Academic journal article Health Care Financing Review

All-Payer Ratesetting: Down but Not Out

Academic journal article Health Care Financing Review

All-Payer Ratesetting: Down but Not Out

Article excerpt


In The Structure of Scientific Revolutions, Thomas Kuhn suggests that scientific paradigms are rejected and replaced with new ones only after the old paradigm can no longer explain the data that has been collected and after a new paradigm has been proposed. He illustrates his thesis by examining a number of scientific revolutions (such as the replacement of the Ptolemaic with the Copernican view of the universe) in which the advocates of the old model tried to fit the data into the existing paradigm, and only after a "comparison of both paradigms with nature" was the old paradigm rejected (Kuhn, 1962).

All-payer ratesetting for hospitals was at the center of the policy paradigm for controlling health care costs during the 1790s. In 1972, Congress passed Section 222 of the Social Security Amendments, which gave States the authority to establish ratesetting programs. By the late 1970s, more than 30 States had adopted some form of hospital ratesetting (Coelen and Sullivan, 1981). In 1977, then-President Carter studied the results of these State programs and initiated hospital cost-containment legislation, which would have established a national all-payer hospital ratesetting system, the center of his health policy agenda (Davis et al., 1990).

The policy paradigm, however, shifted from a regulatory to a competitive approach after the cost-containment legislation was defeated in 1979 and Ronald Reagan was elected in 1980. By 1991, only one State, Maryland, still had an all-payer ratesetting program, and the discussion of all-payer ratesetting in national policy circles was almost non-existent (although the recent "play or pay" health insurance proposal of the Democratic leadership in the U.S. Senate does include a provision for all-payer ratesetting). This shift leads to an obvious question - was there an empirical reason for all-payer ratesetting being dropped from the policy agenda or was it simply the result of the general shift from regulation to competition?

Perhaps ratesetting was unable to achieve its multiple objectives of controlling costs, reducing the extent of cost shifting, and improving access to the uninsured. Alternatively, some fatal flaw may have been discovered, such as an adverse impact on quality of care, stifling of innovation, slowing the diffusion of new technology, or a finding that most hospitals in ratesetting States were in a precarious financial situation. Most of the empirical studies of State ratesetting examine data from the 1970s and early 1980s. Some States, however, have continued to operate ratesetting programs, and, in addition to reviewing the more recent findings, this article updates the data on ratesetting programs by examining the Maryland experience. Maryland was chosen because it was the first State to adopt all-payer ratesetting and the first State to adopt a per case payment system, and it is the only all-payer ratesetting system operating in 1991.

Benefits of ratesetting

Proponents of ratesetting have suggested a number of benefits, including the potential for greater cost containment, increased levels of hospital productivity, a reduction in the level of cost shifting, and improvement in access for the uninsured. I review the empirical evidence to determine how well the State ratesetting programs have met each of these objectives.

Cost containment

The primary objective of all ratesetting programs is to control health care costs. Eby and Cohodes (1985) reviewed the empirical literature that was published from 1979 through 1984 and concluded that "mandatory rate-setting has generally constrained hospital costs where it has been implemented." More recent studies have confirmed this conclusion. The final report of the national ratesetting study concludes that mandatory programs saved $36 billion dollars from 1969 to 1982 and reduced costs per discharge in States with mandatory programs 12-26 percent (Coelen, Mennemeyer, and Kidder, 1986). …

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