to obtain it under the new law, he or she would have to pay premiums for chiropractic services and in vitro fertilization.

Health care experts should go through all the mandatory coverages and decide which ones are truly essential for all residents. Other medical coverages would still be available to any resident who chose to pay higher premiums for the additional coverage.

At the same time, the state insurance commissioner should establish a system of differential copayments by patients based on the relative price of the services provided. For example, the price charged by Massachusetts General Hospital for a normal delivery of a baby is at least $1,000 more than the price of a similar service at a high-quality suburban hospital. Similarly, the price of a magnetic resonance imaging test is $300 to $500 higher at Mass. General than at other Massachusetts facilities.

However, patients do not know about these large price differences and have no incentive to seek out a lower cost provider. By contrast, suppose patients were charged a $100 copayment for a normal baby delivery at Mass. General, and only a $30 copayment for a normal baby delivery at other high-quality hospitals. We would likely see a stampede to these other hospitals.

These are not isolated examples of cost differentials. According to a recent study by the attorney general, the difference in payments made to the lowest-paid versus highest-paid hospital in one major insurer’s local network exceeds 300 percent. Similarly, the price paid by another major insurer to the highest-paid group of doctors was 224 percent higher than the price it paid to the lowest-paid doctor groups.

The study found that price differences were strongly correlated to market leverage – the dominance of a hospital or doctor group relative to other providers within the same geographic region. The study emphasized that these large price differences are not correlated to any of the following four factors: quality of care; sickness of population served or complexity of services; extent to which provider cares for a large portion of patients on Medicare or Medicaid; and whether a provider is an academic teaching or research facility.

To reduce the market leverage of certain institutions, Attorney General Martha Coakley suggests better reporting and more “decision-making tools’’ that allow employers and consumers to make prudent health care decisions. These tools should include differential copayments.

In short, the perfect is often the enemy of the good in health care. Instead of taking a decade to move from fee-for-service to a capitation system, the state should implement two relatively significant cost-saving measures: Reduce the number of mandatory coverage items and charge higher copayments for using the highest-cost providers.

Robert C. Pozen is senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution.