Indiana law with big implications for hospital pricing may be a bellwether

A landmark hospital pricing bill that recently became law in Indiana could foreshadow similar developments in other states.

Indiana hospitals will face both a tax penalty and the loss of their tax-exempt status if their prices exceed designated limits. The limits, to be determined via a formula set by the state’s Office of Management and Budget, will reflect the average of all Indiana hospital prices for inpatient and outpatient procedures.

Once the limits are in place by 2026, large not-for-profit health systems that operate in the state will have three years to bring their prices in line with the caps. The provision applies to the state’s five NFP systems with at least $2 billion in annual net patient service revenue.

The caps are expected to come out to between 250% and 300% of the Medicare rate. For hospitals, that’s an improvement over a prior draft of the legislation that set the caps at 200%. Nonetheless, the benchmarks are projected to require widespread price reduction at the affected health systems.

It won’t be surprising if the Indiana bill is the first of many nationwide, said Hal Andrews, president and CEO of Trilliant Health, a healthcare strategic solutions company.

“From a political standpoint, it’s significant that it happened in Indiana first — a state that is a red state for federal election purposes and state election purposes,” he said. “For a Republican governor and Republican legislature to decide that price caps are the answer, I think is a warning sign for every hospital in every state.”

A big revenue hit

Price caps have received consideration in healthcare policy circles as a way to control healthcare spending and improve affordability. The concept generally refers to setting a limit on commercial payment rates, often based on a percentage of the Medicare rate for a given service. Research in recent years by RAND has fed some of the policy discussion, with hospital advocates countering that those studies miss the mark.

The Congressional Budget Office (CBO) examined the issue in a 2022 report, finding that caps on hospital prices would have a notably higher impact on healthcare spending compared with policies to promote price transparency or provider competition. Caps would be expected to bring hospital prices down by at least 3% to 5% within 10 years, a significant figure when extrapolated across the industry.

If the model proliferates, the obvious concern for hospitals would be their general reliance on commercial payments to compensate not only for Medicare and Medicaid payments that fail to cover the cost of care, but also for unreimbursed care that hospitals provide under EMTALA mandates.

“We all know that commercial insurance subsidizes that,” Andrews said. “That’s been the case since EMTALA came about. At some point, the hospitals have to unite and say, ‘Look, this is fundamentally unworkable. We can’t have all of the risk from uninsured patients coming through the emergency department but then have our rates capped on the business that pays for the business that we have unlimited risk on.’”

One concern in Indiana is the authority granted to the legislature to modify the price cap essentially whenever it sees fit. Strategic decision-making thus becomes more challenging for hospitals, especially with respect to capital investments that have a life cycle of decades, Andrews said.

Other consequential components

There’s plenty of note in the Indiana bill even aside from the price cap. Per the legislation, hospitals are required to offer direct contracting to employers in the form of a narrow network with payment rates no higher than 260% of Medicare.

That provision may be less likely than price caps to spread to other states because Indiana has an unusually high prevalence of self-insured employers. Many such employers lack negotiating leverage with hospitals and end up relying more on high-deductible health plans, and the new law aims to mitigate that trend.

Indiana hospitals could receive a boost from a provision authorizing the state to negotiate with federal regulators on a new system of provider taxes to fund state-directed payments (SDPs) in Medicaid managed care. It remains to be seen whether Medicaid provisions in the budget reconciliation bill being negotiated in Congress affect the availability of new tax arrangements and SDPs.

The Indiana legislature also considered imposing greater restrictions on hospital revenue derived from payments for drugs acquired through the 340B Drug Pricing Program. In the end, legislators seemingly decided not to try tweaking a federal program.

Hospital advocates hope that discussion does not gain traction elsewhere.

“Hospitals shouldn’t be worried just about price caps on commercial insurance but [about] attempts to limit their ability to mark up other things over the acquisition cost,” Andrews said. “Everybody should be studying it and at least modeling what the impact would be if something similar happened to them in their state.”

The outlook nationally

Congress has not been inclined to pursue price caps, leaving such policymaking to the states.

“I would look at Indiana as a blueprint, and I would expect that that blueprint, with slight variations, will be something that other states will use,” Andrews said.

Efforts have taken place elsewhere, although on a smaller scale than Indiana is implementing.

Oregon since 2017 has capped hospital prices on behalf of state employees and their dependents, with the caps set at 200% of Medicare for in-network services and 185% for out-of-network services at 24 selected hospitals.

A 2024 study in Health Affairs (login required) found reductions in facility prices of 3.1% for inpatient care and 25.4% for outpatient care, while a study in JAMA Health Forum (login required) found a 9.5% drop in outpatient out-of-pocket spending. Researchers also reported that, anecdotally, hospital operations were not adversely impacted.

Colorado has a pending bill that would effect similar steps for state employees plus residents who are enrolled in small-group health plans. The benchmark would be one of the tightest proposed anywhere: 165% of the Medicare rate.

New York has a pending site-neutral payment bill for commercially insured outpatient services, establishing a benchmark of 150% of Medicare and prohibiting facility fees. Among the exempt facilities would be safety-net and critical access hospitals.

Anywhere that the cap ends up at or near 200% of Medicare and applies to all or most commercially insured hospital care, “Something has to give, and what’s likely to give is a service line,” Andrews said. “[Policymakers] haven’t really thought about the implications of, ‘They’re going to quit providing cancer services because they don’t have enough margin, because the state capped their rates.’”