To stem rising state employee health care costs, Montana officials adopted a reference pricing model that they say saved the state $15.6 million in just one year, Julie Appleby reports for Kaiser Health News.
About the policy
In 2014, Montana's legislators told the state's Health Care and Benefits Division—which oversees health insurance for state workers—that it needed to control rising health care costs. According to Kaiser Health News, the state workers' health plan costs were stemming wage increases and were quickly depleting the plan's financial reserves.
Upon hearing the news, Marilyn Bartlett, the director administrator of Montana's Health Care and Benefits Division, said she thought "holy cow," and began devising a plan to alter the way the state paid for hospital care, which accounted for 43% of the plans' costs.
Bartlett and her team hired a third-party company to help re-evaluate the numbers. They looked at hospital-set prices, often referred to as "chargemaster rates," and compared them with Medicare payment rates. They discovered hospital charges for state employees varied widely, and in some cases the state was paying more than three times what Medicare paid for inpatient care—and more than six times the Medicare rate for certain outpatient services.
While some states aim to control costs by negotiating discounts off of hospitals' sticker prices, or limiting how much the state is willing to pay for certain services, Bartlett and her team took a broader approach. They decided to set baseline prices based on Medicare payment rates for all inpatient and outpatient services.
Setting those baselines, also known as reference pricing, was a balancing act, according to Kaiser Health News: "Set the bar too high and some hospitals would raise prices; too low, and some could cut back services or refuse to sign on." Ultimately, Bartlett and her team settled on paying an average of 234% of Medicare rates for inpatient and outpatient services.
With the help of a media campaign launched by state workers and their unions and some tough discussions, the state was able to get all of the hospitals to sign on to the plan.
Bartlett said the change saved the state health plan $15.6 million this year, and over the past two years it has helped bolster the plan's reserve fund. Bartlett said hospitals in the state also have fared well, adding, "No hospital has gone broke."
Montana is now considering expanding its program beyond the state's 35,000 workers to also include city, county, and university workers, Kaiser Health News reports.
Experts weigh in
Some experts say Montana could serve as an example for other states looking to rein in health care costs—but others say widespread adoption could lead to narrower provider networks.
For instance, William Kramer, executive director for National Health Policy with the Pacific Business Group on Health, a coalition of employers, said, "A lot of states could learn from Montana."
Zack Cooper, an assistant professor of health policy and economics at Yale University, said while hospitals often argue that Medicare underpays, most hospitals could survive under a centralized price-setting model if they allocated resources wisely. For many, he said, "it's a function of investment decisions, not that Medicare doesn't pay enough."
But Glenn Melnick, director of the Center for Health Policy and Management at the University of Southern California, said, "A centralized price-setting model has danger. It can overpay or underpay." If it underpays, that could prompt more hospitals to opt out of the state's plan.
Damon Haycock, head of Nevada's public employees' benefits plan, warned that such a plan could cause a ripple effect. "If a state takes a hard line and says, we're not paying more than X, then cities and counties and large employers would want the same deal," he said. "And that becomes a massive political hurdle."
According to Kaiser Health News, hospitals often argue that Medicare underpays and commonly offset low reimbursements by charging other insurers more.
Jay Doyle, president of St. James Healthcare in Montana, "When you look at total costs, Medicare probably pays 75 to 80%." According to Kaiser Health News, the hospital in 2016 reported losing $9 million on its Medicare patients.
If more employers adopted a centralized-price setting model similar to Montana's, Doyle said "it would have huge economic impact," including potential layoffs (Appleby, Kaiser Health News, 6/20; Baker, "Vitals," Axios, 6/21).
Learn more: How pharmacy can help reduce employee benefit costs
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