A New Twist on an Old Health Care Idea

All-payer health care, the idea of paying hospitals a flat rate, is making a comeback.
by | July 2018

Many Democrats continue to dream about a single-payer health-care system, but costs and political opposition will keep it from happening for the foreseeable future. Maybe longer. In reaction to that, an old and very different idea is starting to catch on again.

Back in the 1970s and 1980s, about a dozen states adopted what were known as all-payer health pricing systems. Single-payer is about who pays the bills. All-payer is about the bills themselves. Rather than charging patients and insurance companies different prices for the same procedures, hospitals in an all-payer system are required to bill all customers the same amount for similar procedures, an amount determined by state health officials.

The idea that the government could tell hospitals how much to charge never sat well with many health system players. A counterforce emerged that called for a more sophisticated approach to pricing from the private marketplace itself. That approach was managed care, delivered in most places by private health maintenance organizations. HMOs proliferated and took over pricing as well as treatments; lots of lawmakers were happy to take their states out of the rate-setting business. But the managed care pricing system hasn’t worked very well. It hasn’t curbed the bizarre disparities in hospital bills that are a fact of life in most places. The price of an appendectomy in California, for instance, was found in one study to range from $1,500 to $182,955.

As managed care became much more heavy-handed than the all-payer system, there was a political backlash against it. But in the meantime, every state that had instituted all-payer had repealed it.

Except one. Maryland has had an all-payer system in place for more than 40 years. When it began, the cost of hospital admissions was 26 percent above the national average. Over the years, it dropped below that average. Now, Maryland enjoys the nation’s lowest rates of growth in hospital costs, and other countries that utilize all-payer systems, including Germany and Japan, have much lower health inflation rates than the U.S.

But it would be difficult today to create an all-payer system based on treatment rates, says Paul Ginsburg, who runs a joint health initiative for the University of Southern California and the Brookings Institution. Back in the 1970s, there wasn’t a great deal of difference in the prices hospitals charged Medicare, Medicaid or private insurers. That’s no longer true. “Today, to make them essentially the same, Medicaid provider rates would have to be raised substantially,” Ginsburg says. “That would be very costly for states.”

A few states that are dissatisfied with the current system are taking a different tack. Rather than demanding that hospitals charge everybody the same rate for their procedures, states are looking at a new variant of all-payer, one focused on the total cost of care. They want hospitals to get paid a set amount on a monthly basis. The idea is that if hospitals know what their aggregate revenues are going to be, they’ll be careful about costs and invest more in prevention.

Pennsylvania is starting an experiment with the total care idea in rural areas. Vermont has a pair of pilot projects that are bigger and more ambitious, covering around 150,000 residents. Maryland, the lone remaining all-payer state, added total care budgeting four years ago to its all-payer system. In the three years following its adoption, state hospitals saved Medicare $429 million.

There’s little disagreement with the idea that health-care costs have to be brought under control -- or at least that wildly disparate costs for the same procedure have to end. That’s why states are looking into imposing price restraint through updated all-payer systems. But widespread concerns about giving government yet more control over health care means that such ideas, even promising ones, are a tough sell politically.