The post below represents a major change in views for me, and it merits further explanation. For years, I regulated the state's utility companies, and I came to learn how regulation often impedes innovation and promotes inefficiency. I was in favor then, and am now, of permitting markets to work where they can deliver a better result for consumers and society.
I arrived in the hospital world eight years ago, and people would sometimes ask me if I thought the current unregulated facility planning and pricing regime in Massachusetts should be replaced by state regulation of hospital capital expansion and rate-setting. I would answer that the inefficiencies of regulation were likely to far outweigh the inequities and inefficiencies of the marketplace.
Having now watched the unregulated hospital system at work in this state, I reach the opposite conclusion. There is little in the Massachusetts health care environment that encourages efficiency, that encourages wise purchasing decisions with regard to expensive plant and equipment, and that enables effective competition. The current marketplace in the state is dominated by a major player on the provider side, which has leveraged its market power to achieve substantially higher reimbursement rates, enabling dramatic expansion of facilities to further expand its market reach, along with major investments in capital equipment. Other providers grub around for the crumbs that are left behind, yet also feel the need to invest heavily in expensive devices and the like to retain market share. Indeed, there is a slow decapitalization of that sector of the industry as it fights a medical arms race while trying to keep up with societal needs. Meanwhile, there is virtually no mechanism that properly encourages improvements in the quality and safety of patient care.
This is a system that is ripe for regulation. It is needed to protect the industry from itself. It is needed to protect the public.
The report of the Payment Reform Commission cited below provides the logical framework for moving in this direction. If we are moving to a system of capitated, or "global," payments and the associated close networks (accountable care organizations) that are needed to manage care, there will be an inevitable concentration of the health care industry in the state. Over time, there are likely to be two, three, or maybe four integrated networks serving the state. Given barriers to entry by other participants, that will not be enough to provide the kind of contestable market that is needed for real competition, especially if one of the networks enters the fray with rates that are much higher than the others.
If I am correct in my assessment of this situation, it is time to consider hospitals and the accountable care organizations of which they will be a part to be more like utilities. Let's reinvigorate an effective system of rate and facility regulation to provide a level playing field among these organizations, to provide a brake on unnecessary capital investments, and to encourage competition based on the right factors. Those systems that do well in the regulated environment will do so because of the quality and value they offer to society, which will be a function of how well they treat their workforce, how efficiently they organize their work, and how safely and effectively they treat patients across the continuum of care.
