New Medicaid Rule Adds Fuel to The Fire of Commercial Hospital Price Inflation, Health Affairs Opinion Piece Hospital services prices grew faster than any other sector of the US economy. To address the underpayment of hospitals by Medicaid, the federal government issued a regulation correcting the underpayment of hospitals. However, the issue of higher prices and Medicaid paying more to correct the underpayment does not fit in the opinion of The National Alliance of Healthcare Purchaser Coalitions. The outcome of doing so under the new regulation could push hospital prices higher for 66 percent of the US population who have commercial health insurance coverage. Growing evidence of the cause of hospital price variation shows such is the result of
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New Medicaid Rule Adds Fuel to The Fire of Commercial Hospital Price Inflation, Health Affairs Opinion Piece
Hospital services prices grew faster than any other sector of the US economy. To address the underpayment of hospitals by Medicaid, the federal government issued a regulation correcting the underpayment of hospitals. However, the issue of higher prices and Medicaid paying more to correct the underpayment does not fit in the opinion of The National Alliance of Healthcare Purchaser Coalitions. The outcome of doing so under the new regulation could push hospital prices higher for 66 percent of the US population who have commercial health insurance coverage.
Growing evidence of the cause of hospital price variation shows such is the result of hospital market power. The underlying market costs of care is an issue. However, the level of payment by Medicare and Medicaid is one of the few controls on increasing payments leading to cost which commercial insurance covers. In “Hospital Monopolies Driving Up the Costs of Healthcare,” (Washington Monthly), Angry Bear presented an argument by detailing the articles evidence of hospital costs being driven by consolidations, supplies, and the associated hospital operational management.
Under the new rule, Federal regulators will allow states to compensate hospitals at the “average commercial rate” under Medicaid managed care (MMC) plans. In the end commercial healthcare insurance will pass the higher costs to the insured.
Until recently, Medicaid Managed Care (MMC) rates were subject to a federal upper payment limit pegged to Medicare rates. Now the MMC upper-payment limit may will be set to “average commercial rates.” The commercial market for hospital services is not a competitive market. Therefore, it has no validity as a benchmark for price setting.
Consolidation, anticompetitive contracting terms with payers, and out-of-network “surprise billing” practices among hospital-based physicians are just a few of the causes and symptoms of hospital market failure. Weak antitrust enforcement has also been an issue. Health Affairs Michael Chernew and colleagues, Zack Cooper and colleagues, and others have highlighted wide variation in commercial hospital prices across and within states. In a 2020 Health Affairs paper, Chernew and co-authors noted variation in prices “is indicative of market failures.”
How We Got Here
Before the Medicaid rule change, states had many options for paying hospitals adequately in Medicaid programs. Each state has a federal allotment for Medicaid disproportionate share payments. Many states added hundreds of millions (in some cases billions) of additional “supplemental” hospital payments. All of which were subject to an aggregate upper-payment limit tied to Medicare. States also used federal Section 1115 waivers to establish uncompensated care pools.
Medicaid managed care rules and state decisions put more Medicaid beneficiaries in private managed care plans created challenges for paying supplemental hospital payments outside of the managed care contract. The Centers for Medicare and Medicaid Services (CMS) decided to create a new type of state-directed payment (SDP) for Medicaid to be channeled through contracted managed care plans (more like Medicare Advantage which establishes prices to commercial healthcare) and not run afoul of other federal rules.
CMS decided not to define an upper-payment limit on these SDPs when first allowing them in 2016. The result being, growth in these payments has exploded, and a May 2024 Medicaid financing rule seeks to rein them in by placing an upper-payment limit of average commercial rates on SDPs paid to hospitals and skilled nursing facilities by MMC plans.
As representatives of employers and workers responsible for purchasing health care, we are concerned about the new rule. A rule intended to address a Medicaid problem which will have an unintended consequence of increasing premiums and out-of-pocket costs for 153 million workers and their families dependent on employer-sponsored health plans.
Family premiums in 2023 reached almost $24,000. When hospitals raise their prices, employees and families face higher premiums and cost sharing and downward pressure on wages. Scant evidence points to higher quality delivered by the higher-price hospital systems. The new Medicaid rule further increases hospitals’ market power relative to commercial payers by tying Medicaid rates to commercial rates in states choosing “direct” Medicaid managed care firms to pay hospitals commercial rates for Medicaid patients.
CMS routinely publishes information about state-directed payments from MMC plans. However, the information is in a form preventing interested stakeholders and oversight organizations to track and analyze these payments. We cannot be entirely sure how many states have taken advantage of their new ability to set upper hospital payment limits in accordance with the new rule. Many forms are incomplete, and the commercial rate calculation methods and data are not described. Given the number of SDPs and incompleteness of the forms, we were not able to review information for all states. Even so and based on incomplete information, we identified 12 states that use an average commercial rate for setting the total limit on various hospital payments made through MMC plans. Large states such as Texas and New York were included.
Given their size and dominance in some states, big health systems increasing their commercial rates can have an outsize impact on the state average commercial rate. Now big healthcare systems have an added incentive to raise their commercial rates because when they do, they are likely to raise the “average” commercial rate used to set their maximum Medicaid rates. This is possible in the 12 states we identified.
In short, CMS has given big hospital systems already having the means to command unreasonable commercial prices more motivation to squeeze the US’s families harder.
Unintended Consequences of The New Medicaid Rule
The new May 2024 rule permits Medicaid programs to increase hospital rates when hospitals extract higher prices from employer and other commercial plans. If hospitals raise prices by 7 percent for employer-sponsored plans, they can also get a 7 percent increase from MMC plans in states that peg Medicaid rates to average commercial prices.
This policy makes the problems of hospitals’ commercial market power worse. CMS concedes in the recent final regulation, hospital commercial prices are the result of “market power.” To which, rural hospitals and safety-net hospitals “typically are not able to negotiate rates with commercial payers on par with providers with more market power.”
The agency’s rationale for putting its thumb on the scale for big hospital systems in their negotiations with commercial plans is to ensure average commercial rates are high enough that Medicaid rates pegged to them will keep rural and safety-net hospitals viable. This highly indirect approach to helping a few hospitals by helping the most powerful and financially strong adds gasoline to the fire fueling hospital prices and consolidation.
For example, in Massachusetts, which actively collects and discloses commercial prices, prices at academic medical centers were 9 percent above the statewide average in 2021. These large institutions can leverage market dominance to influence statewide average prices, thereby increasing the upper limit on Medicaid rates as well.
Tying Medicaid rates to commercial prices also creates a conflict for health insurers that increasingly do business in the commercial and public insurance (Medicaid and Medicare) markets. While employers expect aggressive negotiations from insurers on their behalf, states expect them to facilitate higher Medicaid reimbursements, creating a conflict of interest. In fact, in 2021, the market for privatized Medicaid and Medicare plans was more lucrative for insurers than employer-sponsored market, making insurers less likely to look out for the interests of employers and workers.
Growing tension between hospitals and health plans, especially where hospitals can command large price increases as a condition for contracting, poses direct threats to the affordability of health care. Many disputes involve academic medical centers and children’s hospitals receiving large supplemental payments from Medicaid and wield power in their local markets. Recently, a children’s hospital quit contracting with a New Jersey Medicaid plan despite higher rates from the state. Another dispute leaving Medicaid patients in Ohio and Virginia out of network was really about a hospital system seeking higher commercial rates, according to the insurer.
Finally, a lack of transparency may exacerbate all of the unintended consequences of the new rule. Both hospitals and states are permitted to keep the methodology used to calculate average commercial prices secret. Such makes it nearly impossible for employers or researchers to verify these figures.
Such secrecy makes the door is wide open to manipulation. In one CMS-approved state-directed payment we reviewed a group of hospitals permitted to survey their own commercial prices to determine the average commercial price. Another state used the state employee health plan rates to inform a calculation of the average commercial rate.
Looking Ahead
If federal and state Medicaid officials want to target more Medicaid funds to hospitals, they should do it without incentives for hospitals with market power to keep raising prices paid by commercial plans covering working families. Returning to a federal Medicaid upper-payment limit for hospitals tied to Medicare or a multiple of Medicare would eliminate the perverse incentives described here. As noted above, federal rules do allow states to target additional Medicaid funds to safety-net hospitals, but states struggle to resist pressure to spread subsidies around based on hospital political and market power.
Hospital consolidation is likely to march on regardless. Employers and workers ask federal policy makers not to fuel consolidation and hospital price inflation with misguided policies that create unintended consequences for the more than 150 million Americans with employer-sponsored coverage.