How a simple state regulation added $85 million each year to Alaska health care costs

A state regulation is a big reason for Alaska's high health care costs, according to a new study. But the Walker administration still hasn't decided to change a rule that has distorted the market in favor of higher charges.

I've been writing about the 80th percentile rule for two years. It seemed obvious it would push health care costs higher, especially for doctors in specialties without much competition. Now we have proof.

Over the 10 years after the rule was adopted in 2004, it added from 9 percent to 25 percent to the increase of health care costs in Alaska, according to the report by Mouhcine Guettabi of the Institute of Social and Economic Research at the University of Alaska Anchorage.

Under the rule, insurance companies have to pay 80 percent of the average going rate for a medical service even if the provider is out-of-network for the insurance plan.

[Alaska needs its very own health care solution]

In Alaska's small market, some medical practices can effectively set the going rate for their specialties. Insurance companies then have to pay 80 percent of that. These providers have little incentive to join networks, which would require negotiated discounts.

Alaska's health care costs have risen faster than nationally and are the highest of all the states. Experts say that high charges for hospitals and physicians — especially specialists — are the largest factor in the disparity, not usage levels, drug prices, insurance companies, or other factors.


Guettabi's results reflect that fact, showing that the rule is an especially large factor for physicians and clinicians, contributing 15 to 39 percent of their increases.

The director of the Alaska Division of Insurance, Lori Wing-Heier, has the power to change the regulation with a signature. She held hearings on it in early 2017. But she held back because of a lack of hard evidence and because the rule protects consumers.

The rule was designed to prevent patients from getting stuck with large bills from out-of-network doctors. Wing-Heier also told me some alternatives to the rule could cut doctor compensation too much.

But there is a huge cost. The rest of us pay more for health care, through insurance premiums and taxes, to protect patients who go out-of-network and the doctors who serve them. Guettabi estimated the rule increased Alaska's health care cost an additional $85 million every year of the 10-year period.

That's a lot of money. But the public doesn't know why we're paying it. We blame insurance companies for higher premiums, not state officials.

Doctors, on the other hand, know who to talk to.

[This disillusioned doctor quit his practice. Now he works to reform Alaska's overpriced health system.]

Wing-Heier posted Guettabi's report on her website. She is asking again for comments. But she told me she is undecided on changing the rule, pointing to caveats in Guettabi's report and suggesting his conclusions are uncertain.

ISER received only $31,250 to do the study, which was funded by the state's Office of Management and Budget.

The report compares Alaska with other states where costs rose at the same rate before the 80th percentile rule went into effect. After the rule, costs rose faster in Alaska. That divergence provides the basis of the findings.

OMB Director Pat Pitney said Guettabi's methods are robust and the results are strong.

"I don't think more information is going to help make a decision," she said.

Guettabi came up with a wide range of impact, from 9 to 25 percent. There was a fascinating reason.

The lower number came from a comparison only with other oil states. Health care costs rose faster in oil states (although not as fast as in Alaska), compared to states with economies not based on oil.

Apparently, states that suffered the full brunt of the Great Recession in 2008 controlled their health care costs more effectively. In states like Alaska, where oil paid more of the bills, people didn't bother to reduce costs as much.

"It's a little bit like a diet," Pitney said. "If you're not dieting, you're gaining."

Alaska's health care bulge came with more doctors and higher compensation.


From 1998 to 2015, Alaska went from having 368 physician offices to 569, with specialists gaining the most, according to Guettabi. In another report Wing-Heier's released on her site, insurance payments in 2016 to Alaska cardiologists, neurosurgeons and radiologists were all more than three times higher than in Seattle.

That pattern makes sense if the 80th percentile rule is driving the market higher. Primary care physicians, who face more competition, cannot use the rule to increase their rates. Their insurance payments are much closer to what is charged in other states and the numbers of their offices didn't increase as much as specialists'.

Alaska avoided a health care diet in other ways, as well, going all the way back to the mid-1990s. That's when our rate of medical inflation began rising faster than that of the nation as a whole.

[The moment has probably passed for Alaska health care reform. The future is here.]

For example, Alaska law makes managed care plans unfeasible here. An HMO that started would be required to allow members to go to any other doctor if they wished, destroying the savings of a coordinated system.

Like the 80th percentile rule, outlawing managed care protects individuals. Together, the two rules allow us to continue going to small clinics and having insurance pay the fees for each service we request. The concept of payment based on results hasn't taken hold here because the system is so fragmented.

The alternative isn't all rosy. Outside Alaska, the experience of going to the doctor has changed. Many small practices are gone. Visits are shorter. More contact is done online.

Outside, people go to the doctor assigned by their managed care plan or stay within their insurance networks. You can't go out-of-network because you would pay too much.

But that may work better. Big, coordinated practices Outside can use innovative payment systems that emphasize outcomes. Meanwhile, from 1995 to 2010, Alaskans' assessment of their own health has gone down.

In Alaska, we still have a 1990s system. That's partly a political decision. But it isn't working and we can't afford it anymore.

The views expressed here are the writer's and are not necessarily endorsed by the Anchorage Daily News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)adn.com. Send submissions shorter than 200 words to letters@adn.com or click here to submit via any web browser.

Charles Wohlforth

Charles Wohlforth was an Anchorage Daily News reporter from 1988 to 1992 and wrote a regular opinion column from 2015 until 2019. He served two terms on the Anchorage Assembly. He is the author of a dozen books about Alaska, science, history and the environment. More at wohlforth.com.