Massachusetts' system of rate regulation, which started in 1981 and ended in 1992, was intended to control the rise in hospital prices.
But it helped spawn a managed-care sector that operated outside the law's influence and benefited from the curbs on indemnity-based business.
And in some cases, it ended up buttressing hospital charges instead of putting pressure on them.
The regulations permitted hospitals to set charges based on their level of operating costs in 1981, updated annually for inflation and other factors.
The law expressly exempted HMOs, which were then a fledgling concept that promised cost control. At the same time, the law required the indemnity plans of Massachusetts Blue Cross and Blue Shield not only to adhere to preset rates but also to take all patients. The regulated system granted the Blues a 7% discount from charges in return for being the "safety net" for people whom other plans might not take. But the indemnity plan could not exclude hospitals that ran up billing volume.
The loophole exempting HMOs helped fuel their growth and made them more attractive to payers by allowing them to negotiate discounts with providers below what the Blues had to pay by law for indemnity claims, said Joseph Avellone, M.D., chief operating officer of the Massachusetts Blues.
But the law also provided "the last refuge" for costly teaching hospitals to deal with HMOs in a semiprotected way, he said. Secure in getting most of their charges from Blues' indemnity business, the hospitals could then offer significant discounts to HMOs for incremental volume, Dr. Avellone said.