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Medicare Model Helps States Control Costs – Within Limits

2021-11-23T16:14:33-05:00

Following innovation of a Medicare-style pricing model for the Montana state employee health system, other states have achieved varying degrees of success.

Marilyn Bartlett became a hero to some when her money-saving reforms in Montana kept the state employee health insurance plan from bankruptcy. She saved the state millions of dollars a year by instituting a system similar to the approach used by the federal Medicare program—the state set the rates it would pay for medical care and procedures rather than letting the healthcare providers dictate payment terms. In doing so, she established a new model for states to control healthcare costs.

Following that success, she left her position with the state of Montana to share her expertise as a consultant to several organizations. In particular, through her work with the National Academy of State Health Policy (NASHP), she has spread her approach of digging through the data to find the actual costs to hospitals of providing a particular service or procedure. Her success attracted the attention of other state plans and employee plan managers, but thus far Bartlett admits to frustration at the slow pace of change.

Saving Money in New Jersey

Bartlett’s approach served as a money-saving model in New Jersey. Christin Deacon was the administrator of the state employee health insurance plan, which covered some 800,000 state employees. Deacon had come to the job without a background in healthcare. She was a bankruptcy lawyer before joining Gov. Chris Christie’s Republican administration as a deputy attorney general. When Democrat Phil Murphy came into office in 2018, she was asked to run the state health plan. She found that lack of a healthcare background helpful in questioning some of the practices that are often taken for granted.

For example, the standard approach for an employer that contracts for health insurance through one of the “big five” national health insurance companies like Blue Cross or Cigna is that the carrier negotiates confidential contracts with hospitals and other providers. Confidentiality generally means that the employer (or employee receiving a service) does not know how much a particular service will cost until they receive a bill. A hospital has a proprietary “chargemaster” price list for services, and the insurer negotiates a discount off this list. But critics see that chargemaster list as arbitrary with little relation to a hospital’s actual costs.

“I came at this from a non-health-care-professional perspective and said: a discount off what? I need a unit price. We need a guarantee of a fixed cost on a service and a guarantee that the cost isn’t going to go up over time more than X”, Deacon said.

In contrast, Medicare ignores the chargemaster list, specifies the prices it will pay for services and procedures, and publishes its prices for all to see. Bartlett’s innovation was to apply this approach—and its ready-made list of prices—to the state health plan. However, hospitals and other providers complain that Medicare payments do not cover their costs. Although Bartlett disputes this claim, she overcame it in Montana by offering roughly double what Medicare pays.

Deacon said that she knew a Medicare reference-based payment plan would attract enough opposition to be a non-starter, so she developed her own unit cost approach.

Bartlett had fired her big-five insurance carrier in Montana, but with more than 20 times the number of employees in the New Jersey program, Deacon needed to stick with her carrier. That meant she had to find a work-around for those confidential contracts and the unwillingness of carriers and providers to disclose prices. She did so not by requiring each hospital to reveal its prices but by grouping hospitals by zip code and asking the insurance carrier for bids geographically on that basis.

The result of these efforts: The state of New Jersey reported it  saved $200 million annually in 2019 and 2020.

Deacon said that new federal rules that took effect Jan. 1, 2021 requiring hospitals to disclose prices and a coming rule requiring the same of health insurance companies would make this kind of innovation much easier to carry out. She has since left her state employment to be a consultant to private employers and states on how to cut health insurance costs, and has caught the fever of figuring out ways to push for reform.

“I recognized that there was only so much I could do as a health plan administrator from an oversight and accountability perspective that would push the envelope, and I knew it was time to move on. I feel very mission-driven in this”, she said. “The fact of the matter is, whether it is a hospital association or carrier, they stand to lose [money] if the cost of healthcare goes down. Reference-based pricing causes healthcare costs to go down.”

The Brick Wall on NC Hospitals

Deacon’s success in New Jersey is in contrast to an ambitious effort in North Carolina that Bartlett consulted on.

Republican Dale R. Folwell is a certified public accountant (CPA) who was elected to his first term as state treasurer of North Carolina in 2017. The treasurer oversees the state health plan, which provides insurance to more than 750,000 current and retired public employees and is the largest purchaser of healthcare in North Carolina. At the time of Folwell’s election, the plan faced billions of dollars in unfunded liabilities and by 2023 would not have had enough money to pay its bills.

In October 2018, Folwell responded to the need to rein in costs by announcing a “Clear Pricing Project” to move away from the traditional payment system: “Starting on January 1, 2020, the [State Health] Plan will move away from a commercial-based payment model to a reference-based government pricing model based on a percentage of Medicare rates to reimburse healthcare providers for their services. The Plan is a government payer like Medicare.”

Folwell’s office sent letters to providers outlining new reimbursement rates that averaged about twice what Medicare was paying. The proposal would have saved the health plan $300 million a year and reduced premiums for state employees.

The blowback came swiftly. North Carolina hospitals coalesced in opposition and founded a separate organization, Partners for Innovation in Health Care, to oppose the proposal. Ultimately only five of 126 hospitals signed up for the Clear Pricing Project. The state House passed a bill that would have mandated continuing the status quo arrangement and created a committee to study the state health plan’s options, although the bill stalled in the state Senate. Carolina Journal noted that the bill’s primary sponsors “received notable political contributions from the N.C. Healthcare Association.”

Folwell complained about the multi-million dollar “dark money” campaign against the proposal by the North Carolina Healthcare Association (formerly the North Carolina Hospital Association). “By spending millions of dollars to oppose us and by using cartel-like tactics, these organizations were able to convince most hospitals to boycott the State Health Plan”, Folwell said. “If big hospitals could do this to their largest customer, just think what they can do to the average individual citizen or business. We’re in a medical arms race in North Carolina. Every dollar unnecessarily or inefficiently spent on healthcare is a dollar that can never be spent on education and other core functions of government.”

Folwell tried enticing more hospitals to join by raising the reimbursement rates, but by August 2019, Folwell’s office had paused its pursuit of additional hospitals. At that time, his office issued a statement that the state health plan would continue with its Blue Cross NC administrator and a new network of providers that included “28,000 medical providers, including five hospitals, who are committed to open contracts and lower prices.” Folwell has continued to work on building a network of providers that accept reference-based payments and to press hospitals on their responsibility under federal rules to reveal their prices.

A Work in Progress

Farther west, Bartlett has also been involved in an effort to replace the traditional insurance model with an employer buying co-operative that more aggressively negotiates on price (rather than accepting a discount off a chargemaster list) but also emphasizes working with healthcare providers on quality of care.

Bob Smith is the executive director of the Colorado Business Group on Health, which incorporated the Colorado Purchasing Alliance. Unlike Deacon and Folwell, who came to this issue with an outsider’s perspective, Smith’s background is in healthcare. When he came back from the Vietnam War, “I knew that I wanted to be a hospital administrator”, Smith said. “Over the years, more and more literature came out on how hospital care was uneven and getting too expensive. Increasingly through my career, it became clear that healthcare in general and particularly hospitals weren’t delivering on value.”

Smith said that the purchasing alliance was authorized under a Colorado law that recognizes that the high cost of healthcare is “a threat to the economy of the state”. The law encourages employers to bypass traditional health insurance carriers and come together in purchasing co-ops to negotiate directly with healthcare providers.

Smith said that shortly after being elected, Gov. Jared Polis (D) told him: “If you would create a health-care cooperative that can force change through the marketplace, then the state of Colorado will be the first employer in.” Smith received letters of intent to join the alliance from the city and county of Denver, Larimore County, and several school districts. But a big break came when the California-based Purchaser Business Group on Health joined, with eight employers from Fortune 500 companies including Walmart, Lowe’s, and Wells Fargo.

Smith began trying to develop a provider network built on a Medicare-style, reference-based price system. “None of the [large] systems would take me up on it because they would have been significantly below what they are currently being paid in the marketplace”, Smith said. “I have had anywhere from just breakfast conversations to in-depth negotiations with every system, and my conclusion is that [most] health systems are more concerned with serving themselves than they are with serving their communities”.

Bartlett received a grant to do an analysis of the area hospitals’ actual costs using the tool she developed for that purpose. Her intent was to prove to the hospitals that the offered reimbursement payments covered the hospitals’ costs. “We used the tool for doing some negotiations with hospitals in Colorado. They couldn’t find anything wrong with the tool, but they came back and said, ‘I don’t care what it says. You are going to pay what I tell you you are going to pay’”, Bartlett said.

Smith recalls an administrator saying: “Don’t bother calculating that, we will just tell you what we will accept. Negotiations would not be a good use of my time.” The Boulder Valley Community Hospital was an exception and signed on.

After nearly a year of unsuccessfully trying to get the larger health systems to participate, Smith  changed his focus to work first with independent primary care physicians and then with independent outpatient facilities. “We will have a robust network of independent out-patient centers—all selected based on outcomes and a commitment to quality improvement—up and down the Front Range with bundled payment agreements in time for Spring open enrollments. This will cover most surgery and some other procedures such as advanced imaging. We also expect to have agreements with independent physicians in each market”, Smith said.

For services that Smith has not been able to negotiate agreements on, employers like the state of Colorado will rely on the contracts in place with their traditional insurance companies. “We started with outpatient services, but we will be bidding out inpatient services. I have to build this from the center out. I’ve told the members we have to do this over a course of three years. It takes time to disrupt a marketplace”, Smith said. And to disrupt the marketplace, Smith said: “Employers need three things. They need size. They need sophistication to be able to measure hospital quality and understand Medicare pricing and so on. And then the third thing they need is courage.”

Reference-Based Pricing for All

Reference-based pricing is not just for state employee health plans. Businesses are also using this model in efforts to contain healthcare costs. Check out these articles:

Society for Human Resource Management: Employers Cut Health Plan Costs with Reference-Based Pricing

Empoyee Benefit News: A how-to guide for reference-based pricing

Problem Addressed: Access to Healthcare

Written by Eric Seaborg

Published on November 22, 2021

Feature image: iStock photo by Andrii Zorii

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Sources

Eric Seaborg, “Marilyn Bartlett: Took on the Medical-Industrial Complex”, The American Leader, Oct 11, 2021, https://theamericanleader.org/leader/marilyn-bartlett-medical-industrial-complex/

Marilyn Bartlett, interview with Eric Seaborg, Jun 24, 2021, Oct 15 2021

Christin Deacon, interview with Eric Seaborg, Oct 21, 2021

Robert Smith, interview with Eric Seaborg, Oct 21, 2021
Follow-up email with Smith

North Carolina Department of State Treasurer, “Meet Treasurer Folwell”, https://www.nctreasurer.com/office-state-treasurer/meet-treasurer-folwell, accessed Nov 7, 2021

North Carolina State Health Plan, “State Health Plan Launches New Provider Reimbursement Effort”, Oct 5, 2018, https://www.shpnc.org/blog/2018-10-05/state-health-plan-launches-new-provider-reimbursement-effort, accessed Nov 7, 2021

Partners for Innovation in Health Care, last updated 2019, http://pihc.info/blank-page/, accessed Nov 7, 2021

North Carolina Department of State Treasurer, “NC State Health Plan Announces Network for 2020”, Aug 8, 2019, https://www.nctreasurer.com/news/press-releases/2019/08/08/nc-state-health-plan-announces-network-2020, accessed Nov 7, 2021

North Carolina General Assembly, “House Bill 184”, Apr 4, 2019, https://www.ncleg.gov/BillLookup/2019/H184, accessed Nov 7, 2021

Dan Way, “Treasurer, hospitals at loggerheads over State Health Plan reforms”, Carolina Journal, Mar 25, 2019, https://www.carolinajournal.com/news-article/treasurer-hospitals-at-loggerheads-over-state-health-plan-reforms/, accessed Nov 7, 2021

North Carolina Department of State Treasurer, “Treasurer Folwell Condemns Hospitals’ ‘Pattern of Deceit’ on Price Transparency”, Mar 31, 2021, https://www.nctreasurer.com/news/press-releases/2021/03/31/treasurer-folwell-condemns-hospitals%E2%80%99-%E2%80%9Cpattern-deceit%E2%80%9D-price, accessed Nov 7, 2021

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