By adopting reference pricing based on Medicare payment rates, two states may be leading the way to a profound change in how states pay for their employees' healthcare services.
Overwhelmed by increasing Medicaid and employee healthcare costs, Montana and North Carolina have become leaders among states in the pursuit of aggressive strategies to reduce the prices paid for hospital services for their employees. If they are successful, hospitals and health systems will need to make good on their “Medicare break-even” cost-reduction goal.
Read more about the impact of rising healthcare costs on states: States reeling under rising healthcare costs
Reference pricing: an emerging state strategy
Like other purchasers, all states have sought to reduce healthcare costs and cost growth by addressing both unnecessary utilization and unwarranted price variation. However, these efforts to-date have not yielded desired results. Against this back-drop, reference pricing is emerging as an alternative cost-containment strategy, where the payment variance in commercial rates for the same inpatient or outpatient service provided to state employees is reduced by setting a target for payments to a percentage of Medicare (e.g., payments for inpatient services will not exceed 200% of Medicare rates for the same service).
Montana was the first state to pursue this approach, and an NPR report notes the state has enjoyed success with its Medicare reference pricing. That success has led to discussions about expanding the approach beyond the state’s 35,000 workers to cover city, county and public university employees, according to an article in Kaiser Health News. And not surprisingly, the state’s Blue Cross Blue Shield plan has also indicated that it wants a similar price arrangement.
Read the following sidebar for a discussion of how the state defined Medicare rate for its employees: Montana’s dive into Medicare reference pricing reduces provider payments by almost $16 million annually
Meanwhile, North Carolina is in the early implementation phase of a similar model. An article in The Wall Street Journal notes that, under the North Carolina proposal, the average commercial rate for state employees would drop from 213% to 182% of Medicare payment for similar hospital services. (The revised amountwas originally 177% but was increased to provide more funding for rural hospitals.) The plan would cover about 727,000 state employees — including teachers, university workers, and state police — saving the state an estimated $300 million annually, with an additional $66 million in savings accruing to workers in the form of reduced cost sharing.
Some commentators, The Wall Street Journal article reports, have called into question North Carolina’s ability to force providers into Medicare reference pricing contracts, citing the state’s larger population and more complex provider markets. And not surprisingly, the plan is facing significant headwind in the state legislature, where the House has passed a bill blocking the plan, as reported by Modern Healthcare. It’s unclear whether a similar bill will gain traction in the senate, where the Senate leader is reportedly less inclined to intervene. North Carolina has more in common with Montana than might appear at first blush. Both states have larger-than-average state workforces and rural populations. Both have “must have” delivery systems. It is worth watching what happens in these states to see if this model could spread to other commercial purchasers and gain traction in other states.
State workforces as a percentage of total workers: Montana and North Carolina compared with U.S. average