The American public has become increasingly concerned about rising health care costs. State policymakers also have become more focused on the issue of rising costs in the commercial market. In less than 20 years, from 2000 to 2019, premiums for employer-sponsored health insurance have more than tripled, far outpacing inflation; in 37 states, premium contributions and deductibles now consume 10 percent or more of the median income. High health care cost growth directly affects business profitability and worker wages, too. Meanwhile, rising health care costs for state employees, dependents, and retirees squeeze out other state budget priorities, such as education and social services.
In general, states have less power to address cost growth in the commercial health care market than they do in public programs like Medicaid that are directly funded by and administered by the state. Nonetheless, state policymakers have explored and implemented a range of cost-control strategies in recent years. Their experiences, along with ongoing research and evaluation, can inform the next wave of policy innovation.
In this brief, we provide practical guidance to state policymakers seeking to contain health care cost growth in the commercial market. We present an overview of 10 potential strategies, which we discuss in greater depth in the accompanying profiles. For each one, we describe:
- key design and implementation considerations
- empirical evidence on the strategy’s potential to reduce health care cost growth
- the potential impact on health equity, including consequences for economically and socially marginalized groups
- contextual features, such as health care market conditions, state analytical and regulatory capacity, and stakeholder dynamics, that might make the strategy particularly attractive to certain states
- possible unintended consequences or limitations.
Strategy Identification and Selection
To develop this set of options, we surveyed the peer-reviewed and grey literature and drew upon recent work by health economists at the Urban Institute, 1% Steps for Health Care Reform, and the American Enterprise Institute. We also examined recent state laws affecting health care cost growth and supplemented our research with our team’s knowledge of current state activity on cost containment.
To select strategies for inclusion, we first employed “gating” criteria to determine whether a strategy should be given further consideration. These focused on whether the strategy:
- has been shown to reduce health care cost growth in the commercial market, or whether a strong argument exists that it could reduce cost growth
- could be implemented in a way that does not negatively affect low-income populations, including those served by Medicaid, or people of color.
A second set of criteria was applied to the group as a whole to ensure that the final list of strategies, even while parsimonious, would provide states with a diverse array of options. These criteria addressed whether the strategies:
- would appeal to states with a range of political dispositions
- could be applied in a variety of geographic settings
- would cover the leading drivers of high health care costs and cost growth
- could be implemented by states with varying levels of resources.
We identified the following 10 strategies for states to address health care cost growth in the commercial market. They are grouped by the resource requirements needed for implementation, with the most resource-intensive strategies listed first. Each strategy in the list links to a detailed overview providing information on design and implementation, evidence of impact, equity considerations, and other topics.
- Implement a health care cost growth target. Establish a target, or benchmark, for per capita health care cost growth; measure performance against that target; hold entities accountable for meeting the target; and implement cost growth mitigation strategies to attain it.
- Promote adoption of population-based provider payment. Encourage or require increased adoption of advanced alternative payment methodologies, particularly those that move provider payment toward meaningful risk sharing.
- Cap provider payment rates or rate increases. Set a limit on prices paid or restrict provider price increases in state-regulated markets.
- Contain growth in prescription drug prices. Establish prescription drug affordability boards, upper payment limits, international reference pricing, or penalties for “excessive” prices.
- Improve oversight of provider consolidation. Reinforce states’ ability to review and disapprove mergers and prohibit anticompetitive contracting terms to counter the impact of health care consolidation on provider prices.
- Strengthen health insurance rate review. Use the insurance rate review process as a lever for health care cost containment.
- Adopt advanced benefit designs. Promote strategies that encourage consumers to choose lower-cost providers, such as reference-based benefit design and “smart shopper” programs.
- Promote use of community paramedicine. Enable emergency medical service providers to provide a range of services to patients without transport to an emergency department (ED) to reduce unnecessary emergency and inpatient care.
- Improve behavioral health crisis systems. Expand behavioral health crisis services to reduce use of more costly ED and inpatient services, and leverage multipayer support for these programs.
- Reduce administrative waste. Address product choices and administrative processes that contribute to waste by, for example, streamlining plan choices, health care utilization review, and billing functions.
As a whole, these strategies address a range of cost drivers and present options that could be attractive to many states. They also have been implemented or considered in different state environments.
The table below assesses each of the 10 strategies based on the cost driver that it addresses, the resource and analytic capacity needed to operationalize it, the degree of difficulty in enacting the strategy from a political and stakeholder perspective, and the political context in which the strategy might be successful. In addition, we make a broad assessment of their relative impact on slowing cost growth, dividing strategies into those with likely sizeable impact (++: on the order of magnitude of 1% or more of total health care spending), smaller but meaningful impact (+: on the order of magnitude of 0.1% of total health care spending), or unknown/highly variable impact (?). This assessment is described in greater detail in the appendix.