Thursday, July 11, 2013

How not to do negotiated rulemaking

The first paper I ever published (co-authored, to be specific) was written to answer the question, "how to improve the administration of the health system in developing countries."  The goals was to come up with ways that the health ministry could regulate the health sector at low cost, since developing country governments generally lack the resources to undertake more vigorous regulations.  

I didn't know what I was doing, but I did some research and I came up with a number of answers, none very satisfying.  These included: 1) alternative dispute resolution; 2) the use of ombudsmen; 3) self-regulation; and 4) negotiated rulemaking.  In retrospect, I have my doubts about some of these tools.  These methods are inexpensive, sure, but they don't seem likely to produce much in the way of behavioral change, especially in countries where regulatory capacity is pretty minimal.  

To my chagrin, the Washington Monthly published an article this month about the deep flaws in the negotiated rulemaking process used by Medicare to set health care payment rates in the U.S.: 
"In a free market society, there’s a name for this kind of thing—for when a roomful of professionals from the same trade meet behind closed doors to agree on how much their services should be worth. It’s called price-fixing. And in any other industry, it’s illegal—grounds for a federal investigation into antitrust abuse, at the least. 
But this, dear readers, is not any other industry. This is the health care industry, and here, this kind of “price-fixing” is not only perfectly legal, it’s sanctioned by the U.S. government. At the end of each of these meetings, RUC members vote anonymously on a list of “recommended values,” which are then sent to the Centers for Medicare and Medicaid Services (CMS), the federal agency that runs those programs. For the last twenty-two years, the CMS has accepted about 90 percent of the RUC’s recommended values—essentially transferring the committee’s decisions directly into law.
The RUC, in other words, enjoys basically de facto control over how roughly $85 billion in U.S. taxpayer money is divvied up every year. And that’s just the start of it. Because of the way the system is set up, the values the RUC comes up with wind up shaping the very structure of the U.S. health care sector, creating the perverse financial incentives that dictate how our doctors behave, and affecting the annual expenditure of nearly one-fifth of our GDP." 
For what it's worth, this certainly seems like an area where more government spending -- on regulators who would actually examine these prices -- could likely lead to lower government spending -- on Medicare reimbursement.  
Medicare is not legally required to accept the RUC’s recommended values for doctors’ services and procedures, but the truth is, it doesn’t have much of a choice. There is no other advisory body currently capable of recommending alternative prices, and Congress has never given the CMS the resources necessary to do the job itself.
In fact, spending on regulators to examine and negotiate these prices might lead to lower health spending in the private market as well.  
The consequences of this set-up are pretty staggering. Allowing a small group of doctors to determine the fees that they and their colleagues will be paid not only drives up the cost of Medicare over time, it also drives up the cost of health care in this country writ large. That’s because private insurance companies also use Medicare’s fee schedule as a baseline for negotiating prices with hospitals and other providers. So if the RUC inflates the base price Medicare pays for a specific procedure, that inflationary effect ripples up through the health care industry as a whole.
The only good news is that the ACA does provide a few potential mechanisms for improving the situation:
The Affordable Care Act also takes some incremental steps toward reforming the payment system. It requires that the CMS create new “mechanisms” for establishing the physician fee schedule, which can include increasing its own in-house data collection and analysis to correct, corroborate, or refute the RUC’s recommendations, especially for inputs that are more easily measured empirically, like determining how long on average a given surgery takes. To comply, the CMS recently commissioned two reports from the RAND Corporation and the Urban Institute to advise the agency on how best to do that...
Some reformers point to a provision in Obamacare that might allow for an end run around Congress. The law creates a new entity, the Independent Payment Advisory Board, which, if Medicare costs outstrip the Consumer Price Index, will have the power to cut or change Medicare provider payments unilaterally. Its decisions can be overturned by Congress only if lawmakers pass alternative cost-cutting measures of equal size. Statutorily, IPAB could create a government-run equivalent of the RUC. Whether it will ever get a chance to exercise that power, however, is an open question: IPAB is a major political target for both Republicans who are demanding its immediate abolition and some Democrats who enjoy close ties to the medical drug and device industry.
The second option to solving the RUC problem would be to get Medicare out of the business of funding fee-for-service medicine. Reformers have been complaining for years that paying providers per procedure creates incentives for gaming and overuse that are difficult, if not impossible, to overcome. Under Obamacare, the CMS is already taking modest steps away from fee-for-service billing by expanding experiments in “bundled payments,” whereby providers are paid a lump sum to take care of patients with certain conditions, like diabetes or heart disease. The AMA, aware of the growing backlash in Washington against fee-for-service, has endorsed some of Medicare’s bundling initiatives.


  1. I wonder what the effect would be of adding representatives from the insurance indusry to the RUC. It seems to me that the insurance industry is full of experts on health care price negotiation, and that their incentives would be to drive down prices for care.

    1. That seems more likely to produce genuine debate. I would support that. Some sort of patient advocacy group might be helpful as well, I suppose. The problem is that this is for Medicare prices, so I'm not sure that the insurers have a legitimate place at the table, even if putting them there would be helpful.

  2. More on how prices are currently set:

    1. Man, some of this stuff is absolutely scandalous.