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Reforming Delivery
Health Care Whack-a-Mole in Maryland

The Federal government has just approved Maryland’s new attempt to bring down health care prices with a cap on hospital spending. Since the 1970s, Maryland has been setting prices for procedures (it is the only state to do so), but controlling costs through bureaucratic fiat isn’t as simple as it might seem. The policy has had some success, but hospitals were able to respond to strict caps on price per procedure by doing more procedures, and readmission rates in Maryland are also above the national average at some hospitals. The new cap on hospital spending is designed to eliminate that workaround, as Wonkblog reports:

The Centers for Medicare and Medicaid Services approved Friday Maryland’s proposal to continue setting hospital prices while adding in a cap on all hospital spending. The state will limit hospital spending growth to 3.58 percent for the next five years, largely by giving each of the state’s 46 hospitals a firm budget to work within. That level of growth would be tied to the projected, overall growth of the state economy. […]

State officials hope that the firm budget — combined with the state’s pre-existing power to dictate hospital prices — will put downward pressure on health spending, forcing hospitals to spend their limited dollars on the most cost-effective health care

Color us skeptical. If the first policy produced perverse incentives for hospitals fixed on the bottom line, the new one will produce all sorts of unexpected costs as well—perhaps, for example, doctors leaving the state to practice where they can make more money.

But even if this experiment does succeed in holding down costs without producing any particularly bad side-effects, the state’s health-care system will be cheaper only relative to other states. The truth is that rate-setting and spending caps are superficial band-aid solutions that can’t get unsustainable costs under control in the long-term. We can’t just leave standard medical practice as it is and impose caps from on high. We need to change the very way medical care is delivered.

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  • Andrew Allison

    You are confusing the delivery of service and it’s price. The problem, as you have frequently pointed out, is that the pricing is impenetrable. All the ACA really needed to do to drive down costs was require hospitals to post price lists for standard procedures, thereby instituting much-needed competition. This is already occurring in general practice, where doctors are advertizing prices.

    • Jim__L

      The problem here is the “enrollment window”. If you get locked in to one provider before you know what services you’re going to need, shopping around based on price becomes impossible.

      • Andrew Allison

        For a year, at most. The bottom line is that the current system produces no better results for those who are insured (and significantly worse for the uninsured) than other countries do for a third the cost. ACA will do little if anything to change that.

        As an aside, if all insurers are required to sell the identical product and it’s the only one allowed, why have more than one? That there is no competition in a market where people are compelled to purchase is illustrated by the negligible difference in quotes from different companies. Klein argues today ( that the real culprits are hospitals and the pharmacological industry, but confuses the low profits reported by insurance companies with the amount of the premium dollar disbursed for care services.

  • Jacksonian_Libertarian

    “We can’t just leave standard medical practice as it is and impose caps from on high. We need to change the very way medical care is delivered.”

    True, without the “Feedback of Competition” which forces continuous improvements in Quality, Service, and Price in free markets, health care can only stagnate and degrade.

  • Boritz

    Central planning, the market, central planning, the market, central planning, the market. . . . . . central planning.
    Let’s hope it works better than at any time in history.

  • hal

    What is needed is growth(more med schools, doctors, and hospitals), competition, and cash paying customers. Taxes should also be zero.

  • ljgude

    From observing the Australian public system strong administrative control of costs can be part of the solution for controlling costs – but that kind of approach does create perverse incentives and unintended consequences. So such regulation needs to be intelligent and nimble. Can it work in the US? Well, color me skeptical too with 50 states and a lackluster federal bureaucracy. But something like that will have to happen for the US to get more out of Medicare and Medicaid.

  • free_agent

    You write, “perhaps, for example, doctors leaving the state to practice where they can make more money”.

    OTOH, it seems to me that in most countries where nationalized health systems have a monopsony and use it to drive down prices, the doctors cannot easily leave to other places where they make more money and/or the people who enter medicine are not primarily motivated by money.

    • Jim__L

      Insurance regulation is on a state-by-state basis in this country. Supporting a legal department to keep up with those regulations isn’t necessarily cost-effective, so in many states only one insurance provider participates — they’re a monopsony already.

      It doesn’t help prices.

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