Should insurers pay the same fees under an all-payer system? - Medicare Payment Systems: Moving Toward the Future

Health Care Financing Review, Winter, 1994 by Gerald F. Kominski, Thomas Rice

Once DRGs and the RBRVS are modified for use by all payers, other fundamental questions to be addressed are how price levels should be chosen and whether the substantial payment differentials that currently exist among insurers for the same service should be reduced or eliminated. The primary reason for retaining payment differentials under an all-payer system would be that patients covered by one payer are more costly to treat than those covered by another.

This article examines the latter issue, i.e., whether all public and private payers should pay the same fees under an all-payer system. Our focus is on hospital and physician payment under an all-payer system, although the conceptual issues could apply to other settings as well, such as nursing homes and psychiatric hospitals. In the next section, we present a conceptual framework that addresses the goals of an all-payer system, the appropriate units of payment, and the question of whether all insurers should be required to pay the same rate. Following a discussion of our data and methods, we present the results of our analysis of discharges from 457 California hospitals. The following section provides policy implications from this data analysis, and discusses the issues surrounding the implementation of an all-payer system for physician services. Our conclusions suggest that a single set of hospital payment rates would not be appropriate for all services because Medicare patients consume a disproportionate share of resources with DRGs. More research, however, is necessary to determine whether this is also the case for physician services, particularly surgery.

CONCEPTUAL FRAMEWORK

Goals of an All-Payer System

The goals of an all-Payer system should be to ensure:

* Equitable access to health care for patients of all insurers.

* Efficient production of services.

* High quality processes and outcomes.

* Containment of growth in total health care costs.

* Elimination of cost shifting among payers.

Although there may be trade-offs between cost, quality, access, and outcomes, it is not unreasonable to expect that an all-payer system could achieve improvements along all these dimensions. The success of the system is likely to depend, however, on both the units of payment selected and the level of initial payments.

One of the primary advantages of an all-payer system is that it facilitates meeting the first goal--adequate access to care. By equalizing payment rates, hospitals and physicians will not have a financial incentive to choose to treat one patient over another (particularly if balance billing is prohibited).

The only major threat to access under an all-payer system would be if payment rates were set at such a low level that hospitals begin to close, physicians quit the profession, or the number of people willing to enter the medical field declines substantially. The threat of increased hospital closure is a real concern. Medicare profit margins have declined substantially since the implementation of the prospective payment system (PPS), although this has been partly to correct for windfall profits in the early years of PPS. Private insurers are subsidizing hospital losses due to Medicare and Medicaid patients (Prospective Payment Assessment Commission, 1992b). Thus, payment rates set at Medicare levels, for example, would most likely pose a serious financial threat to most hospitals. In contrast, these outcomes are less likely to occur in the physician market.