Dan Gorenstein: The Kelley Blue Book cost for a new 2023 Toyota Corolla runs around $22,000.

You know what else costs about $22,000 on average: one year’s health insurance premiums for a family of four in the US.

The spike in what patients, employers, the entire country spends on health care over the last 50 years is staggering.

In 1970, it was $350 per person. By 2020 that had exploded to $12,000.

As health care has gobbled up a larger share of our national budget that’s meant less for everything else; schools, roads, emergency response.

Today, state’s efforts to slow down health care spending without hurting the industry.

From the studio at the Leonard Davis Institute at the University of Pennsylvania, I’m Dan Gorenstein. This is Tradeoffs.

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DG: In late January 2022 The Massachusetts Health Policy Commission made history.

Massachusetts Health Policy Commission Archive: Good afternoon, we’re live.

DG: Stuart Altman, then the board chair, straightened up in his seat. Over Zoom he announced. 

Massachusetts Health Policy Commission Archive: The full commission met in executive session and unanimously…..

DG: The Commission was calling out a hospital, specifically, Massachusetts General Brigham, arguably the state’s premier, hospital system for blowing past its spending targets.

Massachusetts Health Policy Commission Archive: This is an extremely important aspect of the activities of the Health Policy Commission.

DG: The Commission exists to keep total health care spending in the state from growing too fast.

That means monitoring how much consumers, governments and even industry spend on health care throughout the state of Massachusetts.

The danger is that unchecked growth makes health care unaffordable for too many, harms business and limits other public investments.

That January day last year, the Commission determined Mass General was responsible for nearly $300 million in what it called ‘excessive spending.’

And decided to put Mass General on what it calls a ‘performance improvement plan.’

David Seltz: Ten years ago, that would have never happened.

DG: That’s David Seltz. He’s the executive director for the Commission.

Nine months later, Mass General agreed as part of its improvement plan to reduce its costs by some $200 million over an 18-month period. That meant moves like lowering some prices and reducing unnecessary care.

DS: This is the first performance improvement plan like this that I know of in the entire country. So, when you break new ground…it can be scary. But it is also thrilling to see how this process will continue to play out.

DG: The Massachusetts General sanction is what it looks like to slow down health spending in the United States. And it’s a blueprint for the eight other states that have their own versions of the Health Policy Commission up and running.

Massachusetts has been trying to slow spending growth dating back to 2012, when Deval Patrick served as governor.

News: Massachusetts has been a model to the nation for access to health care.

DG: While the rest of the country was just implementing Obamacare, Massachusetts had already insured nearly all its residents. And had moved on to the next problem.

News: Today we become the first to crack the code on costs.

DG: Under the new law that Patrick signed, the state tied annual health spending growth to the state’s annual economic growth.

The goal, says David Seltz, was to shrink down hospital and physician profits so they would eat up smaller shares of household, business and state budgets.

Hopefully making health care a little more affordable without eliminating those profits altogether.

DS: I think terror is probably a good word for those first few years…Was this going to be successful? It was a huge risk.

DG: Such a risk because when you reduce spending somebody is going to lose.

DS: One person’s health care cost containment is another person’s revenue reduction.

DG: David, the Commission members and everybody else knows Boston is a medical town. The metro area is home to 25 hospitals, has tons of biotech companies and consistently gets more federal research dollars than any other U.S. city.

David says he understood the agency was tasked with striking a delicate balance of making care affordable and protecting the industry so vital to the state’s economic health.

DS: You don’t want to go too far, right? You don’t want to overstep and hurt an industry that is, that is really important.

DG: To strike this balance, the Commission first needed to get inside the black box of health care spending to figure out what was making costs balloon. They required the people who provided the services and the people who paid for the services to start sharing prices. Until then those figures had been confidential.

The data helped everyone in Massachusetts see that a combination of utilization, administrative overhead and prices, especially prices, were behind the never-ending rise in health spending.

DS: Using this data to create transparency, especially around provider pricing, is incredibly valuable and lifted a huge veil in Massachusetts.

DG: Underneath the veil prices for the same services were all over the place. One hospital got about double what another hospital charged…same for doctors.

On top of monitoring prices, the Health Policy Commission also evaluates major business deals; mergers, acquisitions and expansions.

The agency is trying to create market conditions so spending and prices level out with minimal interference from the state.

DS: Every time that a hospital or provider system is thinking about should I acquire or should I grow, should I buy physician practices, they know that they’re going to have to come to us and they’re going to have to make a case about why is this in the public interest?

DG: This new standard altered how hospitals, doctors and insurers did business. For example Mass General abandoned plans to buy South Shore Hospital after the Commission scrutinized the deal. The Beth Israel Lahey Health merger only moved forward with strict pricing limitations.

Slowly the Commission with its focus on spending and prices, introduced a new idea into the state: there is a societal cost to unchecked health care spending. And it, like diabetes or some other chronic condition, needed to be managed.

This new approach seemed to set the right tone. Over the commission’s first five years, spending, on average, grew slower than the state’s economy.

Andrew Dreyfus the former CEO of Blue Cross Blue Shield of Massachusetts testified that over that time, the health care industry seemed committed to reining in spending.

Massachusetts Health Policy Commission Archive: I want to give you a little window into our negotiations with our hospital partners. When the Health Policy Commission was first created and the state benchmark was set at 3.6 percent hospitals would come into our negotiations and say we want a 3.6 percent increase that’s what the state says.

DG: And that helped Massachusetts spend less on healthcare. Which the Commission estimates saved $7.2 billion between 2013 and 2018. But problems started to mount. Prices crept up; more patients sought out expensive providers.

And as insurance CEO Andrew Dreyfus told the Commission, hospitals and docs began to treat the benchmark targets as suggestions.

Massachusetts Health Policy Commission Archive: Now that benchmark is essentially dismissed as not being relevant, not being applicable and not being realistic. And so what we have is we have physician practices and hospitals asking us in their negotiations with us for three, four, five times that amount.

DG: The Massachusetts Hospital Association says the target was never meant to be a rate cap. The organization testified last year the spike in labor costs, inflation and other COVID related care has made meeting the target right now unrealistic.

Whatever the reason, spending continued to rise for a few years without consequences.

The growth threatened to erode the first five years of progress. The question was what would the Commission do about it?

After the break what other states have learned from the Health Policy Commission model and Massachusetts takes a bigger swing.

We’ll be right back

MIDROLL

DG: Welcome back.

States around the country watched Massachusetts get hospitals and physicians to slow spending and they wanted in.

First came Rhode Island, Delaware and Oregon in 2018 and 2019. Since then, five other states in the Northeast and West Coast have followed suit. Combined these states represent where 20 percent of the country lives.

The philanthropic group the Peterson-Milbank Program for Sustainable Health Care Costs and private consultant Michael Bailit are working with most of these states. Michael says step one is setting that benchmark or growth target.

Michael Bailit: I view a cost growth target as a catalyst….it creates high level visibility, really transparency on health care spending…but it is not an end in and of itself.

DG: Michael says the Massachusetts experience has taught other states that their policies need more teeth. The Health Policy Commission, for example, keeps confidential the names of hospitals and physician practices that exceed annual growth caps. Not in Rhode Island.

MB: If they met the target, hallelujah, let’s celebrate them. And if they didn’t, let’s draw attention to that.

DG: Massachusetts can only fine hospitals up to half a million dollars pennies for some systems with billions in revenue.

Oregon and California have the power to penalize hospitals, physicians or insurers based on their size and how much they overspent. It’s too soon to report progress for most of these other states. Their programs are too new and officials are just beginning to analyze the data.

So, for now, Michael says, anecdotes have to suffice.

MB: I hear conversations within a state. Where health insurers or provider organizations tell me that when they sit down to negotiate…that negotiations start with state cost target[s].

DG: Michael says the next step is key; policies that tackle the drivers behind high spending. As the seminal 2003 economics paper succinctly put it, “It’s The Prices, Stupid.”

But it’s difficult to execute policies, Michael says, that are designed to keep a lid on prices and minimize harm to the health sector. Michael says that’s why policies to lower spending may end up falling short.

MB: There have been many, many bright, shiny new toys that health care policy fans have run after that haven’t yielded the desired results…We all have to have humility and recognize that this is really hard to do.

DG: This movement, the idea of states trying to slow health spending growth if not prices outright, is seen by some as one of a shrinking set of options.

The managed care revolution of the 80s and 90s, when insurers restricted where consumers could get care, failed to reduce spending. Same with alternative ways of paying doctors and hospitals in the 2000s. Hope that our federal regulators, the Federal Trade Commission and the Justice Department, could keep prices down by preserving competition has faded.

Harvard University economist Leemore Dafny says there was a time when she believed you could make health care affordable through less aggressive tactics.

Those days, though, are gone.

Leemore Dafny: We have a lot of reasons, these markets aren’t functioning well. So, we’re not really surprised that the prices are off. We’ve just, I think, dragged our heels quite a bit in terms of interfering. And it’s time. It’s past time.

DG: One idea, Leemore says, that’s gained traction among her health economist colleagues and some state officials is targeting high prices directly.

LD: We want to experiment and see if we can frankly, substitute regulation for competition because the competition that we currently have isn’t delivering prices that we consider to be affordable.

DG: In a 2020 Brookings Institution paper, Leemore and her co-authors suggested states set an upper limit of how much hospitals can charge for their services effectively a price cap.

Health systems, of course, abhor the idea.

But what good is world-class health care if fewer and fewer people can afford it?

DG: Back in Massachusetts, around 2021, 2022, state officials were grappling with hospitals and physicians blowing off the spending targets. At the same time a survey showed that care had become so expensive half of the state’s residents were delaying or going without care.

Amy Rosenthal: I mean, It’s really bad.

DG: Amy Rosenthal is Executive Director of the Massachusetts patient advocacy group Health Care For All. The group runs a consumer helpline.

AR: We had somebody who called the office because her out-of-pocket costs for her breast cancer treatment were so high that she decided she just wasn’t going to go get care anymore.

DG: She delayed her care for months. The advocacy group eventually helped her find a more affordable plan.

Insurance premiums and out-of-pocket costs rose almost 10 percent between 2017 and 2019, way faster than wages in Massachusetts. Health Policy Commission Executive Director David Seltz says it was clear the agency and the state needed more tools.

DS: Massachusetts is among the most high-income states in the country. And yet 50%, almost 50% are doing things like cutting pills, skipping doctor’s appointments because of the cost of care…To me, that is unacceptable…We need to evolve and make clearer the connection between our, our health care spending target and real relief for residents and families.

DG: The Commission has submitted its wish list to lawmakers. Have the legislature set hard price limits, or at least cap how fast they can grow. Allow the agency to issue bigger fines when businesses go over the benchmark. And give them oversight of prescription drug prices.

As of today, the Commission just has one stick. The performance improvement plan. And they’ve only used it once so far, when they penalized Mass General last year for excessive spending.

DS: So, at some point we need to make a judgment call about whether this this actually worked. And so that is where we’re at now is working with MGB to try to understand how are we going to evaluate whether this works for both parties.

DG: The other eight states will be watching this Mass General situation closely. While efforts to slow spending growth are incremental, David looks at how much has changed since Massachusetts created the Commission in 2012.

Prices, he says, went from tightly-held secrets to the subject of some of the biggest public meetings in the state. That, and putting a spotlight on spending is catching on around the country.

DS: I can’t imagine that 10 years ago a hospital CEO would testify under oath about what they’re doing to control health care costs, about their profits and to be held accountable to this state goal. That’s literally the conversation we’re having in Massachusetts every day. How do we make progress together?

DG: The idea that out of control spending threatens the health of individuals and the larger society represents progress, he says.

But while this change inches along, David says we must keep our eye on the patients who are foregoing cancer treatment or cutting their pills in half.

I’m Dan Gorenstein, This is Tradeoffs.

Tradeoffs’ coverage of health care costs is supported, in part, by Arnold Ventures and West Health.