Massachusetts Health-Care Price Controls Would Raise Prices

Published May 21, 2012

Under Democratic Gov. Deval Patrick, Massachusetts has tried two methods for limiting the government’s exposure to rising health-care costs. First, Patrick forced insurers to stop raising premiums, which led to a predictable trainwreck as insurers started hemorrhaging cash. When a state appeals board overturned Patrick’s decree, he shifted gears, going after the prices charged by hospitals and doctors. Now, the Massachusetts House has unveiled new legislation toward that end.

The 178-page bill, the “Health Care Quality Improvement and Cost Reduction Act of 2012,” creates a quasigovernmental oversight agency, the Division of Health Care Cost and Quality (DHCCQ). It also ties health care spending to the Gross State Product (GSP), capping it at GSP minus one-half a percent. Ultimately, however, it would raise prices.

Bureaucrats Set Prices

The House bill directs the newly empowered DHCCQ to “assess a surcharge” on providers who charge more than 20 percent above the state median. The surcharge will be 10 percent of the difference between the provider price and the state median.

The bill provides two exemptions to this “luxury tax.” The first is if “said service has limited or exclusive availability in the commonwealth, as determined by the division.” The second is if “the division determines that the quality of the service is reasonably related to the price.”

These vague definitions lend themselves to political hanky-panky in which politically powerful and well-connected providers exempt themselves from the bill’s luxury tax or set up its definition of “quality” in self-serving ways.

Providers are “prohibited from passing along the costs of this surcharge to customers,” but this is empty rhetoric. Given the incredible complexity of hospital billing, it will be very easy for high-priced hospitals with significant market power to charge more for other services to make up for lost revenue in other areas.

Ever-Rising Median Prices

The beauty of government-controlled relative pricing is that it creates an incentive for everyone to raise prices. There are two ways for a high-cost provider to get their prices within the 20 percent band: (1) lower their prices; (2) get everyone else to raise their prices.

Thanks to the transparency provisions of the bill, low-cost providers will know what their peers are charging, and they will have the ability and incentive to raise their prices considerably.

For example, let’s say Massachusetts General Hospital (MGH) charges $32,000 for a coronary angioplasty, whereas the state median is $21,000, driven in part by low-cost Tufts, which is charging $16,000. Now that Tufts knows that MGH is charging $32,000, Tufts knows that it can charge, say, $25,000 per procedure, and still gain favorable status from insurers, without incurring the new “luxury tax.”

Once Tufts raises its price to $25,000, the “median” price for angioplasties in the state goes up, allowing MGH to raise its price further, and the cycle repeats itself.

Malpractice Tweaked, Not Reformed

If Massachusetts were serious about cost control, the House bill would have Texas-style caps on malpractice damages. In 2010 in Texas there were 209 paid medical malpractice claims per 10 million residents, compared to 433 for Massachusetts. (The national average was 326.) The average medical malpractice payment in Texas that year was $170,632, compared to $336,437 nationally and $484,290 in Massachusetts.

Instead of comprehensive reform, Section 107 of the Massachusetts bill only caps malpractice claims against a nonprofit charity at $100,000, exclusive of interest and costs. Other nonprofit organizations and all for-profit ones still face unlimited liability.

In Texas, capping malpractice damages led to a huge influx of physicians into the state. Given that Massachusetts has among the longest wait times in the nation for physician appointments, you’d think they’d be interested in addressing this problem. They were not.

Global Budgeting Doesn’t Work

Finally, the bill assigns a “global” budget to the state health-care system, linking state health spending to GSP. It would be great for health spending to grow at a lower rate than the rest of the economy, but global budgeting won’t accomplish that.

If you’re an individual doctor in Massachusetts, you’re not thinking about a state-mandated “global budget” when you make your prescribing decisions. You’re thinking about the best interests of the patient you have, and about protecting yourself from lawsuits.

Medicare has been trying to impose various price-control systems since the 1970s. None of them worked. The fundamental problem with top-down price controls is that individual doctors are always capable of outsmarting the bureaucrats, who don’t figure out they’ve been had until it’s too late.

Health Reform 2.0?

Massachusetts Democrats are labeling their efforts as “Health Reform 2.0” and claim they’ll save $160 billion over the next 15 years. And we can be sure Democrats in Washington will try to impose something similar on the entire nation if given the chance.

As Harvard Medical School Dean Jeffrey Flier said in 2009, “The majority of our representatives … quietly [understand] that [the Affordable Care Act] can only be the first step of a multiyear process to more drastically change the organization and funding of health care in America. I have met many people for whom this strategy is conscious and explicit. We should not be making public policy in such a crucial area by keeping the electorate ignorant of the actual road ahead.”

Thanks to our neighbors in Massachusetts, the electorate can now know what to expect.

Avik Roy ([email protected]) is a senior fellow at the Manhattan Institute. Read his blog at Forbes: