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 2021: “You need to get these costs in check, otherwise.”
Increasing health care costs within the state workers' health plan were helping hold down workers' wages. The plan's financial reserves were dwindling, at risk of negative territory.
So began Barlett's high-stakes game of chicken made to change the way the state did business using its 60 hospitals, which accounted for 43 percent of employee healthcare costs, turning the standard purchasing process on its head.
Instead of beginning with the hospital's market price and negotiating down for discounts, the state began telling these facilities just how much it was prepared to pay – a “reference price” – for every kind of hospitalization. State officials used generally conservative Medicare rates like a baseline and starting point for the discussion.
Before the program 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 many services.
To even out the disparities and cut costs, their state decided to pay typically 234 percent of Medicare rates – a level of payment that hospitals indicated they'd accept and an amount their state calculated would allow an efficient hospital to deliver high-quality care and still profit.
While other states plus some private employers have set prices they are prepared to pay for some standardized procedures – like a colonoscopies or hip replacements – Montana's experiment is more sweeping, covering all hospital services, and it uses Medicare like a common yardstick.
Two years in, their state calls the effort a success, saving $15.6 million this year over the estimate of the items it would have paid with no change. Meanwhile, its reserve fund has grown and it is so healthy the state dipped into it for other needs.
Did Their state Get The Payments Right?
“A centralized price-setting model has danger. It may overpay or underpay,” said Glenn Melnick, director from the Center for Health Policy and Management at the University of Southern California.
Like some other cost-control efforts, the Montana approach could trigger smaller amounts of hospitals that agree to participate in the state plan, he noted.
So far, there's been no manifestation of that, said Bartlett: “No hospital went 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 might be a ripple effect, as others in the community will want parity.
“If a state requires a hard line and says, we aren't paying more than X, then cities and counties and large employers want exactly the same deal,” he explained. “And that turns into a massive political hurdle.”
To get buy-in, their state chosen 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 the calculations. Instead, Medicare sets reimbursement through a complex formula which includes the price of providing the service and the kind of diagnoses. By its calculations, the government program pays hospitals enough to pay for their services as well as a small profit.
Hospital officials, including a lot 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, area of the SCL Health system, reported losing $9 million on its Medicare patients in 2021, the most recent data available.
But economists the prices are adequate when 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 are designed for hospital-set prices, often called “chargemaster rates,” which to Bartlett were seemingly “going up and up.” She and the third-party administrator their state hired gathered data and dove into the new negotiations.
At some hospitals, Montana was shelling out a lot more than 3 times what Medicare paid for inpatient care. Outpatient services showed a level wider range. Some hospitals were paid a lot 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 choice involved a delicate balance: Set the bar too high plus some hospitals would raise prices; lacking, plus some could reduce services or refuse to sign on.
As the July 1, 2021, deadline approached, five hospitals were ready – 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 final major holdout was Benefis Health System in Great Falls, which argued that it was already one of the lower-cost hospitals within the state which 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 vintage 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 exactly what the state pays and what hospitals charge.
Employee unions urged members and other interested groups to or write Benefis, urging it to get aboard.
The hospital is “kind of the monopoly, accustomed to calling their very own tune,” since it is the only real major hospital within 90 miles, recalls Keith Leathers, an investigator with Montana's Department of Public Health insurance and Human Services. He was among those employees who acquired the phone, left messages and wrote notes.
By the end of July, Benefis finally signed on.
Will Others Follow?
“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. Inside the state, companies and cities within the state are watching the experiment too.
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 reach pricing abuse by hospitals, why wouldn't each and every employer do this,” said Francois de Brantes, a completely independent benefits consultant and former director from 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 paid for low reimbursement from some insurers by charging others more.
“If [that] happened, it might have huge economic impact,” including layoffs at his hospital, said Doyle of St. James Healthcare.
But Cooper, the Yale economist, suggested that hospitals paid according to multiples of Medicare will be fine when they deploy their earning wisely instead of on duplicative services, additional MRI machines or gleaming, marble-filled lobbies.
For many, he explained, “it's a function of investment decisions, not too Medicare doesn't pay enough.”