Why AB 3087 Health Price Regulations in California are Misguided

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Source: Sacramento Bee

Anger over rising health care prices is boiling over in California. But good long term results rarely emerge from a red-hot pot.

A case in point is Assembly Bill 3087, which would regulate the prices that hospitals, physicians and prescription drug makers charge commercial insurers. In turn, insurers would be told how much they could charge policyholders. The bill calls for an independent commission to set prices, and also to set a budget for total health care spending in California.

The motivation behind this proposal is understandable. The U.S. spends nearly twice as much on health care per person as other high-income countries, yet we do not have better outcomes. This higher spending is not because we use more health care services, but because we pay higher prices, particularly those with private insurance. On average, private insurers pay hospitals about 75 percent more than Medicare and Medicaid for the same service. AB 3087 would directly target these higher prices, and force the plans to pass savings along to consumers.

But imposing uniform payment rates is dangerous and misguided. Prices have implications for quality, access and innovation. For example, Medi-Cal reimburses physicians far less than Medicare and private plans; nearly half the physicians in the state are not willing to accept new Medi-Cal patients. If this new commission were to set prices too low, hospitals could go out of business and physicians may leave the state.

Instead, we need to turn down the political heat and build on what is already working in California and elsewhere. Overall, health care spending per person in California is lower than the national average. In Southern California, where hospitals and doctors compete for business, some private health insurers pay less than Medicare.

In Northern California, where providers are much more consolidated, the prices for inpatient hospital care are 70 percent higher than in Southern California. But in these cases, targeted action is better. Attorney General Xavier Becerra recently sued Sutter Health in Northern California for using its market power to charge unlawfully high prices. Stronger antitrust enforcement could prevent health systems from obtaining such unreasonable leverage in the first place.

Similarly, large payers for health care are finding ways to rein in prices. In 2011, CalPERS set a maximum contribution it would pay for certain procedures such as hip replacements and colonoscopies. In response, patients shopped for cheaper options, providers dropped their prices and CalPERS saved millions of dollars. Given some time, this kind of market reform will spread.

There is a role for state government in battling high prices, but it doesn’t have to be intrusive. In 2012, Massachusetts created two state agencies, one to collect and report data on health care prices and the other to set statewide health care spending targets. Their oversight and threat of future action appears to have helped slow growth in health care spending.

Californians deserve a high-value health care system. With targeted assistance from the state, markets can deliver just that. As satisfying as universal price regulation might seem, it could easily burn down the entire house.

Last Updated 01/23/2019

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