Setting the bar for hospital prices

North Carolina Treasurer Dale Folwell, who oversees the health plan serving the state’s teachers, lawmakers and other workers, is facing a problem all too familiar among the nation’s employers. Employee healthcare costs are climbing at a rate the state can’t sustain, while workers’ premiums are eating up more and more of their paychecks.

Spending on medical and pharmacy services for the nearly 730,000 employees and their families is increasing by about 7% each year. Meanwhile, the Legislature will provide only a 4% budget hike, putting the North Carolina State Health Plan on a path to run out of money in the next five years, according to the treasurer’s office.

On top of that, the state health plan harbors an unfunded liability of $33 billion for retiree health benefits. 

So Folwell is banking on a radical fix: The state health plan in 2020 will begin paying hospitals and doctors at a set percentage above the Medicare rate for services they provide to state employees.

 Not only would that save North Carolina hundreds of millions of dollars, but it would allow workers to see exactly what services cost so they could make smart decisions when accessing healthcare, his thinking goes.

“You can’t cut the cost of anything if you don’t know the cost,” Folwell said.

But that will only happen if the powerful hospitals in the state don’t stop it. While the move to a reference-based pricing model was unanimously approved by the state health plan’s board of trustees, hospitals and physicians still have to sign new contracts.

Hospital systems suited up for battle, blasting the plan to tie provider rates to Medicare rates as harmful to North Carolina’s communities.

The North Carolina Hospital Association says the change would cost hospitals about $450 million per year. Hospital CEOs warn that slashing their rates may require them to cut services or even close certain facilities, particularly in rural areas.

“If he has the power to pay us a dollar for something that costs us $10 to do, that’s going to damage care for North Carolinians,” said Dr. Michael Waldrum, CEO of Greenville-based system Vidant Health, adding that the hospitals would rather work with the treasurer to develop a value-based care model that saves the state money by keeping employees healthy.

The standoff is a product of U.S. employers’ growing frustration with the rising cost of providing their workers with healthcare benefits. North Carolina is one of many employers taking new and sometimes drastic measures to curb spending because the old standbys, such as cost-shifting, 
aren’t enough anymore. Further, Folwell’s experiment and the hospitals’ vehement response raise questions about what it actually costs providers to perform healthcare services and stay in business.

Across the nation, companies that provide health insurance benefits to their workers are buckling under the weight of rising costs. The price tag of employer health coverage for a family plan was about $20,000 on average in 2018, up 5% over the year before, according to the Kaiser Family Foundation. 

And because many companies have resorted to shifting a larger share of the expense onto their workers in the form of higher deductibles and larger copayments, more than a quarter of adults with employer insurance were considered under-insured in 2018, meaning they were more likely to struggle paying medical bills or skip care altogether, according to a Commonwealth Fund report last month.

In searching for a way to tame spending, Folwell, who took office in 2017, first wanted to find out exactly what the state health plan was paying for services at each hospital and doctor’s office. Decades of research show that hospital prices vary drastically and have little to do with the quality of services.

But the plan’s administrator, Blue Cross and Blue Shield of North Carolina, refused to hand over the negotiated price list for proprietary reasons. And hospitals weren’t exactly forthcoming. In response to the treasurer’s public records request, UNC Health Care System, for example, provided a 150-page fee schedule so heavily redacted it was essentially useless.

Folwell switched gears, thinking: “If nobody will tell us what we’re supposed to pay, let’s look at other examples of when they are told what they are going to pay.”

He landed on what’s called reference-based pricing. The state health plan would set hospital reimbursement at an average 177% of what Medicare pays—155% for inpatient services and 200% for outpatient. Actuaries came up with that figure anticipating that it would save the taxpayer-funded state health plan about $300 million in the first year alone, while reducing plan members’ co-payments and deductibles another $60 million.

Medicare-linked rates will mean reductions in payment for some major hospitals, but independent primary-care doctors, mental health specialists and rural critical-access hospitals should see their payments increase, according to the treasurer. Critical-access hospitals would be paid 200% of Medicare rates for inpatient services and 235% for outpatient services. Professional services would be pegged at 160% of Medicare.

Hospitals describe the rate cuts as arbitrary and irresponsible. Vidant’s Waldrum said the reimbursement cuts will slash the largely rural system’s revenue by $40 million in aggregate. So while it’s true that two of its three critical-access hospitals will receive “a very, very minor benefit,” he said the system will lose as a whole.

“The treasurer likes to make statements that this will help rural healthcare, but he doesn’t come to our hospitals or understand our environment,” Waldrum said. Rural hospitals, he said, can’t sustain themselves on Medicare and Medicaid rates, particularly if they have a big portion of uninsured patients.

Hospital CEOs said they have urged the treasurer to collaborate with them on a value-based reimbursement model, but their suggestions have fallen on deaf ears.

 “Arbitrary cuts do nothing to address the root cause of healthcare costs,” said Terry Akin, CEO of Greensboro-based Cone Health. “We believe strongly that the root cause of healthcare costs has a lot do with management of chronic diseases, keeping people well and healthy and out of the hospital.”

Donald Gintzig, CEO of Raleigh-based WakeMed Health & Hospitals, similarly said the treasurer’s plan is out of sync with the broader movement of the U.S. healthcare system toward value-based reimbursement. The federal government, state-managed Medicaid programs and large employers have proven that with a “value-based approach focused on helping beneficiaries, state employees stay healthier through plan design, through early interventions—that’s how you really improve health and make healthcare more affordable,” Gintzig said.

Some health policy experts doubt the reference-pricing model will endanger North Carolina’s hospitals. Robert Berenson, a senior fellow at the Urban Institute and a former CMS official, said the treasurer’s plan is “very responsible and generous.” Medicare rates typically cover 92% to 93% of a provider’s cost to care for Medicare beneficiaries. Paying hospitals an average rate of 177% of Medicare should more than cover their costs, he said.

That’s not to say hospitals won’t lose revenue, requiring them to make changes to their businesses. Thanks to provider consolidation in the state creating massive healthcare companies, some hospitals have used their scale to secure much higher commercial rates. 

“The hospitals are used to a gravy train,” Berenson said.

In general, North Carolina medical and surgical hospitals are profitable, with operating margins averaging 9.5% in 2017—above the national average of 1.9%, according to Chapin White, an adjunct senior policy researcher at RAND Corp. They also roughly break even on Medicare business, he said. RAND’s data includes critical-access hospitals. Modern Healthcare’s own analysis using Modern Healthcare Metrics found that total profit margins for short-term North Carolina hospitals in 2017 was 11.7%, up from 10.5% the year before. The analysis excludes critical-access hospitals.

But Berenson cautioned that there’s wide variation between hospitals; those already struggling financially and dependent on commercial coverage to subsidize other payers’ rates may be squeezed by the new payment model. However, many hospitals would see “windfall increases in their commercial reimbursements.”

Paul Hughes-Cromwick, co-director of sustainable health spending strategies at Altarum, agreed that hospitals with tight margins would be in trouble if North Carolina’s reference-based pricing model went into immediate effect. But longer term, it is “absolutely” possible for the hospitals to make it on the proposed rates if they become more efficient, he said.

Commercial reimbursement exceeds Medicare and Medicaid reimbursement not because government health program rates are lower, but because hospitals have long been good negotiators, and insurers haven’t been as aggressive as they could be on behalf of the employers they serve, Hughes-Cromwick said.

 “I think this is going to change,” he said. “With more transparency and more of these all-payer claims databases and just more awareness (of the variation in payment rates), I think we could be on the cusp of employers—especially large employers—becoming far more aggressive, because it simply doesn’t make sense that they haven’t been.”

RELATED STORY: Montana’s experiment in reference-based pricing has saved $13.6M so far