Hospitals gouge employers and insurance companies. Combining into powerful alliances, they raise prices almost at will, forcing carriers to pass the costs on to patients and the companies they work for.
Other hospitals operate on the edge of solvency and sometimes go bankrupt. Treating mainly the elderly and the indigent, they can't pay bills or attract top doctors with the meager reimbursement they get from government programs. Health care disappears from low-income neighborhoods or gets shifted to second-rate public hospitals.
The well-off get American medicine at its best. The uninsured and the poor get something less. Meanwhile, the hospital inflation punishing employers, patients and government roars on unchecked.
That's pretty much how U.S. health care works. Except in Maryland. Here, thanks largely to a guy named Hal Cohen, a statewide hospital-spending budget is set and kept each year.
The same nurses attend the rich and the penniless alike. Urban hospitals deliver care that is just as good as — or better than — that found in the suburbs. Hospitals can't soak private employers to make up for the lower revenue they get from government Medicare and Medicaid programs. Best of all, hospital costs rise more slowly over the years than they do in the rest of the nation.
Cohen, who died last week at 73, created a model for the rest of the country to adopt, if only the country knew it.
"A lot of us are talking about this thing," Uwe Reinhardt, a Princeton University economist and one of the country's top health policy experts, says of Maryland's system. "If the private insurance industry cannot get its act together [to control costs], this thing will come. And we have a state where this worked for 20 years or more. You cannot say this cannot work in America, because it worked in Maryland."
Marylanders who criticize government and regulation might be shocked to learn that the state's gem of a hospital system is the most highly regulated in the country, run similarly to health care in Switzerland and Germany.
State technocrats set hospital prices, approved by a governor-appointed commission. For everybody. Johns Hopkins Hospital charges the same rates as Carroll Hospital Center, subject to adjustments for teaching costs, nurse salaries, disease mix and so forth. Medicare pays hospitals basically the same price as Aetna.
Insurers such as CareFirst BlueCross BlueShield can't force lower rates on small hospitals. By the same token, MedStar Health and other hospital chains can't use their market clout to drive up prices. Costs of caring for the poor are spread across the system, with patients in suburban hospitals such as Howard County General effectively subsidizing Bon Secours in West Baltimore.
Since 1977, when the rate-setting Health Services Cost Review Commission got down to business with a mandate from the legislature and Cohen as its director, Maryland has saved more than $40 billion. That's the difference between what Maryland employers, insurers, patients and agencies spent on hospital care and what they would have spent if costs had risen at the same rate as that of the country.
From 1977 to 2008, the increase in cost per hospital admission was lower in Maryland than in any other state, according to HSCRC figures that have been widely cited in academic journals. And there was no discernible effect on the quality of care.
In 1976, Maryland's costs per admission were 26 percent higher than the national average. Under Cohen they quickly fell below the national average and stayed there for years. Recently, however, they've been creeping up, equaling the national cost in 2008, the most recent year for which comparative figures are available. Since then, the commission has allowed only small increases, so it's likely that the cost of a Maryland hospital stay is again below average.
How could price controls — the epitome of heavy regulation — produce better results than the free market? The answer is that health care is not like other products, as Nobel Prize-winning economist Kenneth Arrow showed decades ago. The free market works well for things such as gasoline and iPhones, which consumers understand, buy with their own money and use less of if prices rise too high.
In health care, patients have no idea what they need. It's the doctor who makes the "point of sale" decision for expensive care. Nobody shops around. Insurance companies or government pay most of the bill.
Without price controls, that's a formula for soaring costs. Largely as a result, medical spending is 60 percent or more higher per capita in the United States than in other developed countries.
Maryland's cost commission and its tiny staff have not solved the health care crisis. While cutting growth in the cost of a hospital stay is a powerful achievement, another engine driving the health inflation train is rising admissions, which Maryland is only beginning to address.