A new, independent analysis of the Montana state employee health plan’s transition to reference-based pricing – which limits hospital prices to a multiple of what Medicare pays – found significant savings for the state in the two years after its implementation. Further, there is no evidence that utilization artificially increased as a result of the new payment model, which could occur if hospitals needlessly push more services onto patients to offset lower reimbursement rates, and, to date, there have been no hospital closures in the state.

Facing rising health care costs and dwindling reserves, Montana’s state employee health plan implemented Medicare referenced-based pricing for its approximately 31,000 members in July 2016. The state set out to address the prices the plan was paying for hospital outpatient, inpatient, and physician services instead of reducing plan costs by increasing employees’ out-of-pocket costs or adopting coverage restrictions.

Prior to implementing reference-based pricing, Montana’s third-party administrator negotiated hospital reimbursement rates as a discount off a hospital’s chargemaster rates, similar to traditional negotiations used by most health insurers when contracting with hospitals. However, because hospitals do not have to follow a standard formula or legal requirements for setting chargemaster prices, these rates can be set much higher than what it actually costs a hospital for providing services, even after the plan’s negotiated discount.

In moving to reference-based pricing, Montana established payment rates for inpatient and outpatient services that are a multiple of Medicare’s payment rate for the Montana acute care hospitals. Before the reference-based pricing agreements, Montana paid a range of 191 to 322 percent of Medicare rates for inpatient services and 239 to 611 percent of Medicare rates for hospital outpatient services. The reference-based pricing agreements lowered the range in prices paid by the health plan to 220 to 225 percent for inpatient services and 230 to 250 percent for outpatient services.

Optumas, an independent consulting firm with expertise in health care reform, used publicly available data to analyze the financial impact of the plan’s transition to reference-based pricing. Using data for the three fiscal years before and after the implementation of reference-based pricing (SFY 14 through SFY 19), Optumas calculated what the plan would have paid under traditional (without reference pricing) negotiations based on a discount off chargemaster rates and compared the estimated payments to what the Montana plan actually paid under reference pricing.

Through these comparisons, Optumas was able to estimate savings associated with the reference-pricing initiative. In total, the plan’s estimated savings for inpatient services were $30.3 million and outpatient services savings were $17.5 million – for a combined savings of $47.8 million. This savings enabled the plan to become more financially sustainable and achieved Montana’s financial goal without pushing costs onto employees or reducing coverage.

Using Medicare rates as a benchmark not only saves Montana tax dollars, but the state employee health plan is subject to more transparent price increases. Instead of being tied to opaque hospital chargemaster price increases, the Montana state employee health plan relies on Medicare’s published pricing methodology, which is updated annually, geographically adjusted, and publicly available.

State employee health plans interested in lowering hospital costs without significantly disrupting coverage may be able to use Montana’s reference pricing approach to reduce health care costs. Reference-based pricing could also be used by commercial purchasers or by states working to cap prices in public-option plans.

To learn more, read Optumas’ report, Independent Evaluation – Estimating the Impact of Reference-Based Hospital Pricing in the Montana State Employee Plan.

The National Academy for State Health Policy is planning a webinar to explore these findings.

Read the report: Independent Evaluation – Estimating the Impact of Reference-Based Hospital Pricing in the Montana State Employee Plan.

A hospital chargemaster is the standard list prices for hospital services. Chargemaster rates are essentially the health care market equivalent of Manufacturer’s Suggested Retail Price (MSRP) in the car buying market.

Montana’s reference-based pricing agreements with hospitals:

• Generated estimated savings of $47.8 million across inpatient and outpatient services (SFY 17-SFY 19);
• Lowered prices paid for hospital outpatient services from a range of 239-611 percent of Medicare rates to 230-250 percent of Medicare rates; and
• Lowered prices paid for hospital inpatient services from 191-322 percent of Medicare rates to 220-225 percent of Medicare rates.