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The Best Health Care Fix You've Never Heard Of

We should listen to Martin O'Malley on all-payer reform.

Joe Raedle/Getty Images

There was a moment in the second Democratic presidential debate that perfectly illustrated the difficulty of dislodging the media’s comfortable narratives. The topic was health care, and Hillary Clinton and Bernie Sanders lined up in their familiar positions: Clinton defending Obamacare and citing ways to improve it, Sanders supporting a national single-payer plan to guarantee health care as a right and not a privilege. These are the two dominant poles on the Democratic side: building upon Obamacare, or simply overhauling it.

And then Martin O’Malley tried to chime in

“I really wish you’d come back to me on this on, John,” said the former Maryland governor to moderator John Dickerson. “Because we have found a way to reduce hospital costs, so whenever we come …”

But CBS wanted to go to commercial, so Dickerson replied, “Governor, you’re breaking the rules.”

Dickerson was talking about pre-arranged debate rules against interruption, but he might as well have been talking about the media’s unwritten rule that there can only be two sides to any issue, any question, at any particular time. That’s a shame, because O’Malley actually did employ an obscure yet worthwhile “way to reduce hospital costs” during his governorship, and it’s no small matter. It threads the needle between defending Obamacare and abandoning it, between today’s technocratic system and tomorrow’s vision for national health care. It’s called all-payer rate setting.

The best way to understand all-payer’s potential is by recognizing the deficiencies with the current system.  Premium prices are rising in the Obamacare exchanges. Insurance company UnitedHealth has openly discussed bolting from the exchanges, which would remove choices in some states and potentially increase premiums more. Finally, high deductibles make bronze-level insurance plans mostly unaffordable to actually use. Silver-level plans with higher premiums and cost -haring reductions make the coverage more viable, but takeup is uneven from state to state. 

The cost of accessing coverage, or using it once you have it, has become a signature fear for consumers. There are two ways to deal with this: Increase subsidies so people can afford better insurance, or lower the overall cost of health care, which will subsequently lower the cost of premiums. How can we be sure that is true? Because there’s an Obamacare rule called the medical loss ratio that mandates insurance companies spend a set level of premium dollars on medical treatment, or else give their customers back a rebate. If you lower provider costs, insurers will have to pass that savings back to the public, by law.

That’s where all-payer rate setting comes in. This reform establishes either a government agency or a panel of private insurers that sets one distinct price for every medical procedure. Instead of different insurers bargaining with providers for a price for each service, it allows them to effectively band together and use their market power to get the best possible rate.

The current fragmented system—with different rates for Medicare, Medicaid, the Veterans Administration, and private insurance—allows providers to take advantage. This has driven much of the recent hospital consolidation, with health care providers merging to increase their bargaining power and raise prices. A backlash of insurance company consolidation has formed on the other side, but without an all-payer system that includes Medicare and Medicaid, banding together for bargaining leverage can only go so far.

Along with reducing the cost of health care, all-payer reduces insurers’ administrative costs, because instead of each company needing negotiators and billing clerks for each hospital chain, the prices are all deliberately laid out. It would eliminate the incentive for consolidation, and it actually might get insurers to compete for customers on things other than cost, like quality of service or perks to promote wellness. And because of the medical loss ratio, consumers would see their premium dollars stretch further for better coverage.

This vision of government-enabled price-fixing, while active in places like Germany and Switzerland, may sound fanciful for the United States. But many states have used all-payer systems at one time or another. Though successful at controlling costs, the programs withered during the Reagan era, which venerated market competition and dismissed interventions like rate-setting as failures that stifled innovation. Regardless of the truth, that label stuck.

Today we’re down to a limited version in West Virginia, and a more comprehensive system in Maryland, which includes Medicare rates. An independent state agency has set health care prices in Maryland since 1976.

During O’Malley’s tenure, Maryland instituted a complementary reform to all-payer. State hospitals had reacted to price controls over time by increasing the admission rate, maximizing profits through volume. So in 2014, Maryland revamped the system by setting a global budget for hospitals, delivering a fixed amount of money every year, adjusted for local demographics. This five-year demonstration project is in its experimental stages, but every hospital in the state signed up for the voluntary program within six months, and it has already saved more than $100 million for Medicare in the first year, with hospital readmission rates below the national average, according to data recently published in the New England Journal of Medicine. 

The combination of all-payer and global budgeting reduces the incentive for constant hospital readmissions to maximize profits, and it allows hospitals to focus on prevention and prudent use of treatment to meet their defined budgets. This lets a successful hospital co-exist with a healthier community.

O’Malley’s health care plan, released yesterday, would encourage states to adopt global budgeting. But that tantalizing moment in the Democratic debate prevented O’Malley from bringing these ideas to the national stage. Instead of wrestling with the virtues of all-payer, we have only whistling-past-the-graveyard pronouncements that everything is fine with Obamacare, or demands to nationalize a major sector of the economy. Hillary Clinton’s plans to enhance Obamacare, mostly with tax credits for families with high health-care costs, have become bogged down in a philosophical argument with Bernie Sanders, with the Clinton camp vowing never to raise taxes on people making less than $250,000. Not only does such a pledge limit the promise of progressive politics, it unnecessarily shifts the health care debate into a tax debate.

All-payer offers a way out of this box. It also includes the one feature that appears necessary for passing legislation in the 21st century: industry support. Insurance companies like the certainty of all-payer and the increased bargaining power. And Maryland hospitals quickly signed up for the global budgeting project, perhaps for similar reasons as the insurers: the prospect of reducing administrative overhead, and focusing their work on innovation.

Single-payer remains part of the discussion on the left; in Colorado, it will be on the ballot next year. But all-payer achieves many of the goals of a single-payer system, and should get into this conversation as well. If it weren’t for John Dickerson and the tyranny of the CBS sponsors, it would have a couple of weeks ago.