States Attempt to Rein in Rising Health Care Costs: Is a Self-Regulating Industry Enough?

On April 26, lawmakers in Colorado announced a tentative agreement with health industry stakeholders on legislation designed to lower health care costs. The effort would be implemented in two phases. The first phase provides the chance for health care providers and insurers to lower spending through their own, private negotiations. However, if insurers do not manage to reduce premiums by 18 percent within three years, the state is authorized to establish maximum hospital reimbursement rates in order to achieve the cost reduction targets. Although opposed to earlier iterations of the proposal, Colorado hospital and health plan executives have significantly softened their stance on the latest version.

Colorado’s bill is one of multiple state efforts to improve the affordability of health care by setting a voluntary cost growth target for insurers and providers to meet. However, Colorado legislators appear to have learned one key lesson from other states’ attempts at such a target: without some negative consequences for failure, the industry has limited incentive to curb excessive spending.

A number of states have implemented a system-wide spending growth target, which is designed to bring all payers, both private and public, as well as providers, under the same pressures to reduce spending growth. It largely relies on the industry to self-regulate to bring down costs. Massachusetts implemented their version in 2013 with mixed results. While state spending growth has been lower than the benchmark on average since the law was implemented, in the past two years the state exceeded the target. Although the state’s Health Policy Commission (HPC) is authorized to subject certain entities to a “Performance Improvement Plan,” it can do little to impose actual penalties on high priced hospitals. It’s thus not clear how the state will enforce the target.

At the last board meeting of the HPC, commissioners expressed concerns that the current structure of the benchmark insufficiently incentivizes providers to reduce their spending because of a lack of consequences. As Commissioner Dr. David Cutler noted, “I think that market participants are concluding that there’s not much of a consequence to going above the cap.”

Delaware’s annual growth target uses a measure of health status adjusted total health spending, as well as quality benchmarks. However, like Massachusetts, their approach lacks regulatory teeth to drive spending down. The former Secretary of Health and Social Services for the state of Delaware admits that “politically, it was not feasible to move forward with incentives, penalties, or regulatory levers to ensure that we meet the targets.”

Oregon’s approach, enacted in 2019, largely mirrors the Massachusetts process in that providers who exceed the growth target could be subjected to a “performance improvement action plan.”  As in Massachusetts and Delaware, stakeholders in the newly implemented process favor a “carrots first, sticks later” approach. Indeed, although the Oregon law grants the implementing agency considerable authority to implement the benchmarking program, any enforcement against providers who fail to meet the target is subject to additional legislative review.

Rhode Island’s benchmarking effort has a potentially stronger enforcement mechanism. The state instituted spending growth caps on hospital rates before implementing their statewide all-payer cost growth target. In order for insurers’ rates to be approved, the prices they pay for hospital services cannot not exceed the growth cap requirement of Medicare consumer price index plus 1 percent. Perhaps as a result, Rhode Island is among states with the lowest health care prices paid by private health insurance. Although nationally, commercial insurers pay on average 247 percent more than Medicare for hospital services, in Rhode Island the average is just under 200 percent.

Maryland has also set a system-wide growth target of less than 3.58 percent over five years. But it did so in addition to its all-payer hospital rate setting program, which has had a long history of constraining hospital spending in the state. By implementing its spending growth target in addition to the rate setting program, the state was able to provide a mechanism that helps keep both prices and utilization in check. That may help explain why CMS’s evaluation of the program found they had 4.1 percent slower growth in hospital spending over five years relative to a comparison group.

While there is widespread consensus that commercial health care spending is rising too rapidly, rendering health insurance unaffordable for employers and consumers alike, reining in cost growth in a politically palatable fashion is not easy. The lessons from states with spending growth targets suggest that the industry is not well positioned to self-regulate. The incentives to save are insufficient and providers can hide behind complex hospital upcoding, achievements in quality or innovation, puffery about their charitable programs, and the burden of the pandemic to avoid taking responsibility for the true drivers of our health care spending crisis.

Allowing the health care industry to figure out the best way to reduce costs – with a credible threat of rate regulation if they don’t – could be a path forward. The fear of government rate setting, as envisioned in Colorado’s legislation, could bring providers and insurers together to meet the goal and prevent its implementation. It’s too early to say if that approach will work, but the experience of spending targets imposed by other states suggests the health care industry on its own will not do much to meaningfully reduce health care prices without government intervention.

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The opinions expressed here are solely those of the individual blog post authors and do not represent the views of Georgetown University, the Center on Health Insurance Reforms, any organization that the author is affiliated with, or the opinions of any other author who publishes on this blog.