All Eyes On Montana
The state of Montana has a health plan for state employees run by the Health Care and Benefits Division (HCBD). A few years ago, Montana was in the spotlight of healthcare reformers for adopting a reference-based payment model, which had not been done on such a large plan. The result was savings on the order of 10s of millions of dollars for the state in just a few years.
Recently, the state announced a new contract with Blue Cross and Blue Shield of Montana to change how the health plan is administered. This signals a step away from the payment model.
So what exactly is reference-based pricing, and why did Montana decide to put a pause on it?
Pegging Prices to Medicare
In reference-based pricing/payment (RBP), the insurer sets reference prices for medical services. The insurer tells healthcare providers "we will not pay any more than this reference price".
One document to the Montana Legislative Finance Committee in 2015 outlined the RBP process and cited that setting a fixed reference price can reduce variation in prices charged by healthcare providers and save on overpaying for the same service. This same document mentioned, for example, that hospitals charged between 200% and 500% above what Medicare pays for the same services that the Montana plan covered.
Each hospital has a chargemaster, which provides the details of how much each medical service and procedure costs. Before RBP, the vendor handling the health plan would go around negotiating discounts. The lack of regulation on how chargemaster rates are set and a lack of transparency on mark-ups means that these negotiated discounts may still leave members of the plan with expensive healthcare options.
The Montana public employee health plan is administered via a third-party administrator (TPA). The TPA is the actual organization which handles insurance claims as a vendor.
In 2016, the TPA changed from Cigna to Allegiance Benefit Plan Management (which is still a company under Cigna's umbrella). To set up the plan, Allegiance negotiated with hospitals across the state to agree to terms of reference-based pricing.
Allegiance set the reference prices relative to Medicare rates. Medicare rates are amounts that the federal government pays providers for treating patients under Medicare. Unlike many private insurers, the Medicare program does not negotiate with providers. It uses a complex formula to account for the cost of services to determine a price that gives the provider a small profit margin.
There is an interesting debate from hospitals that Medicare rates don't cover the cost of healthcare, but health economists would disagree.
“Hospitals will say Medicare pays 90 cents on the dollar,” said Zack Cooper, an assistant professor of health policy and economics at Yale, which makes their argument sympathetic “for the first 15 seconds.”
In fact, for most hospitals, Medicare covers their costs, he added.
Diving deeper into this debate is best suited for another issue of this newsletter.
In the end, the reference prices were generally around 234% of the Medicare rates for services, considered quite generous for the hospitals, but still solid considering the state was paying 191-322% for inpatient and 239-611% on outpatient services before.
An independent group, Optumas, found that savings were quite substantial.
reference-based pricing showed savings ranging from $55.06 to $62.50 per employee, per month
Let's do the math. Even with just $55 in savings each month on each employee, and with more than 28,000 members, that's $18.48 million in savings in one year.
Marilyn Bartlett, who took the role of administrator of the state employee health plan in 2014, inherited a plan that was headed towards financial insolvency. Her investigation of how the state plan paid varying prices for the same service inspired looking to a RBP model. She is credited with leading the charge on adopting the model and conducting tense negotiations with hospitals.
Now, the plan is running positive reserves, to the extent that Montana's governors use the plan's reserves to fill gaps in the state budget.
BlueCross BlueShield Taking Over
A recent development that has policy wonks scratching their heads is the announcement that BlueCross BlueShield of Montana will replace Allegiance as the plan's TPA.
The arrangement will supposedly yield savings of $28 million over the following three years through modernizing the RBP strategy. Of course, there is skepticism over how this would be achieved, and BlueCross BlueShield has not yet elaborated on how those savings would be achieved.
Allegiance is alleging that the contract was awarded through an illegal bidding process and that it could end up raising health care costs for state employees and taxpayers.
Illegal and no-bid contracts in government are not unheard of, so that's not totally off the table as far as explanations are concerned, especially since Bartlett retired in 2019. Allegiance submitted a protest, but as of me writing this issue of the newsletter, there has not been a change of plans.
Nonetheless, the RBP model has been adopted by California's retirement plan for some medications, and the state of Colorado is working to negotiate with hospitals using Medicare as a baseline. It's a case study which demonstrates that bringing about real savings in the cost of healthcare may be possible through experts chipping away at challenges in their own industry niche.