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Can an All-Payer Model Save American Health Care?

Vermont just got the OK to establish an all-payer system. Should more states follow suit?

By Dwyer Gunn


(Photo: Christopher Furlong/Getty Images)

Earlier this week, Vermont received tentative approval from the Department of Health and Human Services to establish an all-payer health-care system in the state. Under the proposed system, participating health-care providers in Vermont would be paid a similar rate, regardless of the insurer making the payment. Vermont’s proposed plan also includes a transition to a value-based payment model. “Under the state’s all-payer proposal, which is modeled on Medicare ACOs, providers would be paid global rates determined by the patient populations and health outcomes,” reportsModern Healthcare’s Virgil Dickson. “Fee-for-service payments would be scrapped.”

In some respects, the move is a consolation prize for the Green Mountain State. Vermont Governor Peter Shumlin had previously lobbied for a single-payer system. In fact, the state legislature passed—and Shumlin had signed—a law establishing a quasi-single payer system in 2011. In 2014, however, Shumlin abandoned the plan when the cost estimates indicated it would require dramatic tax increases for businesses and individuals in the state.

“The bottom line is that, as we completed the financing modeling in the last several days, it became clear that the risk of economic shock is too high at this time to offer a plan I can responsibly support for passage in the legislature,” Shumlin said at the time. He also vowed to pursue the all-payer rate-setting model; two years later, he appears to have made good on that promise.


(Graph: New Jersey Commission on Rationalizing Health Care Resources)

In the United States, only Maryland utilizes an all-payer rate-setting model (and Maryland’s system applies just to hospital services). But the model is gaining traction as a potential solution to at least some of the health-care and health-insurance challenges the country faces. Currently, health-care providers (hospitals, doctors, clinics, etc.) receive vastly different payments from different types of insurers, with private insurers generally reimbursing at a higher rate than Medicare and Medicaid, and hospitals charging higher rates for similar procedures than physicians. The above-left chart, for example, from the New Jersey Commission on Rationalizing Health Care Resources (which is cited in this excellent post by health economist Uwe Reinhardt), illustrates how an insurer’s payments for colonoscopies differ across sites of care.


(Graph: New Jersey Commission on Rationalizing Health Care Resources)

Similarly, the graph to the left shows how an insurer’s payments for both appendectomies and coronary bypass grafts differ across different hospitals.

In an all-payer system, this doesn’t happen. Rates for the same procedures are set by a third party (generally an independent regulatory agency), or, as is the case in Germany and Switzerland, they are negotiated by organizations representing insurers and providers.

There are a couple of different reasons that economists think an all-payer rate setting can help constrain the growth of health-care costs:

  • Lower negotiated rates: A coalition of health-insurance providers would have much greater negotiating power than an individual insurer would have on its own, so the negotiated reimbursement rates are likely to be lower than the rates insurers have historically been able to negotiate with particularly in-demand, high-cost providers.
  • Lower administrative costs: The complex, opaque reimbursement system we now use carries very high administrative costs for insurers and providers. An all-payer system would reduce those costs.
  • Increased competition in health-insurance markets: One of the biggest challenges facing new, small insurers with limited market share is establishing a network of providers and negotiating rates with them that allow the insurer to be profitable. In an all-payer rate-setting model, small insurers wouldn’t face that particular barrier. And in the health-insurance markets, more providers generally means lower prices for consumers.

But perhaps the biggest potential cost-saving effect of the all-payer model is that fees can be constrained by a pre-determined formula, schedule, or alternative payment model. Fee increases, for example, could occur on a reasonable, negotiated schedule, or could be pegged to the rate of gross domestic product (GDP) growth in a country (so as not to grow faster than GDP). Maryland’s current all-payer Medicaid waiver requires that the state “limit its annual all-payer per capita total hospital cost growth to 3.58%, the 10-year compound annual growth rate in per capita gross state product.” Or, as in the case of Vermont, alternative, value-based payment models can be implemented on a much larger scale than is currently occurring.

Back in 2014, Shumlin described his abandonment of a single-payer plan in Vermont as “the great disappointment of my political life.” But Vermont’s new experiment in all-payer rate setting, should it indeed go forward, is still a major innovation, and one that likely has a much better shot at being replicated in other states across the country.