Most health plans and hospitals determine reimbursement rates by negotiating discounts off the hospital’s chargemaster rates, aka the “sticker prices” set by the hospital. Increasingly, hospitals and health systems hold significant market power, and data show they are able to negotiate increasingly high reimbursements from plans. In turn, health care spending ultimately consumes a growing share of state and household budgets.
In search of a different result, Oregon passed legislation in 2017 that limits how much insurers can pay hospitals on behalf of the Oregon Educators Benefit Board (OEBB) and Public Employees’ Benefit Board (PEBB) — its state employee health plans. Specifically, payments for in-network and out-of-network services/supplies are not to exceed 200 and 185 percent of what Medicare pays, respectively.
In the original fiscal impact statement, Oregon estimated $81 million in savings for both OEBB and PEBB. However, in implementation, the state found hospital inpatient maternity and newborn services were being paid at 200 percent of Medicare, which was significantly higher than prior rates. To resolve this issue, the state promulgated rules clarifying that payments shall be the “lesser of” billed charges, contracted rates, or the new hospital payment limit.
In its latest audit — analyzing 2021 claims data — the state found $112.7 million in savings, an improvement upon both initial estimates and 2020 savings (which were $59 million on hospital outpatient only). The state attributes this improvement to its regulatory fix, as well as a “return to normalcy” from the COVID-19-related service deferrals seen in 2020.
Oregon Savings at a Glance
States pursuing reference-based hospital pricing to Medicare may generate differing savings based on their approaches and covered populations.
- OEBB and PEBB collectively cover 290,000 Oregonians, including employees of state agencies, school districts, universities, and local governments.
- In 2021, $371.9 million in claims were subject to the law.
Average reimbursement went from 215 percent of Medicare pre-limit to 163 percent of Medicare in 2021.
Oregon is not alone in leveraging Medicare’s transparent, standardized rate methodology in such a way. Legislators in Indiana have introduced a bill that, among other measures, financially penalizes nonprofit hospitals whose annual commercial prices significantly exceed the national mean price as a percentage of Medicare. The bill bases the penalty on the hospital’s total patient revenue, with collected penalties going into the general fund. These funds may then be used to pay the state’s share of Medicaid payments.
Likewise, in 2014, Montana’s state employee health plan began reference-based pricing through contracts with individual hospitals. This year, legislators have introduced a bill to adopt reference-based pricing statewide. As introduced, hospital inpatient and outpatient charges would be prohibited from exceeding 250 percent of Medicare.
Overview of States' Hospital Reference-Based Pricing to Medicare Initiatives
As an increasing number of states explore reference-based pricing, NASHP will provide updates on evolving efforts and tools for those interested in pursuing the strategy. For more information on such efforts, states can utilize the following resources:
