California’s ambitious plan to regulate health prices, explained

California is exploring a bold and controversial new plan to rein in health care spending by letting the state government set medical prices.

The bill will no doubt face significant opposition from the health care industry.

California has struggled to pass more modest attempts at health care price controls before, like a 2016 ballot initiative that would have allowed the state to regulate drug prices in certain programs.

Still, California’s new proposal is worth examining as one that steps closer to single-payer — but doesn’t go quite all the way.

It’s one plausible step a state could take without any assistance from the Trump administration, as we see more blue states looking for ways to shape the future of their own health care systems.

”I think we have appreciated how much we’ve been able to do with transparency and data, and how much we’ve been able to collect, but we reached the point where we felt like we had to tackle the issue of prices head on,” says Sara Flocks, policy coordinator for the California Labor Federation, which is backing the proposal.

The California proposal would give a new state board authority to regulate the prices that health insurance plans charge for anything from a doctor visit to a knee replacement.

It would use Medicare prices as a baseline, setting prices as a percentage of what the federal program that covers elderly Americans currently charges.

This system would be similar to something we usually call all-payer rate setting, where the government doesn’t run all the health care insurance plans but does tightly regulate the prices they charge.

All-payer rate setting essentially shares the same goals of single-payer: It aims to increase efficiency and reduce insurer overhead in the health care system. Single-payer does this by eliminating private plans for one government plan. All-payer rate setting gets there by setting one price that every health insurer pays for any given medical procedure.

”[All-payer] has everything except the government-run plan,” Mark Pauly, a health economist at the University of Pennsylvania, has told me.

“In all-payer systems, the government uses Blue Cross and other insurers as their agent. For consumers, it’s the exact same except for who they write their check for premiums to.”

A number of European countries, like Switzerland and Germany, rely on all-payer rate setting to run health systems that spend significantly less than ours.

Now, this California proposal isn’t quite an all-payer rate setting system: It wouldn’t have the state set rates for Medicare and Medicaid, which cover about one-third of all Californians.

That type of plan would need a sign-off from the federal government, and it’s highly unlikely the Trump administration would give the go-ahead.

The people who put this proposal together did so with an eye toward creating something that wouldn’t need any approval from the federal government, something the state could do on its own.

”It’s clear that people want action; they want us to do something that is going to create relief,” says Ash Kalra, the California Assembly member sponsoring the bill. “We’re seeking opportunities that we can pursue as a state, without the hurdles and complications of working with the federal government.”

This means the California system wouldn’t be quite as efficient as a true all-payer system. Hospitals, for example, would need administrative staff to figure out how much a Medicare plan gets billed versus a commercial one.

Still, just setting commercial rates would be a really significant increase in efficiency. Prices in California — as in every other state — are all over the place.

One especially revealing study from UC San Francisco’s Renee Hsia showed that the price of a routine appendectomy in the state can range from $1,500 to $182,955.

That ends up exceptionally expensive for the patient who gets billed $182,955 — and for the overall health care system, which has a whole medical bureaucracy built around figuring out which health insurance plan gets billed which amount for the exact same procedure.

The California plan leaves one key question addressed: how high it would set medical prices. Instead, it establishes a commission that will “establish prices for doctors.” Where those prices end up will, obviously, be critical to whether a plan like this actually saves money.

This is an area where Kalra, the legislative sponsor, was pretty moderate. He argued that the commission wouldn’t be used to make drastic cuts because of the disruption those could cause.

”Just by controlling costs at even today’s level, that will save hundreds of billions of dollars for Californians in the future,” he says. “I’m not looking to go back and set rates where they were 20 years ago. This is a prospective bill the commission would be looking at today and going forward. The suggestion that this is to go after hospital or doctors by slashing their compensation is just not true.”

This is a fine line that any health care cost effort has to walk.

Cuts that are big enough to meaningfully reduce health care spending are often those that would be most disruptive — and beget more opposition from the health care industry.

The California plan is still a nascent one, but one that I’ll be keeping an eye on, especially as Democrats begin to think more seriously about single-payer systems.

This is the type of health care reform that doesn’t go all the way there but takes a big step in the single-payer direction.

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