NC aims to tie reimbursement to Medicare for
state employees
SHELBY LIVINGSTON March 02, 2019 01:00 AM
“You can’t cut the cost of anything if you
don’t know the cost.”
Dale Folwell, North Carolina treasurer
Dale Folwell, North Carolina treasurer
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.
Tapping the brakes
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 seek collaboration
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.”
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