Health Plans For State Employees Use Medicare’s Hammer On Hospital Bills

States. They are really as perplexed as the rest of us over the ever-rising price of health care premiums.

Now some states are moving to manage costs of state employee health plans. And it's triggering alarm in the hospital industry. The process: Use Medicare reimbursement rates to recalibrate the way they pay hospitals. If the gamble takes care of, more private-sector employers could start doing the same thing.

“Government workers will get it first, then everybody else will see the savings and demand it,” said Glenn Melnick, a medical facility finance expert and professor in the University of Los angeles. “This is the camel's nose. It will just grow and grow.”

In North Carolina, for instance, state Treasurer Dale Folwell next year plans to start paying hospitals Medicare rates plus 82 percent, a figure he explained provides for a modest profit margin while saving the state more than $258 million annually.

“State workers can not afford the family premium [and other costs]. That is what I'm trying to fix,” he explained. The estimated $60 million in savings to health plan members, he said, would mainly come from savings in out-of-pocket costs.

That approach is different from the traditional method of behind-the-scenes negotiating, in which employers or insurers ask for discounts off hospital-set charges that rise each year and usually are many times the actual price of something. Private-insurer payments, even with those discounts, could be exponentially increase what Medicare would pay.

This state-level activity could be a game changer, fueling a broad movement toward lower hospital payments. Montana's state employee program made the adjustment 2 yrs ago; Oregon will begin this fall. Delaware's state employee program is also considering such “Medicare-based contracting” among several options to reduce spending.

The bold move comes as other factors – notably marketplace competition among hospitals and high-deductible insurance plans targeted at getting customers to “shop” for affordable prices – have largely didn't slow rising health care premiums.

For hospitals, though, it can be considered “an existential threat,” said USC’s Melnick.

Indeed, the treasurer's plan in North Carolina has drawn heated opposition, with a hospital industry-associated group running television ads warning of dire consequences, especially for rural hospitals, most of which they say might be forced to close. When the plan first arrived on the scene, the state's hospital association complained it might reduce statewide hospital revenue by approximately $460 million.

Hospitals in areas with large concentrations of state workers “would receive reimbursed less than the cost of care,” said Cody Hand, the association's senior vice president and deputy general counsel. “Our biggest concern is this isn't something that we were while dining for in discussion.”

Rural hospitals are particularly in danger, Hand said, because many were already teetering around the brink financially and also the payment change would be one more problem.

After months of acrimony, its northern border Carolina treasurer in mid-March decided to grant a 20 percent boost in payment to rural hospitals that will give those hospitals an additional $52 million annually. On average, rural hospitals could be paid 218 percent of the Medicare rate.

Nationwide, hospitals have long complained that Medicare underpays them, plus some hospital and business groups have warned employers that tying payments from state workers’ plans more closely to Medicare could result in higher charges to private-sector businesses.

“The result is a cost shift of tens of millions of dollars with other Oregonians,” wrote the Oregon Association of Hospitals and Health Systems as lawmakers there debated an agenda (that eventually became law) paying hospitals 200 percent of Medicare rates.

But policy experts are skeptical.

“Even if Medicare pays a bit below cost, 177 percent of Medicare should be a minimum of 50 percent above cost,” said Mark Hall, director from the health law and policy program at Wake Forest University. “Is that a reasonable margin? I guess that's up for debate, but to most people 50 percent margin might sound reasonable.”

Another concern some people have raised is that hospitals might won't join networks that employ these states’ Medicare-based strategy.

Indeed, Montana officials labored to obtain all hospitals in the state to accept accept for the state worker program an average of 234 percent of Medicare’s reimbursement rates. A few hospitals held out, right up to the deadline, backing down once pressure from employee unions.

The risk if hospitals choose to remain out-of-network is the fact that workers could be “balance billed” for that distinction between those Medicare-plus rates and their generally higher charges, amounts that may be tons of dollars.

To prevent that, Oregon lawmakers set the law's in-network reimbursement for hospitals at 200 percent of Medicare. But those that opt out would receive only 185 percent.

The measure also bars hospitals from billing state workers for that difference between those amounts and also the higher rates they might prefer to charge.

“Oregon thought it through,” said Gerard Anderson, a professor at Johns Hopkins who researches healthcare costs. “Hospitals need to go dieting. The private sector hasn't use them a diet, but most likely the state employee plans will.”

And Within the Private Sector –

For decades, medical health insurance costs for employers and workers have risen faster than inflation despite various efforts to rein them in.

Currently, an average family plan offered by employers tops $19,000 annually in premiums, as the cost for any single employee is near to $7,000.

To be sure, hospital costs make up only one part of what premiums cover, together with doctor costs, drug payments and other services. Spending on hospital care makes up about about one-third from the nation's $3.5 trillion healthcare tab.

“Health care is simply becoming unaffordable,” said Cheryl DeMars, president and CEO from the Alliance, a group of 240 private-sector, self-insured employers that directly contract with hospitals in Wisconsin, northern Illinois and eastern Iowa.

In January, The Alliance began what it calls “Medicare-plus” contracting. As new hospitals join and existing contracts come up for renewal, the group is negotiating rates, basing them on which Medicare pays, DeMars said.

And it'll likely cut costs: Under its old method of paying, the group was forking out between 200 to 350 percent of Medicare for inpatient and outpatient hospital services in its network. Two new contracts happen to be signed so far, averaging 200 percent of Medicare across inpatient, outpatient and physician payments, according to The Alliance.

“We wish to pay a fair price and we're in the process of determining what that needs to be,” said Kyle Monroe, v . p . of network development for that Alliance. “Is it 200 percent? Is it something less?”

Under traditional payment methods, the negotiated prices insurers for public- and private-sector employers purchase hospital care vary widely, by facility, treatment and insurer. But they're generally above Medicare rates by a substantial margin.

A group of self-insured employers recently commissioned Rand Corp. to review what private insurers pay hospitals in 22 states, compared with Medicare rates.

Initial results found private employers were paying, on average, 229 percent of Medicare rates to hospitals over the states in 2021, based on Chapin White, an adjunct senior policy researcher at Rand who conducted the study.

Economists like Melnick say they would prefer that market competition – consumers voting with their feet, as they say – would drive business towards the highest-quality, lowest-cost providers.

But, so far, hospitals have held the line from this scenario and that is unlikely to change. “They're likely to fight constantly,” Melnick said.