There are ways to instill fear in New York hospitals, but threatening price controls isn't one of them.
Tell them state-funded pools for graduate medical education, charity care and bad debt are drying up, but mention a re-institution of the rate regulations that largely disappeared in 1996 with passage of the state's Health Care Reform Act, and some hospitals, especially financially distressed institutions, likely would cheer."Competition is really a problem in high-density hospital markets," said Kenneth Raske, president of the Greater New York Hospital Association. "Payers can play one hospital off of another, and thus financially suffocate many of them."
Raske said the hospital association was never a big fan of hospital price deregulation to begin with "because we knew it would subject fragile hospitals to considerable competitive pressures." But the writing was on the wall. The first leak in the dam of New York's all-encompassing rate-setting system sprang in the late 1980s when the state Legislature changed the law to allow HMOs to negotiate with hospitals rather than pay the state-prescribed rate, he said. Up until then, state controls had kept hospital margins thin, but those rates suddenly "became the ceiling" once HMOs stepped in to negotiate their own prices, Raske said. "The seeds for destruction were sown."
The state completely lost interest in price regulation with George Pataki's election as governor in 1994, Raske said. The new Republican administration had no stomach for being in the "rate-setting business" for hospitals. Opting for the lesser of two evils, the GNYHA successfully lobbied for a "hybrid system" of deregulation that allowed competition but still maintained some controls aimed at protecting the most financially vulnerable hospitals. Assessments on payers created public pools of money to fund medical education, charity care and bad debt.
New York-style deregulation came about 10 years too late, said Spencer Foreman, president of 1,119-bed Montefiore Medical Center, one of the few hospitals in the city that has operated in the black "every year forever." Pataki took office at the end of the nationwide wave of deregulation and by the time deregulation took effect in New York, "(hospitals) got none of the benefits ... but instead got all of the problems associated with regulation and competition," Foreman said.
Matched against the HMOs in a relatively freed-up marketplace, even financially strong New York hospitals found the HMOs ruled the price-setting agenda.
"New York is one of the peculiar places where the memory of regulation occurred in a period of time when, like the Russians used to claim, everyone had just enough to live on," Foreman said. "But that period vanished when we went into deregulated mode. Many hospitals became more at risk."
The payers, however, would only go back kicking and screaming. Their memories of life under regulation include artificially high rates, longer lengths of stay, an oversupply of beds and a dearth of incentives to promote quality of care, said Leslie Moran, senior vice president of the New York Health Plan Association in Albany.
"We fought a long time to get to the quasi-regulated system as it is," Moran said. "It's not a state where the market forces are allowed to work as freely as they could or should."
Raske predicted the financial situation would get progressively worse for hospitals and in as soon as three years, "we will see a significant push to go back to re-regulating hospitals and eliminating them from the vagaries of market forces."
The first step back might be the creation of more publicly funded pools, such as one to provide capital for hospitals. It's not a solution for every market nationwide, Raske added.
James Tallon, president of the United Hospital Fund and the former Democratic majority leader who presided over the state Assembly when HMOs first were given the right to negotiate prices, said he didn't think the situation would regress quite that much.
"Going forward, I think there is great concern that the underlying financial model for hospital services in New York is broken," Tallon said. "If I were to pick one issue that I think hospitals come back to more often than not, it is the question of access to capital."
Like Raske, Tallon speculated that there might be a movement to give the state more oversight over capital investment through the creation of another funding pool. Unlike Raske, however, he said he does not believe there would be widespread support to "repeal deregulation of the mid-1990s."
Looking back, financially strong hospitals actually "resented" the price regulation of the 1980s, Foreman said. They only pined for regulation after it was gone.
"There is a kind of pro-regulation sentiment in New York different from any part of the country," Foreman said. "The bottom line for me is I don't think it has any traction at all unless there is a sharp change in Albany." [[[[