By Julie
Appleby JUNE 20, 2018
Marilyn
Bartlett, the director administrator of Montana’s Health Care and Benefits
Division, recalls thinking “holy cow” when she got an urgent directive from
state legislators in late 2014: “You have to get these costs under control, or
else.”
Increasing
health care costs in the state workers’ health plan were helping hold down
workers’ wages. The plan’s financial reserves were dwindling, heading for
negative territory.
So
began Barlett’s high-stakes game of chicken designed to change how the state
did business with its 60 hospitals, which accounted for 43 percent of employee
health care costs, turning the normal purchasing process on its head.
Instead
of starting with the hospital’s list price and negotiating down for discounts,
the state began telling these facilities how much it was willing to pay — a
“reference price” — for each type of hospitalization. State officials used
generally conservative Medicare rates as a baseline and starting point for the
discussion.
Before
the plan took effect, hospital charges for state employees for the same service
had varied widely, with some hospitals charging three to six times the Medicare
rate for some services.
To even
out the disparities and save money, the state decided it would pay an average
of 234 percent of Medicare rates — a level of payment that hospitals indicated
they would accept and an amount the state calculated would allow an efficient
hospital to deliver high-quality care and still profit.
While
other states and some private employers have set prices they are willing to pay
for some standardized procedures — such as a colonoscopies or hip replacements
— Montana’s experiment is more sweeping, covering all hospital services, and it
uses Medicare as a common yardstick.
Two
years in, the state calls the effort a success, saving $15.6 million this year
over the estimate of what it would have paid without the change. Meanwhile, its
reserve fund has grown and is so healthy the state dipped into it for other
needs.
Did The
State Get The Payments Right?
“A
centralized price-setting model has danger. It can overpay or underpay,” said
Glenn Melnick, director of the Center for Health Policy and Management at the
University of Southern California.
Like
some other cost-control efforts, the Montana approach might lead to smaller
numbers of hospitals that agree to participate in the state plan, he noted.
So far,
there’s been no sign of that, said Bartlett: “No hospital has gone broke.”
But
resistance is natural, said Damon Haycock, head of Nevada’s public employees’
benefits plan, because, ultimately, money saved for state workers is money
hospitals don’t get.
There
could be a ripple effect, as others in the community will want parity.
“If a
state takes a hard line and says, we’re not paying more than X, then cities and
counties and large employers would want the same deal,” he said. “And that
becomes a massive political hurdle.”
To get
buy-in, the state settled on the 234 percent, which many economists consider a
relatively generous mark-up from standard Medicare payments.
Medicare
doesn’t negotiate prices with hospitals or use hospital-set charges in its
calculations. Instead, Medicare sets reimbursement through a complex formula
that includes the cost of providing the service and the type of diagnoses. By
its calculations, the government program pays hospitals enough to cover their
services as well as a small profit.
Hospital
officials, including many of those in Montana, disagree.
“When
you look at total costs, Medicare probably pays 75 to 80 percent,” said Jay
Doyle, president of St. James Healthcare in Butte. The facility, part of the
SCL Health system, reported losing $9 million on its Medicare patients in 2016,
the latest data available.
But
economists say the prices are adequate if the hospitals spend the money wisely.
“Hospitals
will say Medicare pays 90 cents on the dollar,” said Zack Cooper, an assistant
professor of health policy and economics at Yale, which makes their argument
sympathetic “for the first 15 seconds.”
In
fact, for most hospitals, Medicare covers their costs, he added.
Reaching
Out To The Holdouts
The
Montana effort took aim at hospital-set prices, often called “chargemaster
rates,” which to Bartlett were seemingly “going up and up.” She and the
third-party administrator the state hired gathered data and dove into the new
negotiations.
At some
hospitals, Montana was shelling out more than three times what Medicare paid
for inpatient care. Outpatient services showed an even wider range. Some
hospitals were paid more than six times the Medicare rates.
When
Bartlett’s team settled on paying an average of 234 percent of Medicare for
inpatient and outpatient care, the decision involved a delicate balance: Set
the bar too high and some hospitals would raise prices; too low, and some could
cut back services or refuse to sign on.
As the
July 1, 2016, deadline approached, five hospitals were holding out — and the
state didn’t want huge gaps in its hospital network.
“I was
absolutely freaking,” said Bartlett.
Four of
the five remaining agreed before the deadline. The last major holdout was
Benefis Health System in Great Falls, which argued that it was already one of
the lower-cost hospitals in the state and that it should save its biggest
discounts for its biggest customers.
Benefis
declined requests for an interview.
At the
time, state workers and their unions began a classic public relations
arm-twisting campaign. Workers were told they might get hit with out-of-network
bills from Benefis if it did not sign on. Such bills represent the balance
between what the state pays and what hospitals charge.
Employee
unions urged members and other interested groups to call or write Benefis,
urging it to get on board.
The
hospital is “kind of a monopoly, used to calling their own tune,” because it is
the only major hospital within 90 miles, recalls Keith Leathers, an
investigator with Montana’s Department of Public Health and Human Services. He
was among those employees who picked up the phone, left messages and wrote
notes.
By the
end of July, Benefis finally signed on.
Will
Others Follow Suit?
“A lot
of states could learn from Montana,” said William Kramer, executive director
for National Health Policy with the Pacific Business Group on Health, a
coalition of employers. Within the state, companies and cities in the state are
watching the experiment as well.
There
are discussions underway about expanding Montana’s program beyond 35,000 state
workers to cover city, county and university employees.
“If you
want to get at pricing abuse by hospitals, why wouldn’t every single employer
do that,” said Francois de Brantes, an independent benefits consultant and
former director of the Center for Payment Innovation at Altarum, a Washington,
D.C.-based nonprofit research and consulting firm.
That,
of course, makes hospitals nervous since they have traditionally compensated
for low reimbursement from some insurers by charging others more.
“If
[that] happened, it would have huge economic impact,” including layoffs at his
hospital, said Doyle of St. James Healthcare.
But
Cooper, the Yale economist, suggested that hospitals paid based on multiples of
Medicare will be fine if they deploy their earning wisely rather than on
duplicative services, additional MRI machines or gleaming, marble-filled
lobbies.
For
many, he said, “it’s a function of investment decisions, not that Medicare
doesn’t pay enough.”
Julie
Appleby: jappleby@kff.org,
@Julie_Appleby
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