This commentary is by Julie Wasserman, MPH, of Burlington. Wasserman is an independent health policy consultant who worked for Vermont state government for over 25 years.
The cost of health care has become unaffordable for many Vermonters. The most recent household survey commissioned by the state found that 44% of privately insured Vermonters are “under-insured.” This means they have insurance coverage but have difficulty affording their deductibles and out-of-pocket costs. As a result, they forgo needed medical care.
Hospital costs comprise roughly half of every health care dollar spent in Vermont. Recently proposed double-digit hospital rate increases for FY23 will consume an ever greater share of health care spending, exacerbate the affordability crisis, and further deprive community-based services of needed revenue and resources (primary care, mental health, home health services), much of which has the potential to prevent costly hospitalizations. Global budgets are a means for controlling and lowering hospital costs to realize savings that can be redirected to community-based services as well as help lower insurance premiums.
Global budgets are an alternative payment model in which hospitals are paid a prospectively determined amount for all inpatient and outpatient services to serve a patient population in a given year. Global budgets cover the actual operating costs of hospitals (separate from their capital expenses) and are based on current and historic utilization of medical services. Prior to determining the amount of global payments for each hospital, prices would first need to be standardized.1 Without the standardization of prices as a first step, hospital global budgets would lock in current irrational pricing.
Hospital prices have little basis in reality. Charges are set arbitrarily and vary wildly for the exact same service. The term used to describe this phenomenon is “price variation.” A prime example of price variation is obstetric care for a routine newborn delivery which costs $5,385 at one Vermont hospital but only $2,192 at another Vermont hospital.
A recent report from the RAND Corporation on hospital price transparency for the period 2018-2020 found UVM Medical Center set its commercial prices (inpatient and outpatient combined) at more than 300% percent of Medicare prices. This means employers and private insurers pay more than three times the relative amount Medicare would pay for the same services. Likewise, Southwestern Hospital’s prices tally at 287% of Medicare prices, and Rutland Hospital’s at 279%. (RAND observes that relative prices have the advantage of incorporating all of Medicare’s adjustments for case mix, wages, and inflation and are comparable across both inpatient and outpatient services).
Conversely, Mary Hitchcock Memorial Hospital set its rates at 177% of Medicare prices (a bit more than half of UVM Medical Center’s prices), Porter set its rates at 155% of Medicare prices, and Mt. Ascutney (the lowest) at 117%. The RAND study states, “Very little variation in prices is explained by each hospital’s share of patients covered by Medicare or Medicaid; a larger portion of price variation is explained by hospital market power.” How can Vermont justify the high prices at UVM Medical Center, Southwestern, Rutland and others? (See table below.)
One approach to standardizing hospital prices is “reference-based pricing” where the price of a given procedure is the same regardless of the provider.2 The price for a service can be determined by indexing (or referencing) it to a multiple of the Medicare rate since Medicare rates are a well-established national standard, transparent, linked to quality measures, and most importantly, are not subject to bargaining leverage.3 Reference-based pricing can level the playing field and has the potential to distribute health care dollars more equitably among Vermont’s hospitals.
Vermont’s health care system continues to be primarily based on fee-for-service payments despite the All Payer Model’s best efforts. Reference-based pricing is a fee-for-service tool that can provide a path to value-based global hospital budgets, foundational to the long-term financial sustainability of Vermont’s hospitals.
1 The Green Mountain Care Board concurs that the price charged by individual providers (not volume or utilization) is the primary driver of increased medical costs.
2 Montana employed reference-based pricing benchmarked to Medicare rates for its state employees and has seen no increase in premiums, out-of-pocket costs, or reductions in its benefit plan for six consecutive years due to savings. ($48M in savings from 2017-2019, and ongoing.) The Vermont State Auditor’s report found that Vermont could potentially save $16.3M annually if it implemented reference-based pricing for state employees.
3 The Colorado Supreme Court recently ruled in favor of a patient paying the “reasonable value” of care provided instead of the hospital’s chargemaster price. The patient was covered by a reference-based price “health plan” which is increasingly popular among self-insured employers enabling them to avoid arbitrary and sometimes inflated hospital prices.