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Controlling Health Care Costs

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Reducing Health Care Spending: What Tools Can States Leverage?

rolls of dollar bills with rubber bands on them

Abstract

  • Issue: Rising health care spending continues to be a concern for state governments and their constituents, who are facing greater out-of-pocket costs and premiums.
  • Goal: To examine the strategies available to states to control spending across all payers and how state health policy commissions can support implementation of those strategies.
  • Methods: We survey literature and analyze policies with respect to their impact on spending at the state level.
  • Key Findings: States may pursue a variety of strategies to control spending growth, ranging from promoting competition, reducing prices through regulation, and designing incentives to reduce the utilization of low-value care to more holistic policies such as imposing spending targets and promoting payment reform. Though different states will likely choose different approaches, health policy commissions can support a wide variety of strategies by supporting initiatives of existing state agencies or by directly implementing new policies themselves. The specific strategies a state may prefer will depend on its resources, priorities, and health care landscape.
  • Conclusion: Given limits to significant federal action, meaningful policy action to control spending growth is likely to occur at the state level. State health policy commissions can play a central role in supporting any of those efforts.

Introduction

The United States spends more on health care as a share of the economy than any other country. In 2018, health spending accounted for 17.7 percent of the U.S. gross domestic product (GDP) — nearly twice as much as the average OECD country despite scant evidence of better outcomes.1 These costs also are anticipated to rise, reaching $6 trillion or 19.7 percent of the GDP within the next 10 years.2

This is of particular concern to states. Unlike the federal government, states must balance their budgets. The more dollars that get spent on health care, the less there is for other priorities such as education and transportation. Additionally, there is growing concern from constituents, who are facing greater premiums and out-of-pocket costs as spending increases.

To this end, many states have expressed interest in reducing the rate of growth in health care spending. To do so, states, by definition, must change the behavior of health care providers and payers. This presents two core challenges. The first is to identify the components of spending that should change. For example, one strategy may be to lower, or constrain the growth of, health care prices. Another may be to reduce the utilization of low-value care. The second challenge is designing a system that encourages, or forces, those changes. States have a wide variety of legislative and regulatory tools at their disposal, such as sharing data analytics, regulating prices, or preventing mergers and consolidation, which often lead to an increase in prices.

Health policy commissions also can play an important part in helping states achieve their health spending goals. Massachusetts and Maryland, for example, rely on a state commission to support their policy goals. In some cases, commissions may support strategies implemented through existing state agencies. In other cases, they may have the authority to directly implement strategies to constrain health care spending.

Commissions are well suited to serve as a deliberative forum for policy goals. A commission can consider data points and analysis alongside expert and stakeholder input and guide state lawmakers and regulators in implementing optimal state policy. The appropriate structure of a state policy commission will depend on available resources and the mix of strategies that states choose to pursue.

This report discusses various approaches states can take to control spending across all payers and describes how state commissions can support those goals. We focus on reducing overall spending, as opposed to strategies designed for specific patient populations, such as Medicaid beneficiaries or state employees. We consider ways to improve competition, lower prices, reduce use of low-value care, and limit spending or premiums. We look at the role state commissions may play in supporting these strategies, offer thoughts about how commissions might be structured, and discuss the impact of the authority they could be given. For example, Massachusetts, along with a few other states, rely on “soft authority,” while others, such as Maryland, endow commissions with strong regulatory powers.

Part I. Strategies for Controlling Health Spending

Health care spending is determined by prices and utilization and both of those, in turn, reflect a wide range of market features, such as the extent of provider and insurer competition and local practice patterns. Premiums reflect that spending and any insurer markup, which also reflects insurer competition (Exhibit 1). For this reason, one strategy to control spending focuses on improving either provider or insurer competition. More proximate, yet narrow strategies target high prices or utilization of health care services. The broadest direct strategies focus on spending itself. In each case, policy tools may range from soft encouragement to incentives and regulations with varying degrees of enforcement.

Improving Competition

Competition, the foundation of efficiency in the overall economy, does not work well in health care markets. Information asymmetries, employer and government subsidies, market consolidation, and distortions in incentives because of the presence of insurance all impede beneficiaries from shopping for lower-priced, higher-quality health care. For example, research clearly indicates that provider consolidation through mergers or acquisitions leads to increased prices without significant measurable improvement in quality or outcomes.3 Similarly, evidence suggests a lack of insurer competition can increase premiums.4 Efforts to improve provider competition include initiatives such as price transparency, to support consumer shopping, as well as limits on provider consolidation and other anticompetitive behavior — such as bans on “antitiering,” where hospitals with significant market power demand placement in preferred groups during benefit design.5

Of these strategies, promoting price transparency is particularly popular. Existing evidence suggests that price transparency offered to employees has minimal effect.6 There may be some potential value to state-sponsored transparency initiatives that work through broader mechanisms, but that literature is nascent, and it seems unlikely that price transparency as currently practiced will significantly slow spending growth.7 Its weak impact may be because only certain services are shoppable. Moreover, even for shoppable services, insurance shields patients from the true price of their care, reducing the incentive to use transparency tools and shop for providers. Some patients also prefer to follow physician recommendations, while others are simply unable to shop for low-cost and high-quality care because of the limits on consumer choice in consolidated markets.

It could be useful to encourage insurance plans to use reference pricing — that is, making patients pay the difference between the actual price and the reference price — or tiered or narrow provider networks. Yet, those types of plans have drawbacks. In some cases, patients may be charged significant amounts out of pocket or may be unable to receive care from desired providers. In addition, patients may face disruptions in existing provider relationships. Finally, because employers typically control benefit designs, policies to promote consumer shopping will need to engage employers that may be resistant to change.

Commission Support of Procompetitive Policies

State commissions can be useful in supporting procompetitive policies. While existing agencies can support competition through policy and antitrust regulation, state commissions can serve as a venue for hearings on anticompetitive practices, such as all-or-nothing contracting, where a health care organization requires an insurer to keep all its facilities in-network instead of only those that are considered high-value.8 Commissions can then suggest remedies to such anticompetitive behavior. They also can be a hub for information and strategies to promote the diffusion of insurance plans that encourage consumer shopping and competition.

State commissions also can analyze proposed mergers and advise relevant state agencies that have oversight authority. For example, when Beth Israel Deaconess Medical Center and Lahey Health decided to merge in Massachusetts, the state’s Health Policy Commission had concerns about potential price increases and access to high-quality care for underserved populations. The commission referred the case to the state’s attorney general’s office, which required the merged organization to cap prices for seven years and provide more than $70 million in financial commitments to services for low-income communities.9 Mass General Brigham, previously known as Partners HealthCare, has similarly been unable to acquire organizations, such as South Shore Hospital, because of antitrust investigations recommended by the Massachusetts Health Policy Commission.10

Lowering Prices or Price Growth Directly

Though procompetitive approaches, particularly efforts to prevent further consolidation or anticompetitive behaviors, should be pursued, their impact may be limited. In many markets, options are already restricted because previous provider consolidation is difficult to undo. This calls for more direct approaches. The most common strategies focus on lowering prices or price growth. Many studies have attributed the U.S.’s increased health care spending to significantly higher prices relative to other countries.11 In addition, prices vary significantly both within and across geographic areas within the United States (Exhibit 2). For inpatient facility services, the ratio of average commercial to Medicare inpatient prices across states in 2017 ranged from 1.40 to 2.74 with an interquartile quartile range of 0.35.12 The ratio for outpatient facility and professional services ranged from 1.23 to 3.05 and 1.29 to 3.36, respectively.

Several approaches beyond the procompetitive strategies discussed above could be used to constrain prices. Hands-off strategies include requiring providers to publicly justify high prices or having the state discourage, but not prohibit, high prices. Providers could be publicly identified as expensive and possibly shamed into restraining their prices. It also may be possible to disadvantage high-price providers in any dealings they have with the state.

Alternative approaches involve more direct forms of regulation. One approach is to set prices. Maryland used this approach for decades in conjunction with other strategies; more recently, the state has moved toward more of a global budget model (see box). Price setting can be difficult, because incentivizing the optimal allocation of services requires setting thousands of prices relative to one another. By setting prices as a function of an external benchmark, such as Medicare prices, the process can be simplified; this approach also can help deal with the introduction of new services.

Yet, even in this model, regulators must worry about differences across providers. For example, should the prices at academic medical centers be the same as at community hospitals? Inevitably, if rates are set to be the same across all providers, many prices will rise in many cases, diminishing any savings. If they vary by provider, analytical challenges and equity issues will arise. In addition, because rate setting supplants market dynamics, it limits the ability of competition to drive efficiencies or better quality. For example, providers generally cannot increase their prices if they improve quality.

Maryland Evolves from Price Setting to Global Budgeting to a Total Cost of Care Model

In 1971, Maryland established the Health Services Cost Review Commission (HSCRC), an independent agency that set hospital rates for payers in 1974 with the following goals:

  • Constraining hospital cost growth
  • Ensuring hospital solvency
  • Promoting equity in hospital financing.

Later, in 1977, Maryland received a waiver from the Centers for Medicare and Medicaid Services that allows the state to pay HSCRC-approved rates, which were set prospectively, to both Medicare and Medicaid. This waiver gave the state significant regulatory authority over health care spending.

Since then, Maryland’s all-payer system has continued to evolve and HSCRC’s scope has widened. In 2014, the state added global hospital budgets in response to concerns about excessive utilization of care. Budgets have generally been set based on a hospital’s historical revenue trended forward, with factors such as inflation, quality, and market area changes being taken into consideration. Adjustments could be requested, but penalties are applied to subsequence budgets if the revenue varies more than the allowed percentage over a year.

When global budgets were launched, Maryland also started monitoring, but not regulating, nonhospital cost growth. Then, in 2019, the state began piloting the Maryland Total Cost of Care Model to hold the state at risk for total Medicare costs. It includes three parts:

  • The Hospital Payment Program to test population-based payments for Maryland hospitals
  • The Care Redesign Program that allows hospitals to make incentive payments to nonhospital health care providers if it has attained savings under its fixed global budget
  • The Maryland Primary Care Program that is structured to incentivize primary care providers to offer advanced services and care management to their patients.

Through legislative mandate, all acute-care hospitals in Maryland are required to submit confidential patient-level administrative data on discharges and visits to HSCRC. This includes demographic, financial, and clinical information. These data are then managed by the Chesapeake Regional Information System.

The HSCRC itself is composed of members that have been appointed by the governor. They represent independent experts, payers, providers, and consumers, including those under the commission’s purview.

A more modest approach is to cap prices. Defining price caps as a function of Medicare rates is likely the simplest approach. Caps that reflect a multiple of relatively low rates nationally, or in the state or local market, are more responsive to market conditions or changes in delivery costs and less dependent on changes in Medicare policy. This allows for growth of fees to match more closely that of input costs, such as nurses’ wages or medical supplies, as opposed to scheduled Medicare fee increases, which are set below input cost growth. This concern is particularly salient if fee caps are extended to physician services because current Medicare policy has virtually no fee increases scheduled for physicians in nominal terms for many years.

From a state perspective, the advantages of using Medicare rates likely outweigh the disadvantages. However, from a federal perspective, Medicare policy would be more complicated if all rates were based on Medicare fees. That is because the stakes associated with changes in Medicare prices would be higher, placing more pressure on Congress any time prices change.

Typically, the price caps that have been discussed by states have been tied to a relatively low percentage of Medicare rates.13 However, higher, or more generous, caps have been proposed that would minimize hospital closures, potential job losses, and other market disruptions and could be lowered gradually as outcomes are monitored.14 Another option is a limited price cap. In 2016, Montana capped hospital prices for state employees. The State of Montana Benefit Plan limited both inpatient and outpatient hospital prices to, on average, 234 percent of Medicare.15 The policy has reduced disparities between the least and most expensive hospitals in prices charged to state employees by 28 percentage points.16 Because the caps were limited to state employees, its impact on providers is less than an analogous cap for all commercial coverage.

A related strategy is to cap price growth. This can supplement price caps with less disruption. Focusing on price growth may be easier and face less political opposition but can lock in existing inefficiencies or price differentials across providers (unless price convergence is built in). In 2010, as part of a broader effort to improve affordability, Rhode Island implemented inflation caps that were equal to the Medicare price index plus 1 percentage point for both inpatient and outpatient services.17 These caps, along with a switch from per diem to diagnosis-related group (DRG) payments were largely responsible for the state’s reduction in fee-for-service spending. In addition, price growth caps gave insurers greater leverage when negotiating with providers, suggesting that price growth caps may be more effective in areas where providers have disproportionate market power.18 Still, it is also worth noting that caps on price or price growth do not directly influence utilization, potentially limiting the impact of these policies on total spending.

Commission Support of Price Reduction Policy

Addressing high prices is a narrower charge than addressing overall health care spending because prices reflect a single transaction that policymakers could directly regulate. In practice, however, price regulation raises a number of practical problems that commissions may help address. For one, the commissions could develop and implement soft strategies to control prices, such as holding hearings to shed light on high prices or requiring providers to publicly justify their prices.

State commissions also can play an important role if regulatory strategies are used. For example, if states decide to set, as opposed to cap, prices, commissions (like the one in Maryland) could help determine the appropriate price. While this may not be needed if prices are based on a multiple of Medicare or Medicaid rates, in many cases some variation across facilities may be important because of variation in markets or quality. Commissions can perform or support the related analysis and even be granted authority to set the prices.

Commissions also may play a similar role if caps are placed on prices or price growth, particularly given the logistical challenges associated with any price regulation (setting or capping). Specifically, health care services are paid for in a variety of ways. For example, hospitals may be reimbursed on a per diem or DRG basis. States focused on price regulation must be able handle the various payment structures used (or require uniformity in pricing systems, which may lock in existing, suboptimal models). States also must recognize the ways providers and insurers can circumvent price regulations. For example, quality-based payment models could be altered in ways that are designed not to promote quality but rather to circumvent price regulations, for example, by lowering the performance needed to meet quality targets.

Commissions can help monitor the effects of price regulations and adapt regulations accordingly to adjust for payments occurring outside of traditional current procedural terminology (CPT) or DRG bases. Since this sort of analysis requires greater expertise and resources, commissions may be valuable in helping states navigate potential policy options and find the tools that work best for them. Additionally, they may help reduce prices, to some degree, by facilitating lower administrative costs. This could be done by standardizing billing and quality metrics or by streamlining processes for reporting data to states. Indiana, for example, operates a health information exchange that enables data to be more easily shared among hospitals, payers, and public health officials.19 Still, there is little evidence such initiatives will significantly reduce spending or spending growth.

Reducing Utilization of Low-Value Care

Discussions surrounding health care spending often focus on reducing the use of low-value care. These are services that offer patients with certain clinical presentations no benefit, or benefit less than cost, leading to unnecessary spending and potentially even patient harm. This is important given that overtreatment is estimated to cost between $158 billion and $226 billion each year.20 Eliminating even a fraction of that spending has the potential to yield substantial savings without significantly impacting quality or outcomes.

Identifying low-value care is difficult. The utility of a clinical service ultimately depends on the context in which it is provided. For example, imaging is often unnecessary for headaches and is, therefore, of low value in many cases. Yet for a patient who has risk factors or symptoms that may signal a more serious underlying etiology, imaging is of much greater value. This distinction is often difficult to make with administrative data, which can lack clinical detail and nuance.

Despite these measurement challenges, initiatives such as Choosing Wisely, implemented by the American Board of Internal Medicine Foundation, have created lists of typically low-value care and private vendors sell software to measure how often these services are provided. These lists have been used to analyze Medicare claims and develop measures of low-value services across a variety of categories, such as imaging and surgical procedures.21 In one study, the most sensitive versions of these measures found that 42 percent of patients received low-value care, totaling 2.7 percent of overall annual spending. More specific versions of these measures, however, found that 25 percent of patients received low-value care, totaling 0.6 percent of overall spending.22 That difference suggests that the impact of any policy targeting low-value care will depend significantly on the measures being used.

Examples of Low-Value Care

  1. Unnecessary diagnostic testing prior to low-risk surgery
  2. Vitamin D screening
  3. Prostate-specific antigen screening in men age 75 and older
  4. Imaging during the first six weeks of low back pain
  5. Branded drugs when identical generics are available

Efforts to measure and raise awareness about low-value care, often driven by state data agencies, have been growing. For example, states such as Colorado, Maine, Virginia, and Washington have been able to use all-payer claims databases to track spending on potentially wasteful services. In Colorado, the Center for Improving Value in Health Care found that 13 services accounted for 81 percent of all low-value spending, with eight of those services having the potential to harm patients.23 The Virginia Center for Health Innovation (VCHI) identified more than 2 million low-value services that contributed to almost $750 million in spending, such as baseline laboratory studies in patients without systemic disease undergoing low-risk surgery.24

Efforts to eliminate low-value care focus on education or incentives. For example, with regard to education, Colorado plans to generate and share provider-specific data to encourage improvement at the local level.25 In addition, VCHI created the Smarter Virginia Health Care Coalition and is working with the state’s major health systems to reduce the use of low-value services. This involves training and educating physicians and developing strategies, in conjunction with large health systems, to reduce low-value care.

With regard to incentives, payment models, such as accountable care organizations (ACOs), reward providers for providing high-value care and reducing unnecessary spending. While not targeted exclusively at low-value care, these efforts have been shown to reduce the utilization of low-value services. Value-based insurance design (VBID) plans, which typically incentivize patients to choose services whose clinical benefits exceed the costs or services that are high-value, sometimes also actively discourage the use of low-value care.

Commission Support for Reduction in Low-Value Care

Commissions may be useful in supporting efforts to reduce low-value care. They can help interpret and publicize state measurement activities. They can develop priorities regarding which low-value care services to focus on. In some cases, they may develop more aggressive strategies, or even penalties, designed to discourage use of low-value care.

Address Spending Holistically

Holistic strategies are designed to influence spending overall, as opposed to particular components such as prices or utilization. The broadest holistic strategies target total cost of care or premiums, but more limited versions may target episodes of care or spending from specific provider types, such as inpatient hospitals. These approaches typically assign individuals to accountable entities, such as insurers or provider systems, and hold those entities accountable, to varying degrees, for spending. Examples of these strategies would include premium regulation and encouraging alternative payment models or global hospital budgets (particularly those that extend responsibility for care delivered outside of the hospital).

Soft holistic approaches could involve monitoring and reporting spending or encouraging policies that promote alternative payment models. For example, states could use alternative payment models for Medicaid or state employees, which could induce participation in such models in the commercial sector. In other cases, states could use soft sanctions if spending targets are exceeded. For example, in Massachusetts, the state attributes patients to providers and can require providers to file improvement plans if spending exceeds the target. In these approaches, provider systems are accountable for total spending, which makes them responsible for care delivered by organizations outside of their system. While provider systems may be able to influence that care, or which providers their patients visit, it may be problematic to severely penalize providers for actions that they may have only limited control over.

Other states have adopted stronger approaches. For example, Arkansas previously used a multipayer, episode-based payment model. This had been facilitated by a collaboration between the state’s Medicaid program and the state’s largest insurer, which had a dominant market share. However, the state’s program was limited by the number of conditions suitable for episode payment — those with clear episode definitions and sufficient volume to adequately adjust for risk differences. Their experience suggests that episode-based payment may be more useful for a limited and targeted set of conditions. Maryland has been successful with a broader hospital budgeting model. Though the state’s model was initially limited to price regulation, it evolved to a hospital global budgeting model and has recently expanded to include some responsibility for total costs of care.

An alternative approach would be to hold insurers accountable for the total costs of care. Insurers are a natural target because insurers aggregate all spending (claims costs, other financial transfers, and insurer administration) to the population level and, therefore, have the broadest scope. To the extent that the core concern is high premiums, insurers are the most proximate organization to the policy target.

There are complications to using a holistic approach, however. For example, insurers must negotiate prices with providers, and, if providers have significant market power, insurers may not be able to successfully control spending. Moreover, some tools that insurers may use to control spending, such as narrow networks or utilization management, may not be acceptable to customers (or policymakers), making it difficult for insurers to meet any premium targets without pressure on providers. If the premium targets are too strict relative to available tools, some insurers may leave a market, further complicating cost-containment activities.

Finally, there are some regulatory barriers to focusing on insurers. In 2019, 61 percent of Americans with employer-sponsored health coverage were enrolled in self-insured plans.26 As a result of the federal Employee Retirement Income Security Act (ERISA) and its preemption clause, states have long considered it more difficult to regulate these plans.27 However, this may be changing, given the recent U.S. Supreme Court decision in Rutledge v. PCMA.28 In Rutledge, which involved state regulation of pharmacy benefit managers, the Court stated that “ERISA does not preempt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”

Many holistic strategies also require attribution of patients to providers. For example, in Maryland, the state attributes patients to hospitals using a multistep process based on first attributing the patients to physicians and then attributing the physicians to hospitals. In cases where patients cannot be attributed using that method, other approaches are used, such as using geography.

Similarly, holistic approaches also must address risk adjustment. Risk adjustment is included in many existing population-based programs, such as in health insurance marketplaces, the Medicare Advantage program, and the Medicare ACO program. Although adjustment models seem to perform acceptably, there are concerns about both the fit of the models and the susceptibility of the models to changes in provider coding behavior. For example, Massachusetts and public programs such as Medicare Advantage have seen very large increases in risk scores.

Strategies to combat coding increases are therefore very important. The Centers for Medicare and Medicaid Services adopts several such strategies for ACOs, including normalizing risk scores each year and capping risk-score growth. Moreover, holistic models, such as population-based payment models, are best suited for large provider groups. Holding small practices accountable for total spending is more problematic, even when risk adjustment is working well, since risk adjustment accounts for expected utilization and there may be wide variation in actual utilization.

The choice among holistic strategies depends on many factors. If the delivery system is very fragmented, soft strategies that focus on episodes may be preferred to population-based models, such as an ACO, because small providers may not be well suited to manage risk. Moreover, relative to population-based approaches, episode-based models are less reliant on attribution (for many episodes) and risk adjustment. Still, episode-based strategies often only cover a portion of spending, often missing patients with multiple, complex chronic conditions. Population-based and global budget models are more comprehensive and are well suited to address both the medical and social needs of high-risk and high-cost patients. But these broader models are best suited for larger delivery systems. And though broader payment models do not need to address overlap in episodes or medical conditions, the issues related to risk adjustment and attribution are more salient. Maryland’s model has evolved over time from a price-setting model to a hospital-budgeting one and now has begun to transition closer to a population-based payment model.

It is worth noting that holistic strategies do not have to be pursued alone and may complement other approaches. For example, states taking a holistic approach may adopt any of the other strategies with respect to competition, prices, or even utilization to support the ultimate goal of lower statewide spending. Rhode Island not only used inflation caps but had hospitals transition from per diem to DRG-based payments to slow the growth of health care spending.29 The state also combined these efforts with requirements for commercial insurers to increase their spending on primary care and care coordination services (see box).

Rhode Island’s Price Controls and Affordability Standards

In 2004, Rhode Island created the Office of the Health Insurance Commissioner (OHIC) to review commercial health insurance rates.30 Given broad statutory language and regulatory authority, the commission’s role became more extensive over time, including mandating increases in primary care spending, adding quality incentives to payment systems, and creating a multipayer medical home. By 2010, OHIC began to adopt affordability standards and price controls, including inflation caps and DRG payments. OHIC also required commercial insurers to increase spending on primary care and care coordination services. In 2018, the commissioner established the Working Group on Healthcare Innovation to develop recommendations for a global state spending cap. The group’s priorities also include standardization and incentivizing quality.

Rhode Island has an all-payer claims database, but given limited resources, these data are managed by researchers at Brown University. OHIC is led by the state health insurance commissioner, who is appointed by the governor.

Commission Support for Holistic Strategies

Given these challenges, state commissions can be very useful for holistic strategies. In soft-touch approaches, they can analyze data, recommend specific policy actions, and support any sanctions, if applicable. In more regulatory approaches, the commission can support development of important policy parameters.

The experiences of different states are instructive. Massachusetts operates a soft-touch holistic system where the Health Policy Commission (HPC) acts as an independent agency, with the goal of making care more affordable to state residents. Though the HPC does not have direct regulatory authority, the HPC has a number of influential functions, including conducting and sharing analyses about drivers of health care spending, making evidence-based recommendations for public policy, and supporting regulatory actions by other agencies.31 Although the commission may not be able to penalize payers or providers, it can “encourage, cajole, and if needed, shame them into doing their part to control costs.”32

Without the direct authority to regulate, these commissions also must be creative when building credibility. A simple, but important, way to do this is by being transparent. Commissions can share their analysis with the public through regular reports or offer perspectives and recommendations by speaking with news and media outlets, therefore influencing debate. If more people know about the commission and are engaged in its work, the harder it becomes to ignore recommendations. Commissions also can collaborate. Many, such as the one in Massachusetts, derive authority by working with other regulatory agencies. Thus, even if the commission itself cannot impose penalties, it can pass on information to agencies that can.

Conversely, states may prefer to create commissions with greater holistic authority, giving them the ability to force changes in the health care sector. For example, Maryland has focused on hospital budgets and total cost of care measures. This is feasible in Maryland because its commission has a long and well-established history. It is also worth noting that stakeholders have significant interest in working with the commission, given the state’s Medicare waiver. Without it, Medicare and Medicaid payment rates would drop significantly, since the waiver created all-payer rates that increased fees from public payers. Although the difference could be offset as commercial rates rise, that would take time, creating something akin to golden handcuffs that incentivize hospitals to make the current system succeed.

Part II. Implementing Policy Goals

What Data and Analytic Capability Do States Need?

To understand trends in spending and implement many of the strategies discussed, states need data. States with the proper regulatory authority can compel organizations, particularly payers, to report data. This is useful not only because it requires less resources from the state, but also because payers are likely better equipped to make accurate estimates about spending for their members.

Aggregate data supplied by payers may be enough, but more detailed, claims-level data allow for more thorough and accurate analyses. To this end, many states now have (or are creating) all-payer claims databases, which are particularly useful for understanding prices or pursuing in-depth examinations of specific services or patient populations.33 However, these databases are resource-intensive, and states may lack the funds and expertise to analyze the data. All-payer claims databases not only require an intake platform and servers, but experienced statisticians and programmers.

In Massachusetts, the state manages its own data with the Center for Health Information Analysis (CHIA). CHIA manages the state’s all-payer claims database and also collects financial data from payers and providers. Notably, CHIA functions as an independent entity that collaborates with state agencies, such as the Health Policy Commission. Though this separation has the potential to create inefficiencies, it also builds trust in CHIA’s work. The data are aggregated and analyzed without regard for what other agencies hope to do with the results. Oregon has a similar Health Policy and Analytics Division. Rhode Island, on the other hand, does not leverage its own data. The state instead works with researchers at Brown University who receive funding through grants. Therefore, the design of a state’s policies may be dependent on its analytic capabilities and available funding sources.

Who Should Be Part of a Commission?

The composition of the commission is a key consideration and dependent on the role that the commission will play. While insights from payers and providers are generally crucial for substantive and political reasons, some states may find it better to minimize the number of commission members employed directly by providers, insurers, or groups funded by those sectors to avoid conflicts of interest. Inclusion of people retired from those segments, or who work for organizations that engage those sectors, may be useful, which is what Massachusetts has done. But other states differ. The commission in Oregon includes stakeholders such as large hospital systems and strong consumer advocates. Their inclusion arguably increases buy-in since they are able to participate in the decisions being made. However, it is important that stakeholders have a strong incentive, like in Maryland, for the commission to succeed. For example, a statutory price reduction, if goals are not met, could foster constructive engagement.

Regardless, expertise in hospital care, nursing care, behavioral health, physicians, and long-term care may all be important. Academics with health policy experience, particularly related to health care markets and financing, are valuable, as well as representatives of employers and organized labor and consumer or patient advocates. In addition, it is important to have some state government representatives, even if ex officio. The Health Policy Commission in Massachusetts has 11 members spanning relevant areas of expertise, while the Heath Services Cost Review Commission in Maryland also includes providers and insurers, among others.

Conclusion

Given barriers to significant federal action, substantial policy changes to control spending growth are likely to be limited to state policy. States can pursue many different strategies, ranging from efforts to promote competition, reduce prices, or decrease utilization of low-value care to broader strategies that address overall spending.

State health policy commissions can play a central role in supporting any of those efforts. However, given differences in political economy and resources, there is likely no one approach to designing commissions for success. Some states may choose to use commissions to provide analytic, convening, and advisory input while other states may give commissions more regulatory authority. States must reflect on their respective priorities, decide on the basic approach they want to take to address health care spending, and then design the commission that works best to support those approaches.

NOTES

  1. Centers for Medicare and Medicaid Services, National Health Expenditure Data, Historical (CMS, 2019); and Roosa Tikkanen and Melinda K Abrams, U.S. Health Care from a Global Perspective, 2019: Higher Spending, Worse Outcomes? (Commonwealth Fund, Jan. 2020).
  2. Sean P. Keehan et al., “National Health Expenditure Projections, 2019–28: Expected Rebound in Prices Drives Rising Spending Growth,” Health Affairs 39, no. 4 (Apr. 2020): 704–14.
  3. Leemore Dafny, Kate Ho, and Robin S. Lee, The Price Effects of Cross-Market Hospital Mergers (National Bureau of Economic Research, Mar. 2016, revised Oct. 2018).
  4. Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayanan, “Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry,” American Economic Review 102, no. 2 (Apr. 2012): 1161–85.
  5. Martin Gaynor, Farzad Mostashari, and Paul B. Ginsburg, Making Health Care Markets Work: Competition Policy for Health Care (Brookings Institution, Apr. 2017).
  6. Massachusetts Health Policy Commission, Massachusetts Health Policy Commission Review of the Proposed Merger of Lahey Health System; CareGroup and its Component Parts, Beth Israel Deaconess Medical Center, New England Baptist Hospital, and Mount Auburn Hospital; Seacoast Regional Health Systems; and Each of their Corporate Subsidies into Beth Israel Lahey Health; AND the Acquisition of the Beth Israel Deaconess Care Organization by Beth Israel Lahey Health; AND the Contracting Affiliation Between Beth Israel Lahey Health and Mount Auburn Cambridge Independent Practice Association (MHPC, Sept. 27, 2018).
  7. Office of Attorney General Maura Healey, “AG Healey Reaches Settlement with Beth Israel, Lahey Health Over Proposed Merger,” press release, Commonwealth of Massachusetts, Nov. 29, 2018.
  8. Dafny, Ho, and Lee, Price Effects of Cross-Market, 2016, revised 2018; and Gaynor, Mostashari, and Ginsburg, Making Health Care Markets Work, 2017.
  9. MHPC, Massachusetts Health Policy Commission Review, 2018; and Healey, “AG Healey Reaches Settlement,” 2018.
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  12. Michael E. Chernew, Andrew L. Hicks, and Shivani A. Shah, “Wide State-Level Variation in Commercial Health Care Prices Suggests Uneven Impact on Price Regulation,” Health Affairs 39, no. 5 (May 2020): 791–99.
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Publication Details

Date

Contact

Michael E. Chernew, Leonard D. Schaeffer Professor of Health Care Policy, Harvard Medical School

[email protected]

Citation

Michael E. Chernew, David A. Cutler, and Shivani A. Shah, Reducing Health Care Spending: What Tools Can States Leverage? (Commonwealth Fund, Aug. 2021). https://doi.org/10.26099/dyp4-2t03