Anderson and Herring on all-payer rate setting

The All-Payer Rate Setting Model for Pricing Medical Services and Drugs

By Gerard Anderson, PhD, and Bradley Herring, PhD
AMA Journal of Ethics, August 2015

In theory, the price set by a competitive market-oriented health care system should result in efficient (and presumably ethical) rates for hospitals, physicians, drugs, and other health care services. In practice, however, price efficiency does not generally occur for many health services. Because of health insurance, most patients are less sensitive to prices than they would be if they paid the full price. In addition, in some geographic areas, health systems with significant market power can negotiate very high prices, while in other areas, one or two dominant private health insurers have great power to set relatively low prices. As a result, prices paid by individuals for the same service can vary by a factor of 10 at some hospitals. Moreover, a side effect of all these negotiations is that the private insurers and health systems spend millions of dollars negotiating and carrying out unique deals with each other—dollars that could be better spent delivering care.

At the same time, the public Medicare and Medicaid programs in the US have set payment rates using a totally different approach from that of the private insurers. The Medicare program has used a diagnosis-based prospective payment system for hospitals since 1984 and the Resource-Based Relative Value Scale (RBRVS) payment system for physicians since 1992. Both attempt to estimate the underlying costs of providing a given service, resulting in a distinct amount for each of about 750 different hospital services and 16,000 different physician services. There is, however, wide variation in payment rates among state Medicaid programs; the average Medicaid payment rates are comparable to Medicare for hospitals but about one-third lower than Medicare for physicians.

Consequences of Price Inefficiency in Health Care

The result of the wide variations in payment rates and methods among private and public insurers can lead to access problems. When the payment rate of one insurer is much lower than that of other insurers, patients have access to a restricted number of participating hospitals and clinicians. And when the premium rates of some insurers are much higher than those of other insurers, people have difficulty paying for health insurance. Moreover, as noted above, the complexity of numerous insurer payment methods means that health systems have to negotiate payment rates with various insurers and hire many people to keep track of these different payment methods, leading to higher administrative costs embedded in these prices. The end result is that prices in the US are typically much higher than they are for similar services in other industrialized countries, or, as one of us wrote years ago, “It’s the prices, stupid.” In addition, when the payment methods differ from one insurer to another, hospitals and clinicians are given mixed messages about exactly what services to provide and whether to emphasize quality, price, or satisfaction.

Are there alternatives?

Alternate Model: The Common Payment Method

One option is for all insurers—public and private—to use the same method for paying hospitals, but not necessarily the same rates. This would reduce the administrative costs associated with each insurer’s developing and maintaining its own payment methodology and each health system’s learning each new methodology. A common payment system (but not necessarily the same payment rates) could be adopted voluntarily or imposed through legislation.

The US has developed a variant of this approach already: the RBRVS payment system for physicians used by Medicare since 1992. Subsequently, nearly all private insurers have chosen to adopt Medicare’s relative value units as the starting point for negotiating payment rates to physicians. Although most private insurers pay higher rates than Medicare does and some pay less, nearly all insurers use relative value units as the basis for starting the negotiation.

Alternate Model: All-Payer Rate Setting

A significant step beyond the common payment method approach is “all-payer rate setting.” In this approach, there is both a uniform payment method and a single rate that all private and public insurers pay for a service. In some variants, all hospitals and physicians are paid the same rate, while in other variants each hospital and clinician has a unique rate. An international example of all-payer rate setting is the German system. In Germany, all insurers sit on one side of the proverbial table and representatives for the hospitals and physicians sit on the other side. Their objective is to negotiate a single payment rate for each service that all health insurers and all health systems will accept. The rates are binding on all insurers and all hospitals and clinicians. There are no special deals for a dominant organization in a local market.

The US attempted a number of state-specific all-payer rate setting programs beginning in the 1970s. One program that has remained operational is Maryland’s, which was fully implemented in 1977. Until 2014, the state used prospective diagnosis-based payments for each admission, a method similar to the Medicare hospital payment system. The Maryland program was able to reduce significantly the rate of increase in spending per hospital admission below the national rate of increase in the US. However, because the admission rate increased, the program was less successful in controlling overall hospital spending. This necessitated a revision to the payment system. Since 2014, Maryland has used a prospective annual global budget that requires each hospital to monitor both the number of admissions and the cost per admission.

The Maryland program has a number of features that differentiate it from other all-payer rate setting programs. Whereas the payment rates in Germany result from a negotiation between payers and hospitals and physicians, the payment rates in Maryland are established singlehandedly by a quasigovernmental agency called the Health Services Cost Review Commission (HSCRC). Moreover, all payers in Maryland—large private insurers, small private insurers, the Medicare program, and the Medicaid program—essentially pay a given hospital the same rate for the same service. Unlike the Germany system, however, each hospital negotiates its own rates.

The Maryland program has a Medicare waiver that allows it to set Medicare payment rates. Much of the attention paid to the HSCRC’s all-payer hospital rate revolves around this waiver and what Maryland must do to maintain it.


These models have numerous advantages and have worked relatively well in Maryland and in other countries. However, all-payer rate setting could be difficult to sell elsewhere in the US, inasmuch as many insurers, hospitals, and clinicians believe they live in Lake Wobegon and receive above-average rates that give them a competitive advantage. This makes them less willing to accept a regulated system that would eliminate this competitive advantage, which means that the US will continue to pay higher prices than other countries and will restrict access to health care for some Americans.



By Don McCanne, MD

Because of the political resistance to single payer, some have suggested that we adopt an all-payer system instead, especially since we already have an example of such a system in Maryland, and it has even introduced a form of global budgeting for hospitals - a policy feature of the single payer model. Would this be an incremental step towards single payer?

All-payer leaves in place the multitude of payers, both public and private. It would perpetuate administrative complexity and would have very little impact on the inequities of our system. Although the prices public and private insurers pay would be more highly regulated, the complex system of collecting premiums for private plans, and taxes for public programs would remain in place.

The major advantage is that all-payer depends more heavily on government or quasi-government control, with experience confirming the principle that the government can do health care financing better. The major disadvantage is that all-payer likely would be considered an endpoint rather than an incremental step, with little appetite for moving forward with the disruptive changes that implementation of single payer would require. That would be unfortunate since those systems in other nations that more closely resemble all-payer tend to be more expensive than the OECD averages for per capita health spending.

In this article, Anderson and Herring make the point that all-payer could be a hard sell since many insurers, hospitals and clinicians believe they are receiving above average “Lake Wobegone” rates compared to what they would receive in an all-payer system. As the authors state, “This makes them less willing to accept a regulated system that would eliminate this competitive advantage, which means that the US will continue to pay higher prices than other countries and will restrict access to health care for some Americans.”

So we’re back to the political feasibility issue. As we’ve stated many times before, instead of modifying policy to match the politics, we should advocate for optimal policy and work on changing the politics. Instead of accepting all-payer as a compromise, let’s go for single payer.