Category Archives: Economy and government

Massachusetts AG recommends healthcare price controls

(Also available at Forbes Blog, Science and Business.) How can health care costs be controlled in Massachusetts? According to a June 22 report from the state’s Office of the Attorney General (OAG), the answer includes temporary controls on prices negotiated between payers and providers. Specifically, the report recommends “at least setting temporary statutory restrictions on how much prices may vary for comparable services” in order to “moderate price distortions, without price setting, . . . as a stop-gap until the corrective effects of tiered and limited network products can improve market function.”

The analysis supporting and rationale for this recommendation from the office of Attorney General Martha Coakley, defeated by Scott Brown for the U.S. Senate in early 2010, have important implications for the national debate about healthcare reform and cost control.

First, as was true for the OAG’s 2010 report on cost control, the 2011 report was motivated by continued rapid growth in Massachusetts healthcare costs following the enactment of its healthcare reform law in 2006. That cost growth further highlights the “expand coverage now – deal with costs later” philosophy underlying the Massachusetts law and its nationwide descendant, the Patient Protection and Affordable Care Act. It also highlights that when “later” arrives, proposed solutions will likely include a heavy dose of additional government controls on private contracting.

Second, the OAG recommends price controls as a temporary solution to address variation in spending for hospital and physician services that cannot readily be explained by variation in the health status of patients or summary measures of health care quality. The report vaguely blames that unexplained variation on “dysfunctional” markets. The analysis parallels studies of geographic variation in Medicare spending and associated views that Medicare spending can be cut significantly in high cost regions without any reduction in the quality of care. In contrast to the conclusions of the OAG analysis and much of the Medicare research, substantial uncertainty exists about the extent to which variation in spending across regions or providers that researchers have been unable to explain is in fact attributable to unmeasured differences in patient health and quality of care.

Despite the headlines given to the OAG report’s price control recommendation, that recommendation receives very little discussion in the 54 page report. Instead, the report focuses on analyzing spending using data from major insurers and providers. It also includes useful discussion of the impediments to coordinated care and to the limitations and drawbacks of global payments to providers (capitation) as a cost control mechanism, in contrast to an earlier recommendation to adopt global payments universally by the state’s Special Commission on the Health Care Payment System.

The OAG favors giving “consumers increased options and incentives to make value-based purchasing decisions through tiered and limited network products that, without penalizing necessary and appropriate use of health care, make consumers more responsible for differences in cost when they select a more expensive provider.” But it argues that those mechanisms “cannot counteract, on their own, historic price disparities that threaten many health care providers.” The report contains no discussion of the potential (inevitable) adverse effects of price controls. It’s not even clear that limits on “how much prices may vary for comparable services” would help lower costs, as opposed to exerting upward pressure on reimbursement to providers currently receiving relatively low reimbursement. Overall, the price control recommendation seems to come out of Fenway’s short left field.

Gingrich is toast

Newt Gingrich favors a health insurance mandate and regards Paul Ryan’s Medicare proposal as “right wing social engineering.”  Support for a mandate endorses a central plank of Obamacare.  The Ryan proposal is the central alternative to top-down, bureaucratic controls on spending and access to care as a means to reduce Medicare cost growth.

The Speaker’s intelligence and erudition make it hard to believe that his statements were gaffes.  One might like to think that he succumbed to excessive exposure to ethanol fumes while visiting Iowa.  (He’s a big fan of ethanol, too.) Whatever the cause, his Presidential candidacy almost certainly has gone from long shot to no shot.  He’s toast.

Taxes and deficits

Republicans should not consent to higher tax rates to reach an ostensibly non-partisan compromise on deficit reduction.   The main reason is that Congress will very likely use a good chunk of any tax increase  to sustain excessive spending.  To elaborate:

If federal spending is cut by $1, the direct effect is to reduce the federal deficit by $1.  The indirect effects are uncertain in magnitude and perhaps in direction.  Some people in general and economists in particular believe that reduced spending will hurt the economy and increase other federal spending (e.g, for unemployment benefits) and/or reduce tax collections.  Other people and economists believe that reduced spending will help the economy and reduce other spending and/or increase tax collections.  Academic and other researchers try to estimate the effects of past spending cuts and predict what would happen now.  The results are subject to significant uncertainty.

If federal taxes are increased by $1, the direct effect is to reduce the deficit by $1.  The indirect effects depend on the effect of the tax increase on economic activity.  While the effects are uncertain in magnitude, it is highly probable that tax increases would reduce economic growth, increasing other government spending and reducing tax collections.  Academic and other researchers again try to estimate the effects of past tax increases and predict what would happen now.  The results likewise are subject to significant  uncertainty.

If, however, taxes are increased as part of a political compromise to reduce the deficit, it is entirely plausible that spending will not be reduced as much as would ultimately be the case without tax increases.   In other words, Congress will use some portion of any tax increase to sustain spending.  Other things being equal, a $1 increase in taxes would then reduce the deficit by less than $1.

The connection between taxes and government spending has been researched with historical data, as usual with less than definitive results.  My own strongly held view is that federal spending is much too high, that marginal tax rates are too high, and that any increase in taxes will in significant part finance spending that should be cut.