Hospital Price Caps Among State Ideas to Lower Health-Care Costs

States looking to cut health-care costs are weighing ideas such as capping hospital rates based on Medicare payments, which are generally lower than rates employer-sponsored plans pay.

Legislation being considered in Indiana (House Bill 1004) includes a provision that would penalize nonprofit hospitals that charge more than 260% of Medicare rates. Most of the state’s hospitals are nonprofits.

The legislation “will actually help lower prices effectively immediately for Hoosiers—for workers and their employers,” Gloria Sachdev, president and CEO of the Employers’ Forum of Indiana, said in an interview. Rand Corp. studies have shown Indiana’s hospitals charge among the highest in the nation compared to Medicare prices, and the state’s employers have been fighting to get hospital prices down.

About one-third, the largest single share, of US health spending goes to hospitals. Hospital expenditures grew 4.4% to $1.3 trillion in 2021, the Centers for Medicare & Medicaid Services reported, and employer health plans are pushing to control the costs. In addition to rate caps, some states are also pursuing measures such as limiting potentially anticompetitive clauses in contracts between health insurers and hospitals.

HB 1004 is scheduled to be voted on Feb. 20 in the House Public Health Committee in the heavily Republican Indiana legislature. It is one of three bills the 78-member Employers’ Forum, which focuses on health care, hopes will pass during the legislative session, which ends April 29. The other two bills deal with noncompete clauses and site-neutral payments.

The comprehensive bill would require site-neutral payments—or payments at the same rate for a given service regardless of the care setting—by prohibiting hospital facility fees from being added for services that occur in an outpatient office setting. That would result in payments equivalent to what independent physicians get for the same service, Sachdev said.

The bill would also prohibit health insurers and hospitals from entering “all or nothing” clauses in their contracts that mandate including all hospitals within a hospital system in insurer networks, and it would prohibit “anti-tiering” clauses that block insurers and employer plans from implementing financial incentives in plan designs steering beneficiaries to better quality, better value hospitals.

Noncompete Clauses Targeted

The Indiana Senate passed Senate Bill 7 Feb. 7 by a 45-5 vote. That bill would bar newly hired physicians from entering into noncompete clauses with employers. That doesn’t affect hospital costs, but Sachdev said it would help the state keep more physicians. Senate Bill 6, approved by the Health and Provider Services Committee Jan. 9, requires site-neutral payments.

Site-neutral policies’ savings potential has been shown in a national survey. The Committee for a Responsible Federal Budget issued a report Feb. 14 finding that site-neutral policies in commercial insurance could reduce national health expenditures by up to $458 billion over the next decade while cutting the federal budget deficit by up to $117 billion.

“For the last several years our legislators have been trying to do things so that the market will self-correct,” by focusing on transparent prices, providing good faith estimates so consumers can shop better for health care, and compiling data on health-care prices in an All Payer Claims Database, Sachdev said. But “transparency in and of itself is not going to cause prices to come down,” she said.

Indiana legislative leaders sent a letter in December 2021 to the state’s hospitals and health insurers threatening legislative action unless hospital prices are lowered to national average levels by 2025. So far, only Indiana University Health has committed to doing so.

Hospital Group Opposes Bills

The Indiana Hospital Association opposes the bills, President Brian Tabor said in an interview. The state shouldn’t “be capping prices at this arbitrary level,” he said, referring to the 260% of Medicare limit in House Bill 1004.

Moreover, the Rand report’s reliance on comparing hospital commercial insurance rates to Medicare “does not allow for apples-to-apples comparisons across states or between hospitals,” Tabor said. “The proper way to evaluate state rankings or to compare hospitals is based on actual price data that is available through transparency efforts.”

Restricting hospitals from charging facility fees for physician services is “in direct conflict” with Medicare requirements, Tabor said. Facility fees cover hospital overhead expenses, he said. “Many hospital contracts follow Medicare billing principles,” he said. The site-neutral legislation “would override those contracts,” and would adversely affect small, regional health systems, he said.

The noncompete restrictions for physicians are overly broad and unfairly focus on hospitals, Tabor said. “The largest growth in physician practice acquisition is in the space of the private equity and insurance subsidiaries,” he said. UnitedHealth Group Inc.'s OptumHealth unit is one of the country’s largest employers of doctors with about 60,000 nationwide.

Connecticut and Other States Act

In Connecticut, Gov. Ned Lamont (D) is calling for passing legislation that would cap hospital out-of-network rates at Medicare rates, as well as prohibit anticompetitive contracting practices between health plans and hospitals.

Washington state, Colorado, and Nevada have the authority to use prices based on Medicare rates for public option plans in their Obamacare marketplaces, but only Washington is currently doing so. Montana was the first state to reference Medicare prices for state employee plans, and and it is changing to a new arrangement. Oregon currently uses that system for its state employee plan.

“There is increased interest in addressing high health-care costs across the country,” Maureen Hensley-Quinn, senior program director for coverage, cost, and value at the National Academy for State Health Policy, said in an interview.

The Connecticut bill that would tie out-of-network rates to 100% of Medicare rates is intended “to keep hospitals at the negotiating table with health plans who are trying to bring down reimbursement rates, but can have challenges in doing that with a big powerful hospital or health system,” she said.

Hospitals with strong market power “can simply say we will go out of network,” Hensley-Quinn said.

SF 883 in Minnesota includes a provision that allows health insurers to offer plans that use reference prices based on Medicare, and A1249 has been introduced in New Jersey, which would use Medicare reference pricing for the state’s employee health plan, Hensley-Quinn said.

Referencing pricing to Medicare shouldn’t prevent health plans from implementing value-based care, which many health plans are trying to put in place to get away from fee-for-service payments, Hensley-Quinn said. Fee-for-service payments are believed to inflate health-care costs by encouraging over-use of services rather than providing care that offers the best value.