Faced with high and escalating health care costs that compromise patient access, burden businesses, and squeeze state budgets, some states are now taking bolder action to address health care affordability in the commercial market.
This crisis of affordability is not new, and its impact on patients and the economy is profound. Patients often delay or even forgo needed care due to steep costs or face hard choices between medical debt or paying for other necessities like food and transportation. Employers have had to shift more premium expenses to employees, switch to insurance coverage with higher out-of-pocket costs, limit wage growth, or reduce hiring to manage rising health care expenses. As large employers and purchasers of commercial health insurance, states are also feeling financial pressure as rising health care costs threaten affordability for state health care workers and leave fewer resources for other priorities like education.
High and Rising Hospital Prices
Many states are turning to solutions that tackle hospital prices because they have been a leading contributor to commercial market spending growth. Expert analyses show that some hospitals command over three times what Medicare pays, with wide pricing variation both within and across states. These stark differences in hospital pricing most often reflect hospital market power and negotiating leverage, rather than differences in the quality of care delivery. This happens in highly concentrated markets with little competition, where dominant hospitals push for higher payments or threaten to leave insurers’ networks.
What States Are Doing to Limit Payments for Hospital Care
With affordability pressures mounting — and growing evidence of overpayment for hospital care — some states are looking to adopt strategies that limit how much hospitals are paid, typically referred to as “price caps,” or “reference pricing.” Under this strategy, hospital payments are capped at a certain level, typically pegged to a percentage of Medicare rates, for both inpatient and outpatient services. Rather than relying on failed market negotiations, this method offers a transparent and more equitable approach to determining hospital reimbursement rates. Medicare rates are assessed and updated annually to reflect regional differences in wages and other costs, inflation, the cost of teaching programs, the share of low-income patients served by a hospital, and the level of uncompensated care the hospital provides.
Oregon has successfully administered price caps for its state and public school employees since 2019, limiting hospital payments to 200 percent of Medicare rates for in-network services and to 185 percent of Medicare rates for out-of-network services. In the first 27 months of implementation, the policy yielded $107.5 million in savings for the state, amounting to 4 percent of plan spending. In addition, a recent study of the program found a 9.5 percent reduction in out-of-pocket spending per outpatient procedure for individuals enrolled in high-cost-sharing plans. Oregon achieved these savings without unintended consequences such as disruptions to hospital networks, or price hikes for services or insurance plans not subject to the caps. The absence of such “cost shifting” may indicate that hospitals were initially reimbursed at excessive levels — as evidenced by studies of market consolidation and hospital pricing — and had adequate financial flexibility to accommodate price reductions.
In Colorado and Washington, the state executive branch is spearheading legislation to implement price caps. Washington would apply price caps to public and school employee health plans, with proposed cap levels ranging from 200 percent to 350 percent of Medicare, based on the hospital type. Colorado’s bill would apply to both state employee and small-employer plans. In other states, such as Nevada, New Jersey, and Vermont, legislators and other stakeholders are supporting similar price caps bills focused on state employee health plans. State employee health plans are often the largest purchaser of commercial insurance in the state; this can be an important first step to addressing market failures that have led to excessive hospital payments.
A legislative proposal in Indiana with strong support from the state executive branch takes a broader approach and seeks to limit prices for services at all nonprofit hospitals in the state. Under the bill, a hospital could have its nonprofit status revoked if it charges any payer more than 300 percent of the Medicare reimbursement rate. A pending bill in Massachusetts would also apply limits to all hospital prices, while an Oklahoma bill would cap payments across the fully insured commercial market.
Some states, including Colorado and Washington, are looking to reallocate savings toward underfunded critical services, like primary care and behavioral health services.
Laying the Groundwork for Future Efforts
As state leaders consider policy solutions to address their health care affordability crises, they can look to Oregon’s success and the growing momentum in pursuing price caps. States can tailor this strategy based on their hospital landscapes and other market dynamics, including adjusting the level of the caps and providing accommodations for certain hospital types, such as hospitals that may be financially vulnerable.
Tools like Brown University’s Hospital Payment Cap Simulator can help estimate state-specific savings and the impact on hospital operating margins after implementing this policy for state employee health plans.
With health care affordability a top concern, state leadership on price caps offers a promising way to ease household budgets while improving patient outcomes.
