Massachusetts Sets Global Cap on Health Care Costs

Published October 9, 2012

In an attempt to impose top-down containment on Massachusetts’s soaring health care costs, Democratic Governor Deval Patrick signed a law which creates a statewide global cap on public and private health care costs. The law expands the state’s bureaucracy and specifies a target growth rate for overall medical spending based on the growth rate of the state’s economy.

Joshua Archambault, director of health care policy at the Massachusetts-based Pioneer Institute, says he doesn’t expect the so-called “global cap” to rein in costs in the long run.

“You certainly can in the short term hold down costs and put certain companies in tough situations financially,” said Archambault, “But in the long run they’ll be forced to pass on any additional costs that are put on them to the consumer to make up the difference. If they don’t, they’ll simply go out of business.

“I think in the long run,” continued Archambault, “in order to have any sustainable cost containment, you’re going to have to get consumers involved. We can’t just have government pick the winners and losers.”

Consequences of 2006 Reforms

The landmark Massachusetts health care reform law of 2006 increased the number of citizens covered by private insurance and Medicaid, but it did little to halt the rising costs of care. According to a report by the Beacon Hill Institute at Suffolk University, total health insurance costs have increased by as much as $6.1 billion since the passage of the 2006 law. Massachusetts currently spends more per capita on health care than anywhere else in the industrialized world.

Patrick’s law, signed Aug. 6, is an attempt to change that, with the goal of reducing health care costs by $150 billion in 15 years. Archambault is skeptical.

“We have 6.5 million residents in Massachusetts, and of those, the government has control over the health care decisions of about 40 percent. This group spends about $13 billion annually on health care. So if we zero out all of this group’s spending for roughly the next 15 years, then we can achieve the savings,” said Archambault. “It’s completely unrealistic.”

Skepticism About Global Caps

Patrick’s law specifies a target growth rate tracking the growth in the overall state economy. Providers not meeting that target would face regulatory hurdles. But according to Manhattan Institute senior fellow Avik Roy, this type of global cap never works.

“The reason why global budgets never work is that if you’re a doctor at a hospital and somebody comes in with a heart attack and you have to treat that patient, you’re not focused on what is the cost-effective way to treat that patient. You’re focused on treating that patient: making sure that patient doesn’t die,” Roy said.

“Medical billing is so complex,” continued Roy, “that for a hospital it’s relatively easy, if you’re being forced to reduce rates for one procedure, to increase rates somewhere else to make up for it. And certain aspects of the way the regulation is structured will actually incentivize the lower-cost players to raise prices, because the law requires prices to be in a certain band, bracketing the average.

“If you’re in the band but well below the average, you have incentive to raise your prices because as long as you’re in that band, the regulators won’t come after you,” he added. “So it’s far from clear that this approach is going to lead to a reduction in prices because it fundamentally misunderstands the incentives.”

Growth of Bureaucracy

Patrick says he is counting on a network of new task forces to apply the global cap. According to Archambault, the law creates 25 commissions, task forces, advisory councils, with 266 appointees altogether.

“These appointees are given a tremendous amount of future latitude to issue regulations and oversee our health care system going forward. They’re going to set up a state health plan to determine what medical resources are ‘rationally appropriate’ for different parts of the state,” said Archambault. “On top of that, they are adding hundreds of millions of surcharges, fees, and penalties to pay for new spending in the bill.”

Fees and penalties charged providers and insurers, said Archambault, will simply be passed on to consumers in the form of higher prices. And the law contains very vague language describing the mandate of the new bureaucracies it creates.

“That is the biggest concern here, that we don’t fully understand what level of power these new organizations will have in overseeing things going forward,” Archambault said.

Says Bureaucratic Rationing Inevitable

Devon Herrick, a senior fellow with the National Center for Policy Analysis, says the cuts will be made by bureaucrats and the citizenry may not like them.

“Countries with socialized health care systems often use this as a rationing system. Hospitals are paid one global budget and essentially forced to treat all patients that come for treatment. The idea is to remove the fee-for-service incentive, where hospitals have an incentive to over-treat patients. However, the result is a system that rewards hospitals for avoiding for under-treating patients and avoiding as many patients as hospitals possibly can,” explains Herrick.

Roy says Massachusetts will only achieve savings through a change in course, toward “a market-oriented system where people are truly incentivized to be value-conscious in their care because, for example, they’re paying for routine expenditures through health savings accounts” or a similar system.

Archambault says that’s just what he and his colleagues recommended.

“What we suggested for them to do is to promote greater utilization of consumer-directed health plans—HSAs and the like. Unfortunately they went in the exact opposite direction,” Archambault said.