Policy Approaches to Reduce What Commercial Insurers Pay for Hospitals’ and Physicians’ Services — “the case for price-cap policies” [Executive Summary]


This is a republication of the report “Policy Approaches to Reduce What Commercial Insurers Pay for Hospitals’ and Physicians’ Services”, with the title above, focusing on the Executive Summary.


Executive Summary by:


Joaquim Cardoso MSc.
The Health Strategist — Journal
September 29, 2022


Key messages:


The prices that providers negotiate with commercial insurers are high because of several factors, including


  • hospitals’ and physicians’ market power and
  • consumers’ and employers’ lack of sensitivity to those prices.

By reviewing state laws, draft federal legislation, policy proposals, and published articles, CBO identified three broad policy approaches available to the Congress:


  • Promoting competition among providers, which would aim to reduce prices by targeting providers’ market power;

  • Promoting price transparency, which would aim to reduce prices by targeting consumers’ and employers’ price sensitivity; and

  • Capping the level or growth rate of prices, which would aim to reduce prices by regulating them.

Effects on Prices.


  • In CBO’s assessment, price-cap policies could have the largest effects on prices. 

  • The third set of policies would reduce the prices that commercial insurers pay for hospitals’ and physicians’ services by regulating those prices in various ways:
    (1) Capping the level of prices by setting maximum amounts that hospitals and physicians could receive from commercial insurers,
    (2) Capping the annual growth rate of those prices, 
    (3) Taxing services whose prices exceed certain maximum amounts.

Depending on the design of the caps, adopting the most comprehensive set of price-cap policies included in this analysis would reduce prices 


  • either by a moderate amount (from more than 3 percent to 5 percent) 

  • or by a large amount (more than 5 percent) in the first 10 years after the policies were enacted, relative to the trajectory of prices under current law.

Infographic:





Congressional Budget Office (CBO)
Phillip L. Swagel,
Director
September 2022


AT A GLANCE:


The prices that commercial health insurers in the United States pay for hospitals’ and physicians’ services are much higher, on average, and have been rising more quickly than the prices paid by public health insurance programs. 


Those rising prices-rather than growth in the per-person use of health care services-are an important driver of recent increases in premiums for commercial health plans. 

Higher premiums in turn increase the amount that individuals and employers pay for health insurance coverage and increase total federal subsidies for commercial health insurance. 


In this report, the Congressional Budget Office describes policy approaches available to the Congress that would reduce the prices that commercial insurers pay providers and thereby reduce premiums for that coverage.


Factors That Lead to High Prices. 


The prices that providers negotiate with commercial insurers are high because of several factors, including 

  • hospitals’ and physicians’ market power and 
  • consumers’ and employers’ lack of sensitivity to those prices.

The prices that providers negotiate with commercial insurers are high because of several factors, including (1) hospitals’ and physicians’ market power and (2) consumers’ and employers’ lack of sensitivity to those prices.


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How Federal Legislation Can Address High Prices. 


Government policies can reduce commercial insurers’ prices for providers by targeting the factors that contribute to high prices, although many of the causes of those factors are not amenable to change by legislative action. 


The government can also reduce prices through regulation.


Government policies can reduce commercial insurers’ prices for providers by: (1) targeting the factors that contribute to high prices, although many of the causes of those factors are not amenable to change by legislative action; (2) … through regulation.


By reviewing state laws, draft federal legislation, policy proposals, and published articles, CBO identified three broad policy approaches available to the Congress:


  • Promoting competition among providers, which would aim to reduce prices by targeting providers’ market power;
  • Promoting price transparency, which would aim to reduce prices by targeting consumers’ and employers’ price sensitivity; and
  • Capping the level or growth rate of prices, which would aim to reduce prices by regulating them.

Effects on Prices. 


In CBO’s assessment, price-cap policies could have the largest effects on prices.


Depending on the design of the caps, adopting the most comprehensive set of price-cap policies included in this analysis would reduce prices either by a moderate amount (from more than 3 percent to 5 percent) or by a large amount (more than 5 percent) in the first 10 years after the policies were enacted, relative to the trajectory of prices under current law. 

Adopting all of the provider- competition policies in this analysis would reduce prices by a small amount (from more than 1 percent to 3 percent), and adopting all of the price-transparency policies would reduce prices by a very small amount (0.1 percent to 1 percent). 

Those amounts reflect anticipated effects in a given year once policies had been fully implemented and stakeholders had fully adjusted to them. 

Each approach might have larger effects beyond the first 10 years, but those longer-term effects are more uncertain.


In CBO’s assessment, price-cap policies could have the largest effects on prices.


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Implications for the Federal Budget. 


Each of the three policy approaches would reduce the federal deficit. 


In CBO’s assessment, commercial insurers would pass most of their savings from paying lower prices on to customers by reducing premiums (because of competition among insurers, insurance regulations, and other factors), thus decreasing federal subsidies for health insurance.


In CBO’s assessment, commercial insurers would pass most of their savings from paying lower prices on to customers by reducing premiums


Other Potential Effects. 


Lowering the prices paid by commercial insurers would have other effects as well, such as reducing income for some providers and improving financial outcomes for people with commercial health insurance. 


It could also result in decreases in some aspects of the quality of health care and patients’ access to care.


Lowering the prices paid by commercial insurers would have other effects as well, such as reducing income for some providers and improving financial outcomes for people with commercial health insurance. 

It could also result in decreases in some aspects of the quality of health care and patients’ access to care.


Summary


In this report, the Congressional Budget Office describes policy approaches that the Congress could consider to reduce the prices that commercial insurers pay for hospitals’ and physicians’ services. 


The report explains CBO’s assessments of the extent to which prices would be lower under each approach than they would be under current law. The price reductions are characterized as very small (0.1 percent to 1 percent), small (more than 1 percent to 3 percent), moderate (more than 3 percent to 5 percent), or large (more than 5 percent). 

CBO assessed what the size of those price effects would be in the first 10 years after a given set of policies had been enacted, once those policies had taken full effect and stakeholders such as insurers, providers, patients, and employers had fully adjusted to the changes.


CBO chose the policy approaches to analyze by reviewing recent state laws, draft federal legislation, policy proposals, and published articles about ways to reduce commercial insurers’ prices for providers and by consulting with relevant experts. 


CBO focused on policies that would fall within the historical purview of the Congress and that would have the primary purpose of lowering prices or addressing the underlying factors that lead to high prices.


Lawmakers have a limited ability to reduce commercial insurers’ prices for hospitals’ and physicians’ services by targeting factors that cause those prices to be high. 


The prices that commercial insurers pay are determined through negotiations with providers. 

Those negotiations often lead to high prices because of providers’ market power (the ability to command higher prices than would prevail in a perfectly competitive market) and because of a lack of price sensitivity among insurers, which reflects insensitivity to prices among the consumers and employers who select their plans. 

Some of the underlying causes of high prices could be mitigated using policy approaches that could be implemented by legislation. 

But many other causes are inherent to the structure of the U.S. health care system or are not amenable to change by policy.


As a result, the policies available to the Congress to target factors that lead to high prices could reduce prices by at most a small percentage. 

Because health care accounts for a significant portion of federal spending, however, even small reductions in those prices would result in sizable savings on federal subsidies for commercial health insurance.


Some of the underlying causes of high prices could be mitigated using policy approaches that could be implemented by legislation.

But many other causes are inherent to the structure of the U.S. health care system or are not amenable to change by policy.


CBO grouped the policies in this analysis into three broad approaches according to the mechanisms they would use to lower the prices paid by commercial insurers (see Table S-1). 



Two of the approaches would reduce prices by addressing some of the factors that contribute to high prices; the third approach would reduce prices by regulating them.


Two of the approaches would reduce prices by addressing some of the factors that contribute to high prices; the third approach would reduce prices by regulating them.


  • 1.Policies That Promote Competition Among Providers 
  • 2.Policies That Promote Price Transparency 
  • 3.Policies That Cap the Level or Growth of Prices


1.Policies That Promote Competition Among Providers


The first set of policies that CBO examined would reduce the prices that commercial insurers pay providers by targeting the market power of hospitals and physicians in four ways:

  • Increasing antitrust enforcement,
  • Reducing providers’ incentives to consolidate,
  • Making it easier for providers to change jobs, and
  • Prohibiting anticompetitive contracts between insurers and providers.

In CBO’s assessment, adopting all of those policies would reduce the prices that commercial insurers pay providers by a small percentage (from more than 1 percent to 3 percent) in the first decade, relative to what CBO estimates those prices would be during that period under current law. 

That assessment is based on estimates of how prices respond to changes in the concentration of market share among a few providers and the extent to which those policies would affect competition among providers. 

However, there is limited evidence about the degree to which market concentration would be slowed or reduced under most of the policies. 

And even slight changes in the policies’ design or implementation could dramatically alter their effects on prices. Given that uncertainty, the actual effects could be larger or smaller than CBO anticipates.


2.Policies That Promote Price Transparency


The second set of policies would reduce commercial insurers’ prices for providers by targeting consumers’ and employers’ sensitivity to those prices. 

That approach includes two types of policies:

  • Expanding or refining existing federal regulations that require hospitals and insurers to make their prices available to the public, and
  • Establishing a federal all-payer claims database (APCD) and providing standardized information about prices for health care services using that database.

Adopting both types of policies would reduce prices by a very small percentage (0.1 percent to 1 percent) in the first 10 years relative to their trajectory under current law, in CBO’s assessment. 


CBO based that assessment on estimates from a study of New Hampshire’s experience with an APCD and a public reporting website and adjusted those estimates to account for services that would not be affected under these policies, the later time period, and other factors. 

However, some aspects of that study are difficult to generalize, and studies of patients’ responses to price information in other settings have generally found smaller effects. 

Given that uncertainty, the actual effects could be larger or smaller than CBO anticipates.


3.Policies That Cap the Level or Growth of Prices


The third set of policies would reduce the prices that commercial insurers pay for hospitals’ and physicians’ services by regulating those prices in various ways:

  • Capping the level of prices by setting maximum amounts that hospitals and physicians could receive from commercial insurers,
  • Capping the annual growth rate of those prices, or
  • Taxing services whose prices exceed certain maximum amounts.

[price capping policies consists of …] regulating those prices in various ways: (1) Capping the level of prices by setting maximum amounts that hospitals and physicians could receive from commercial insurers, (2) Capping the annual growth rate of those prices, or (3) Taxing services whose prices exceed certain maximum amounts.


In CBO’s assessment, adopting the most comprehensive set of those policies-capping both the level and annual growth of prices in all markets-would decrease prices by a moderate percentage (from more than 3 percent to 5 percent) or by a large percentage (more than 5 percent) in the first decade compared with the projected path of prices under current law. The exact size of that reduction would depend on the level of the caps and other features of the policies.


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Effects of the Policies on the Budget and Other Outcomes


Each of the three broad policy approaches described in this report would reduce the federal budget deficit. 


They would do so mainly by lowering federal subsidies for health insurance premiums in various ways: by increasing tax revenues (because the amount of premiums excluded from taxable income would be lower), by reducing premium tax credits for people who buy insurance through the marketplaces established under the Affordable Care Act, and by reducing subsidies for health insurance for some self-employed people. In CBO’s assessment, most of the price reductions resulting from those policy approaches would ultimately be passed along to individuals in the form of lower insurance premiums and higher taxable wages.


The effects on prices and the federal budget could differ depending on the legislative details of any specific policy or group of policies. 


CBO does not describe the separate effects of each individual policy discussed in this report, and some policies would have little effect on the deficit if adopted in isolation. 

Some of the policies would also have other effects on the budget, but the net result of each broad approach, if adopted in its most comprehensive form, would be to reduce the deficit.


The three policy approaches would have other effects as well, including reductions in income for providers and improved financial outcomes for people with commercial health insurance. 


The effects of the policy approaches on the quality of health care and patients’ access to care are uncertain. 

Some aspects of health care quality and access could worsen with lower prices, and other aspects might improve. 

In addition, price reductions under some of the policies might be too small to have any effect on health care quality or access.


Other types of policies might reduce premiums for commercial health insurance-and federal subsidies for those premiums-by targeting people’s use of health care services or health care spending (which reflects both the price and the use of services). 


Such policies include requiring hospitals to adopt fixed, all-inclusive budgets and accelerating the adoption of other alternative payment models, such as accountable care organizations or bundled payments. 

CBO did not include such policies in this report because they do not primarily target prices for providers. 

Limiting the use of costly existing technologies or the price of new technologies is another strategy for reducing health care spending and premiums for commercial insurance. 

CBO does not discuss those types of policies in this report, which focuses on ways to reduce prices that apply to both existing and new medical services.


Limiting the use of costly existing technologies or the price of new technologies is another strategy for reducing health care spending and premiums for commercial insurance.


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About This Document


This report was prepared at the request of the Chairman of the House Committee on the Budget. 

In keeping with the Congressional Budget Office’s mandate to provide objective, impartial analysis, the report makes no recommendations.

Michael Cohen, Daria Pelech, and Karen Stockley wrote the report with guidance from Berna Demiralp and Chapin White. Elizabeth Bass, Alice Burns (formerly of CBO), Chad Chirico, Carrie H. Colla, Michael Falkenheim, Sebastien Gay, Tamara Hayford, Jared Maeda (formerly of CBO), Paul Masi, Sarah Masi, Alexandra Minicozzi, and Emily Vreeland offered comments. Robert Lindsay and Joshua Varcie fact-checked the report.

Comments on earlier drafts were also provided by Ge Bai of Johns Hopkins Carey Business School (a visiting scholar at CBO), Michael Chernew of Harvard Medical School, Leemore Dafny of Harvard Business School, Christopher Garmon of the University of Missouri-Kansas City, Martin Gaynor of Carnegie Mellon University, Robert Murray of Global Health Payment LLC, Chris Pope of the Manhattan Institute, and Christopher Whaley of the RAND Corporation. 
The assistance of external reviewers implies no responsibility for the final product; that responsibility rests solely with CBO.


Jeffrey Kling and Robert Sunshine reviewed the report. 
Christine Browne and Christian Howlett edited it, and Casey Labrack created the graphics and prepared the report for publication. The report is available at www.cbo.gov/publication/58222 .


Phillip L. Swagel
Director

September 2022


Originally published at https://www.cbo.gov on September 29, 2022.


References and additional information:

See the original publication


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