Massachusetts Flirts With Healthcare Price Controls -- a Bad Idea, If an Understandable One

(MoneyWatch)  Massachusetts Gov. Deval Patrick's attempt to impose price controls on health care is a mistake. But it's an understandable one, and he's right to hold healthcare providers and health-insurance companies responsible for runaway costs and shrinking access to care.

The other prong of his proposed legislation -- making insurance affordable for small businesses -- also recognizes the failure of Massachusetts' 2006 reform law to do that. And whatever happens to it, the whole package has some important implications for the healthcare reform bills now in Congress, which are based largely on Massachusetts' approach to expanding coverage.

Among other things, Patrick's bill would:

• Limit the price increases of hospitals and other providers to the statewide rate of medical inflation;
• Place a two-year moratorium on new health benefit mandates by the state;
• Cap insurance premium increases for firms of 50 or fewer workers to 1.5 times the rate of medical inflation;
• Require health insurers to submit small-business rate increases to state regulators 30 days before they go into effect;
• Require most carriers to offer at least one narrow-network plan that costs 10 percent less than plans with broader networks.

All that essentially adds up to price controls, even though there would be public hearings before the governor could veto "excessive" price increases by hospitals and physicians. Usually a last-ditch attempt by governments to control inflation, price controls don't work in the long run because inflation returns as soon as the caps are removed. That was exactly what happened, for example, when President Nixon's price and wage controls were eliminated in the 1970s. Only after Fed Chairman Paul Volcker raised interest rates to the roof did inflation come down.

This part of Patrick's initiative appears to reflect the findings of a report on state health spending supervised by Attorney General Martha Coakley (her, again?). The Coakley report attributed the rapid rise in health costs principally to the ability of large healthcare systems and physician groups to wrest payment hikes from insurers that are twice as high, on average, as those received by their smaller and less well-positioned competitors. Just as in every other market across the country, bigger providers like Partners HealthCare and Care Group are able to throw their weight around in price negotiations.

Partners, the largest healthcare organization in the state, didn't have any immediate comment on the governor's proposal. But Partners spokesman Rich Copp told the Boston Globe that insurers, not providers, set rates for small businesses. This is somewhat disingenuous, since provider reimbursements affect everyone's premiums.

Interestingly, some of Partners' smaller competitors doubt that the price cap would benefit them, since they're less well-capitalized than the major systems are. Safety-net hospitals might also suffer if their private-insurance reimbursements covered less of their Medicare and Medicaid shortfalls. This is another reason why the blunt instrument of price controls is not the right way to address healthcare inflation.

Insurance companies, naturally, support the idea of a provider reimbursement cap, but don't think the governor's proposal goes far enough. They prefer another pending bill that would limit provider payments to 110 percent of the Medicare fee schedule. Providers are expected to fight both measures tooth and nail.

The other thrust of Patrick's legislation is to provide some relief to small businesses that are struggling to pay insurance premiums that are rising in double-digits every year. This was a major hole in the 2006 reform law, which created an insurance exchange (the "Connector") for individuals but not for small firms. In fact, the merger of the small business and individual insurance markets under that legislation actually drove up premiums for small companies. And the statute also requires employers with 11 or more workers to offer coverage or pay a fine of $295 per employee per year. While that mandate probably plays a minor role in small employers' decisions on whether to drop coverage, the rate increases they experience each year might push some firms over the edge.

In announcing his proposal, Patrick talked about the burden of insurance cost on small businesses and how it has deterred many from hiring new workers. This is a potent argument on the national stage as well, and one that President Obama has made. But what should really catch the attention of Washington policymakers is Patrick's insistence on holding providers accountable for rapidly rising costs.