Themomentum of state-level activity could be a game changer, fueling abroad movement toward lower hospital payments. (Photo:Shutterstock)

States. They're just as perplexed as the rest of us over theever-rising cost of health care premiums.

Now some states are moving to control costs of state employeehealth plans. And it's triggering alarm from the hospital industry.The strategy: Use Medicare reimbursement rates to recalibrate howthey pay hospitals.  If the gamble pays off, moreprivate-sector employers could start doing the same thing.

“Government workers will get it first, then everyone else willsee the savings and demand it,” said Glenn Melnick, a hospitalfinance expert and professor at the University of SouthernCalifornia. “This is the camel's nose. It will just grow andgrow.”

Related: Montana's experiment with reference-based pricing:Will other states follow?

In North Carolina, for instance, state Treasurer Dale Folwellnext year plans to start paying hospitals Medicare rates plus 82percent, a figure he said would provide for a modest profit marginwhile saving the state more than $258 million annually.

“State workers can't afford the family premium [and othercosts]. That's what I'm trying to fix,” he said. The estimated $60million in savings to health plan members, he said, would mainlycome from savings in out-of-pocket costs.

That approach differs from the traditional method ofbehind-the-scenes negotiating, in which employers or insurers askfor discounts off hospital-set charges that rise every year andgenerally are many times the actual cost of a service.Private-insurer payments, even with those discounts, can be doubleor triple what Medicare would pay.

This state-level activity could be a game changer, fueling abroad movement toward lower hospital payments. Montana's stateemployee program made the adjustment two years ago; Oregon willstart this fall. Delaware's state employee program is alsoconsidering such “Medicare-based contracting” as one of severaloptions to lower spending.

The bold move comes as other factors — notably marketplacecompetition among hospitals and high-deductible insurance plansaimed at getting consumers to “shop” for lower prices — havelargely failed to slow rising health care premiums.

For hospitals, though, it can be viewed as “an existentialthreat,” said USC's Melnick.

Indeed, the treasurer's plan in North Carolina has drawn heatedopposition, with a hospital industry-associated group runningtelevision ads warning of dire consequences, especially for ruralhospitals, some of which they say might be forced to close. Whenthe plan first came out, the state's hospital association complainedit would reduce statewide hospital revenue by an estimated $460million.

Hospitals in areas with large concentrations of state workers“would be getting reimbursed less than the cost of care,” said CodyHand, the association's senior vice president and deputy generalcounsel. “Our biggest concern is this is not something that we wereat the table for in discussion.”

Rural hospitals are particularly at risk, Handsaid, because many were already teetering on the brink financiallyand the payment change would be an additional problem.

After months of acrimony, the North Carolina treasurer inmid-March agreed to grant a 20 percent boost in payment to ruralhospitals that would give those hospitals an additional $52 milliona year. On average, rural hospitals would be paid 218 percent ofthe Medicare rate.

Nationwide, hospitals have long complained that Medicareunderpays them, and some hospital and business groups have warnedemployers that tying payments from state workers' plans moreclosely to Medicare could result in higher charges toprivate-sector businesses.

“The result will be a cost shift of tens of millions of dollarsto other Oregonians,” wrote the Oregon Association of Hospitals andHealth Systems as lawmakers there debated a plan (that eventuallybecame law) paying hospitals 200 percent of Medicare rates.

But policy experts are skeptical.

“Even if Medicare pays a bit below cost, 177 percent of Medicareshould be at least 50 percent above cost,” said Mark Hall, directorof the health law and policy program at Wake Forest University. “Isthat a reasonable margin? I guess that's up for debate, but to mostpeople 50 percent margin might sound reasonable.”

Another concern some people have raised is that hospitals mightrefuse to join networks that employ these states' Medicare-basedstrategy.

Indeed, Montana officials worked hard to get all hospitals inthe state to agree to accept for the state worker program anaverage of 234 percent of Medicare's reimbursement rates. A fewhospitals held out, right up to the deadline, backing down onlyafter pressure from employee unions.

The risk if hospitals opt to remain out-of-network is thatworkers could be “balance billed” for the difference between thoseMedicare-plus rates and their generally much higher charges,amounts that could be hundreds or even thousands of dollars.

To prevent that, Oregon lawmakers set the law's in-networkreimbursement for hospitals at 200 percent of Medicare. But thosethat opt out would receive only 185 percent.

The measure also bars hospitals from billing state workers forthe difference between those amounts and the higher rates theymight like to charge.

“Oregon thought it through,” said Gerard Anderson, a professorat Johns Hopkins who researches health care costs. “Hospitals needto go on a diet. The private sector has not put them on a diet, butmaybe the state employee plans will.”

And in the private sector…

For decades, health insurance costs for employers and workershave risen faster than inflation despite various efforts to reinthem in.

Currently, a typical family plan offered by employers tops$19,000 a year in premiums, while the price tag for a singleemployee is close to $7,000.

To be sure, hospital costs make up just one part of whatpremiums cover, along with doctor costs, drug payments and otherservices. Spending on hospital care accounts for about one-third ofthe nation's $3.5 trillion health care tab.

“Health care is just becoming unaffordable,” said Cheryl DeMars,president and CEO of The Alliance, a group of 240 private-sector,self-insured employers that directly contract with hospitals inWisconsin, northern Illinois and eastern Iowa.

In January, The Alliance began what it calls “Medicare-plus”contracting. As new hospitals join and existing contracts come upfor renewal, the group is negotiating rates, basing them on whatMedicare pays, DeMars said.

And it will likely save money: Under its old method of paying,the group was forking out between 200 to 350 percent of Medicarefor inpatient and outpatient hospital services in its network. Twonew contracts have been signed so far, averaging 200 percent ofMedicare across inpatient, outpatient and physician payments,according to The Alliance.

“We want to pay a fair price and we're in the process ofdetermining what that should be,” said Kyle Monroe, vice presidentof network development for The Alliance. “Is it 200 percent? Is itsomething less?”

Under traditional payment methods, the negotiated pricesinsurers for public- and private-sector employers pay for hospitalcare vary widely, by facility, treatment and insurer. But they'regenerally above Medicare rates by a substantial margin.

A group of self-insured employers recently commissioned RandCorp. to study what private insurers pay hospitals in 22 states,compared with Medicare rates.

Initial results found private employers were paying, on average,229 percent of Medicare rates to hospitals across the states in2017, according to Chapin White, an adjunct senior policyresearcher at Rand who conducted the study.

Economists like Melnick say they would prefer that marketcompetition — consumers voting with their feet, so to speak — woulddrive business to the highest-quality, lowest-cost providers.

But, so far, hospitals have held the line against this scenarioand that's not likely to change. “They're going to fight likecrazy,” Melnick said.

Kaiser Health News isa nonprofit news service covering health issues. It is aneditorially independent program of the Kaiser Family Foundation,which is not affiliated with Kaiser Permanente.

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