Montana tries to bargain for lower health care costs by switching gears

Montana is signaling it may move away from an innovative way to determine the price it pays hospitals for its public employee health plan services, an approach that has saved the state millions of dollars and become a model for health plans nationwide.

The plan gained national prominence among employers and health care price reform advocates when, in 2016, it announced that the health plan would pay the maximum amount for all inpatient and outpatient services. These amounts were determined at Medicare reimbursement rates. Adopting that model, known as reference-based pricing, has saved the state millions of dollars. Taxpayers help fund the medical plan, which insures government employees and their families, for a total of about 28,800 people.

Montana did not invent reference-based pricing, but the state sets prices for all services through health care plans of that size, not specific procedures like knee replacements.

Now, Montana is positioning itself to change its model, just as more states and employers, looking to cut costs, consider adopting it. That has health economists and those working elsewhere to lower hospital costs wondering whether the state is once again ahead of the curve — or setting itself up for a setback.

“We look to Montana for success stories,” said Gloria Sachdev, president of the Employers Forum of Indiana, a nonprofit that seeks to improve health care costs. “Now that it’s doing something new, I think a lot of eyes will be on Montana.”

In September, the state awarded Blue Cross and Blue Shield of Montana a contract to take over the administration of the public employee health plan starting next year. The contract calls for using Medicare rates as a baseline to set overall goals for the amount the plan will pay hospitals. This gives Blue Cross the ability to meet those goals with reference-based pricing — but also through contracts with individual health care providers using a mix of reimbursement models.

The state said in a news release announcing the deal that its new reimbursement targets will save $28 million over the next three years. But the details of the deal are unclear on how that will be achieved.

Blue Cross, one of Montana’s largest insurers, will not detail its plans while Allegiance Benefit Plan Management, the current administrator of the public employee health plan, challenges the state’s contract decision. Since the state adopted the reference-based pricing model, the adherence agreement held.

John Doran, a Blue Cross spokesman, said state officials have directed company officials to refer all questions to the Montana Department of Administration.

Asked how the upcoming changes would affect the health plan’s existing model, Montana officials pointed to the state’s contract with Blue Cross. According to that document, Blue Cross can create “custom alternative payment arrangements with providers” with state approval.

In a state news release, officials said the goal is to “modernize” its six-year-old reimbursement strategy. Department of Administration Director Misty Ann Giles said in the release that the state chose a vendor to help it “become more flexible to efficiently reach its goals.”

The United States has struggled to respond to rising health care costs. The Centers for Medicare and Medicaid Services estimates that in 2020, health spending will increase by about 10%, to $4.1 trillion, or $12,530 per person. More than 160 million people in the United States have employer-sponsored health insurance. Historically, the prices that employee health plans pay have been privately negotiated between health care providers and third-party administrators such as Blue Cross, often beginning with the hospitals’ proposed prices.

This process has exacerbated the lack of transparency in the cost of care and contributed to wide variations in the prices that private insurance plans pay. In a study of medical claims data from 2018 to 2020, think tank Rand Corp. found that private insurers in some states, such as Washington, paid hospitals less than 175% of what Medicare would have paid for the same service. For the same benefits, in other states, they pay 310% of the Medicare rate or higher.

In 2016, Montana took a bold leap. Instead of negotiating on hospital list prices, the state sets a range of what hospitals can charge for services, establishing the maximum cost as a set percentage above the Medicare rate. If hospitals refused to negotiate through that model, they risked losing access to patients insured through the state’s largest employer.

Marilyn Bartlett, who spearheaded the change to reference-based pricing while working for Montana, said that at the time, the plan had been losing money for years and its reserves were at risk of slipping into the negative. By 2017, Bartlett said, the plan’s reserves had accumulated more money than the state’s general fund and equaled what the state paid in employee premiums.

“We flattened the price curve, and actually we had a negative one,” said Bartlett, now a senior policy fellow at the National Academy for State Health Policy advising other states on how to reduce health care costs. “That’s unheard of.”

President of Allegiance Benefit Plan Management. Stephen Tahta said that during his tenure as administrator of the Allegiance Health Plan, it saved more than $48 million.

Hospital representatives said a growing number of employer-based plans are considering increasing their reliance on reference-based pricing.

In recent years, California retirement plans that provide insurance benefits to public employees have worked to expand reference prices for some drugs.

And the state of Colorado this year joined a purchasing alliance to negotiate with hospitals to set prices for its public employee medical plans, using Medicare rates as a baseline. Bob Smith, executive director of that coalition, the Colorado Business Group on Health, said that while major health systems have pushed the process so far, patients have a health care price comparison tool to choose providers that charge reasonable prices and offer high quality. care

The American Hospital Association opposes reference-based pricing, saying it could increase what patients pay for care. One way this can happen is through balance billing, when a provider charges a patient for the difference between the cost determined by the plan and the amount the provider charges.

Those advocating for price reform say that initial prices for hospitals before negotiations can be arbitrary and that Medicare rates are a fair starting point. Medicare reimbursement may be adjusted if a provider faces steep costs, such as working in rural areas or hiring staff to provide specialized care.

In the agreement awarded in September, the state Blue Cross plan will pay providers in aggregate in its first year no more than 200% of the Medicare rate. The agreement states that Blue Cross will target reimbursement to providers at an overall rate of 180% of the Medicare rate within three years of the agreement.

The state left it up to Blue Cross to find ways to reach those goals.

After sharing KHN Blue Cross reimbursement details with Chris Whaley, RAND health economist and policy researcher on state contracts, he said it was difficult to know how the new system would work. Blue Cross’ plan does not say how often the company will contract with suppliers outside of reference-based pricing. Whaley said that could cause Montana to lose focus on its reimbursement strategy.

“The model seems to be working very well already,” says Whaley. “Is the reference-based pricing model something that’s going to evolve and improve? Or is it something that might be taken away and not have the same impact as before?

Loyalty is alleging that the contract was awarded through an illegal bidding process and could increase health care costs for state employees and taxpayers.

Belinda Adams, an administration spokeswoman, said state officials are reviewing the issues raised by the loyalty but believe the hiring process was fair and legal.

The state has 30 days after Loyalty filed its protest to issue a decision on the company’s claim if the two sides can’t reach an agreement that resolves the dispute. Meanwhile, Adams said, Blue Cross is preparing to take over administrative responsibility for the public employee health plan in January.

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