Introduction

Rising prices for health care services are a major determinant of increased health care spending and health insurance premiums.  Hospital prices (for inpatient and outpatient care) are the largest driver of rising health care spending in the commercial market in the U.S. Much of the increase in price stems from hospital market consolidation and the failures of competition in the health care marketplace.

State policymakers are concerned with high and rising hospital prices due to their impact on consumers, employers, and state expenditures. As major payers of health care for those enrolled in public programs and for government employees, states have a financial interest in and justification for taking action to rein in high prices. Additionally, in their role as market regulators, policymakers recognize the need to protect consumers from unchecked hospital price growth.

Facing this evidence, health care purchasers, from private employers to state officials, are raising important questions about the affordability of health care:

• As the nation makes gains in providing insurance coverage for more people and states have fewer uninsured individuals, what can be done to ensure health care is affordable?
• Are increasing hospital price trends, which outpace the consumer inflation index, justified by better quality or outcomes? Or are they reflective of imbalances in market power?
• As so much of the US health care dollar goes to high-priced hospital care, how can policymakers protect consumers from excessive prices?

Given the need for action, there are a variety of models on the state and federal level, a few of which are highlighted in this brief – each approach has specific, varying goals and implementation designs. If policymakers aim to disrupt rising hospital prices, rather than simply regulating provider behavior, states may consider using insurance rate review to cap hospital price growth via “affordability standards.” This policy idea, described in detail below, was implemented by Rhode Island and Delaware and is supported by research and theory presented in a March 2020 proposal by a group of health care experts and economists. Additionally, as outlined in the National Academy for State Health Policy (NASHP)’s model legislation, affordability standards allow states to use an existing infrastructure, insurance rate review, to shift insurers’ investment priorities, disrupt the negotiation dynamic between insurers and providers, and limit runaway hospital price growth.

Identifying Solutions to Disrupt Increasing Price Trends

If a state is motivated to target hospital prices to increase health care affordability, there are a few strategies to consider – each requires reining in rising prices rather than regulating the contracting or consolidation practices of hospitals. These models span a spectrum of approaches – some are grounded in a more stringent, regulatory approach and likely require legislative approval. Others are more flexible and potentially more politically expedient, may be less resource-intensive to operate and may not require special enabling legislation, but may also be less likely to yield profound impacts on prices and spending.

One model for lowering high hospital prices is articulated in a March 2020 proposal from Chernew, Dafny and Pany, a group of economists with expertise in health care financing. The proposal argues for flexible price caps with nimble oversight to account for the diversity across providers, hospital markets, and state regulatory infrastructures, and suggests approaches to three facets of the price control calculus:

• Addressing egregiously high-priced providers by establishing a hard upper limit on prices, essentially making it illegal to price above a certain level;
• For pricing below the upper limit, controlling the rate of growth using provider-specific price growth caps to prevent runaway price increases; and
• Addressing the potential to game this type of approach through value-based contracting or reimbursements that occur outside the parameters of service-based pricing mechanisms.

This model and variations thereof, do hold promise for reining in price growth and would not require the intricacies of a full-fledged rate setting system. It represents an option for some states but demands an investment of resources – and likely political capital – that may not fit into all states’ agendas or complement specific political perspectives. It is one promising option within a range of approaches that a state may consider.

The basis for the proposal is informed in part by work that has been ongoing in Rhode Island for over a decade to limit price growth through the insurance rate review process. This is a more “macro” approach to hospital price limitations. It has not required the state to seek specific enabling legislation outside of more general public interest and affordability language in the Office of the Health Insurance Commissioner’s statutory mandate and has been implemented using resources within the Office of the Health Insurance Commissioner.

Rhode Island uses a set of “affordability standards” in its insurance rate review process to ensure that consumers have access to stable, affordable, cost-efficient health insurance products. Health insurers with more than 10,000 covered lives are required to comply with the affordability standards. The standards include requirements for:

• a primary care spend obligation,
• primary care practice transformation,
• behavioral health care integration, and
• payment reform.

As part of the payment reform affordability standard, insurers must meet certain requirements for their hospital contracts, including keeping average contracted hospital price increases below inflation plus one percent and ensuring that at least 50 percent of the average rate increase will be for expected quality incentive payments.  A 2019 Health Affairs review found that Rhode Island’s affordability standards led to a quarterly net reduction in fee-for-service per enrollee spending by a mean of $55 from 2010 to 2016.

In 2021, Delaware became the second state to require insurers to meet a set of affordability standards as a pre-condition for having requested premium rates approved. Mirroring Rhode Island, Delaware’s Department of Insurance will require that insurers’ average contracted prices do not increase greater than three percent or inflation plus one percent beginning in 2022. Delaware also included other priorities in their affordability standards like Rhode Island.

Additionally, New Jersey Gov. Phil Murphy signed an Executive Order in early 2021, requiring the state’s Department of Banking and Insurance to prepare a report and plan for the development of both a cost-growth benchmark and insurance affordability standards to apply to providers and insurers. The report is expected by the end of 2021.

Following state activity, NASHP released model statutory and regulatory language for states interested in leveraging insurance rate review to limit annual hospital price growth through affordability standards. NASHP’s model is very similar to Rhode Island and Delaware’s language but focuses exclusively on hospital price growth caps and allows states to add their own priorities to the affordability standards if appropriate, i.e., primary care spend obligation for insurers, etc. The success or ease of implementing this model may depend on the type and scope of a state’s existing insurance rate review authority.  Although a state may be in a better position to enact an affordability standard if it has prior approval authority rather than file-and-use authority for insurance premium rates, a state could start with the authority it has and use retrospective enforcement under file and use review.

Chernew et al.’s proposal, Rhode Island and Delaware’s affordability standards, and NASHP’s model language are all iterations of the same type of policy that seeks to cap escalating hospital prices or interrupt the price growth trend in some capacity. Each approach has its strengths and its limitations. However, if policymakers are interested in disrupting the current market and impacting prices for hospital services, these types of policies may be appropriate. Price and price growth caps level the playing field for insurers, allowing them to negotiate lower prices with hospitals and health systems that may have disproportionate market power to keep prices high.

Strengths of Implementing Price Growth Caps via Insurance Rate Review

Leveraging Existing State Infrastructure:

A growing number of state policymakers who are striving to increase health care affordability have expressed interest in price growth caps, implemented via insurance rate review, due to its lower administrative burden. Compared to other policies, like rate-setting or a cost-growth benchmark, using insurance rate review to cap hospital price growth builds upon existing state infrastructure. State insurance departments and specifically offices that oversee health insurance products have a long history of working to protect consumer access and affordability. Many insurance departments already have the authority to engage in market conduct reviews to determine whether health insurers are offering reasonably priced products, complying with regulations, and operating in a manner that is fair to consumers.

Creating a Flexible Framework:

In policy solutions for hospital cost containment, policymakers must contend with the fact that hospital prices are both high and highly variable – they differ based on provider, service, insurer, and geographic location. In addition, there is a wide variety of hospital types, financial positions, and corporate structures across communities. This can make it challenging for policymakers to track, understand, and address high prices on a wide scale and to rely on solutions crafted for specific markets as they may not be directly transferrable.

Affordability standards with a price growth cap offer a flexible approach that can account for the differences between hospitals and allow for changes over time. NASHP’s model gives the insurance commissioner the authority to waive a requirement if a health insurer can show good cause, such as if a hospital or health system can’t appropriately meet the average price growth cap on contracted prices.  This allows a state agency to determine if certain hospitals, such as smaller, rural facilities, should be held to the same cap as urban, university-affiliated teaching facilities. There’s also the possibility of re-basing provider reimbursement rates over time. In 2020, Rhode Island updated its affordability standards and allowed hospitals that are reimbursed at less than the network median rate to receive a one-time, value-based rate increase for inpatient services. This means that hospitals that were historically lower-priced had their rates increased to be more in line with other hospitals without violating the growth cap.

The Rhode Island Office of the Insurance Commissioner (OHIC) has also used the affordability standards as a framework to consider the impacts of consolidation. In June 2021, OHIC released a working paper to help inform the state’s review of a proposed hospital merger. OHIC proposed principles for oversight of the merged entity, which would have a market share representing nearly 80 percent of the Rhode Island hospital discharges. As part of this oversight, OHIC recommends building on the price growth caps for hospital services to include comprehensive price growth caps for professional services as well.  This represents the type of flexible caps that adjust for different market factors as proposed by Chernew, Dafny and Pany.

Changing Hospital-Insurer Negotiation Dynamics:

Many reform strategies aimed at containing hospital costs demonstrate some reduction in overall costs, but most do not directly impact hospital prices. These policies may rely on correcting or improving competition in the existing hospital market. However, as Chernew et al. point out, even the most robust market-based reforms can only have limited impacts in concentrated markets where there is little competition. As of 2016, 90 percent of metropolitan areas have highly concentrated hospital markets. As hospitals and providers consolidate, insurers lose their leverage in negotiations to lower prices. Capping price growth through insurance rate review creates a backstop for insurers to negotiate against. Instead of being forced to accept rising prices by dominant health systems, insurers can point to the affordability standards to keep contracted prices from rising any more than the allowed threshold.

Building Affordability Standards to Match State Goals:

Both Rhode Island and Delaware included additional requirements for insurers in their affordability standards. Beyond price growth caps, the states outlined specific goals for the future of the state’s health care system, including greater investment in primary care, adoption of alternative payment models, and tying price increases to quality of care. Importantly, the affordability standards allow states to set goals based on observed trends or data. For example, Delaware found that while carrier spending on hospital inpatient and outpatient services was increasing over time, professional prices (those paid to primary care doctors) remained relatively flat. Through this research, Delaware recognized a need to shift spending away from hospitals and to primary care.

Chernew et al. suggest that interested states could also inversely tether growth caps to prices. In other words, a state could set a lower growth cap (allowing for smaller price increases) for higher-priced providers. This type of structure would incentivize high-price providers to become more efficient and lead to convergence of prices across providers over time, meaning there would be less dramatic variability in prices across hospitals. Overall, using affordability standards gives policymakers an opportunity to shape future spending to be more sustainable and focused on specific goals or outcomes for the state.

Importance of Flexible State Oversight and Monitoring for Industry ‘Gaming’

The approaches adopted by these states do not address the potential for carriers and providers to “game the system.”  Adherence to price growth caps can be frustrated in several ways. For example, adoption of some types of risk-based purchasing contracts that are not claims-based effectively moves a considerable amount of payment outside of the context of the strict service transaction. So, while price limits may be adhered to, actual spending could increase more than desired, by structuring risk-based price contracts to shift monies outside of the price per unit of service construct.

Similarly, it is conceivable that providers commanding a significant market share may decide to simply refuse to enter into contracts with carriers that fail to meet their revenue or pricing demands. This is most likely to be seen in those markets where there are few dominant providers, a landscape that is growing increasingly common. In such instances, states may wish to consider coupling a price limiting strategy with initiatives to assertively address market consolidation or cap out-of-network prices. A June 2021 NASHP blog described how states can leverage insurance commissioners’ authority to take a comprehensive approach to cost containment – limiting hospital price growth, prohibiting anticompetitive hospital contract terms, and enforcing limits on unwarranted facility fees.

Conclusion

As states continue the important work of containing hospital costs, there are a variety of policy models and approaches policymakers could take. If a state is specifically interested in reining in hospital price growth and has the appetite for a more aggressive approach, policymakers may consider the three-pronged approach outlined by the Chernew, Dafny, and Pany or go even further and consider a full-fledged rate-setting system. If less stringent – though proven effective – approaches are of interest, policymakers can consider those adopted by Rhode Island and Delaware and laid out in NASHP’s model. This approach also allows policymakers to shift investment and spending priorities in a state.

Price growth caps are not a one-size-fits all solution to high health care costs. They are a tool to achieve a specific goal: stopping runaway price increases. Price growth caps alone will not slow down or prevent consolidation, prohibit anticompetitive provider behavior, or protect consumers from inappropriate charges like facility fees. But these caps are a bite at the apple to disrupt the current negotiation dynamic between hospitals and health plans and the trend in rising hospital prices. Regardless of a state’s strategy, policymakers know that hospital prices and costs must be addressed, particularly as we envision a new health policy landscape amidst ongoing waves of the COVID-19 pandemic. Affordability standards may be a way to reshape the existing system to better meet consumer needs and states’ goals for the future while also limiting cost increases over time.

Acknowledgements: NASHP recognizes and thanks Michael Chernew for his thoughtful guidance, helpful review of this brief, and contributions to the hospital cost research field that supports state policy development to reduce rising prices. The authors also thank the state officials from Rhode Island and Delaware who shared their time and expertise to inform the research for this brief and other related NASHP resources on the topic. The authors would also like to thank Arnold Ventures for their generous support for work on hospital and health system prices and costs.