State Highlight: The Use Of Supplier-Based mostly Reference Pricing In Oklahoma And South Carolina

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Consumer Protections Meet Political Pushback: Lessons from States Studying Facility Fees

By Sabrina Corlette and Karen Davenport

State worker well being plans (SEHPs) have wrapped up their open enrollment intervals for plan 12 months 2025. Many state employees bought some bad news about hefty premium hikes in the process. Like different employer well being plans throughout the industrial insurance coverage market, SEHPs are going through important increases in health care costs. These will increase power states to decide on between drawing extra closely on tax income to cowl these prices and shifting extra prices to state employees and their households.

SEHPs can pursue quite a lot of avenues to constrain price development, and one technique—also known as “provider-based reference pricing”—has been gaining traction. A recent study estimates that using this sort of reference pricing would have saved as much as $7.1 billion throughout all SEHPs in 2022. This 12 months, Washington State’s Workplace of the Insurance coverage Commissioner recommended provider-based reference pricing for that state’s SEHP, following comparable—and profitable—latest initiatives in Oregon and Montana.

In our surveys of SEHPs’ price containment efforts, we discovered that 9 state plans use some type of provider-based reference pricing to ascertain reimbursement charges for well being care suppliers. On this article, we deal with the teachings discovered from the SEHPs in Oklahoma and South Carolina, each of which have lengthy used government-set price schedules to pay taking part suppliers.

Defining Phrases: What Is Supplier-Based mostly Reference Pricing?

In relation to medical health insurance, there are completely different types of “reference pricing.” One type is a profit design technique to steer policyholders to lower-price in-network providers. The state worker well being plan of California (CalPERS) is well-known for pioneering this strategy. The plan surveys costs for particular elective providers inside geographic areas and determines a cap or “reference worth” as the utmost it’s going to pay for that service. Plan enrollees who select to obtain providers from a supplier that expenses the next worth than the reference worth should pay the distinction. This type of profit design-based reference pricing just isn’t the main target of this put up.

Somewhat, we zoom in right here on provider-based reference pricing: The plan pays taking part suppliers a non-negotiable, established charge that is the same as or a proportion of a reference charge, akin to the worth Medicare pays for a similar service. This method is kind of completely different from plans’ frequent technique for establishing supplier reimbursement ranges, which is to barter a reduction off the supplier’s listing costs. There’s broad consensus within the financial literature that these listing costs are dictated extra by a provider’s market power than by the price or high quality of these providers.

A plan can implement provider-based reference pricing by figuring out an higher restrict or cap on the charges the well being plan pays for specified well being care providers. That is the method of Oregon’s SEHP, which caps in-network hospital charges at 200 percent of the Medicare rate. It may also be applied through a government-set price schedule for supplier providers, as is the method of SEHPs of Oklahoma and South Carolina.

Reviewing The Proof: Value Financial savings From Supplier-Based mostly Reference Pricing

Of the 9 SEHPs in our survey which have provider-based reference pricing, solely two have benefited from public-facing analyses of their price affect. A latest peer-reviewed study of the Oregon SEHP’s reference pricing program for hospital providers discovered that it saved the plan $107.5 million within the first 27 months of this system. Equally, an independent study on Montana’s reference pricing program concluded that this initiative saved the SEHP almost $48 million from state fiscal 12 months (SFY) 2017 by SFY 2019, following its 2016 implementation. Nonetheless, in 2022, the state moved to regulate this system to permit Blue Cross Blue Protect of Montana, the newly contracted plan administrator, to exceed the reference pricing cap in sure circumstances (though what these circumstances might be has not been publicized). It’s not clear whether or not that transfer will have an effect on future spending development. This 12 months, Washington State’s insurance coverage division has projected that if the state’s SEHP applied a reference worth of 160 p.c of the Medicare charge for supplier providers, it might scale back medical spending between 3 percent and 19 percent.

Highlight On South Carolina and Oklahoma And Issues For Different States

South Carolina and Oklahoma reported in our 2022 survey of SEHPs that they set the costs for the suppliers with whom they contract. Each states report that their costs fall between Medicare’s price schedule and the prevailing industrial charge. Though there have been no exterior evaluations of using provider-based reference pricing in these states, each SEHPs report that the technique has generated important financial savings for the plan, its members, and state taxpayers.

These financial savings don’t seem to have affected enrollee entry to care, as directors in each states describe networks with broad supplier participation. Due to each plans’ giant memberships, they’re able to use their market energy to persuade hospitals and physicians to take part. Moreover, officers noticed that as a result of they cowl schoolteachers and different public servants, suppliers of their state have been usually sympathetic concerning the want for decrease charges. Certainly, in Oklahoma, officers reported that 99.3 p.c of hospitals and 80.0 p.c of physicians take part within the SEHPs’ community. South Carolina’s plan has one hundred pc hospital participation and greater than 99 p.c of physicians (though they don’t instantly contract with behavioral well being suppliers). South Carolina officers famous that suppliers like working with the SEHP as a result of it’s a “immediate payer” and offers beneficiant protection.

South Carolina and Oklahoma officers have additionally discovered that reference pricing is comparatively simple to manage. As one administrator put it, “When a brand new hospital opens, we attain out and supply our price schedules. As a result of we don’t have a negotiation course of, there actually isn’t something to barter.” One other noticed that using a price schedule makes it very simple to for the plan to calibrate its spending over time and to assist hold price development in test.

Plan enrollees additionally profit from these SEHPs’ success in constraining supplier worth development, as these states have much less have to shift prices to employees by larger premiums and deductibles. State workers in North CarolinaMontana, and Oregon have been vocal proponents of reference pricing proposals.

Potential Challenges

Regardless of the advantages, SEHPs searching for to undertake reference pricing can face a number of challenges. First, numerous states have diluted their market energy by separating completely different teams of state employees into completely different plans. For instance, many states have separate plans for presidency employees and college workers. Others have separate plans for state and municipal employees. These states could have to consolidate these plans into one, or work in tandem on buying methods, to successfully counter the inevitable resistance from hospitals and different suppliers.

Second, even in states the place the SEHP is consolidated and the most important employer within the state, SEHPs could face challenges getting hospitals to comply with the reference worth. Montana’s effort encountered stiff resistance from hospitals and required a public relations strain marketing campaign to persuade holdout hospitals to signal community contracts. The proposal from North Carolina’s SEHP to ascertain reference pricing foundered when hospital lobbyists convinced legislators to reject it. Nonetheless, latest information that the SEHP is facing a loss of more than $106 million has prompted some advocates to revive requires a reference pricing program.

Third, the third-party directors (TPAs) that many states use to design and administer their supplier networks and course of claims could oppose or hinder a transfer to reference pricing, significantly because it successfully reduces the TPA’s position in community design. The Montana SEHP, for instance, needed to sever its relationship with its long-standing TPA to maneuver ahead with its reference pricing program. SEHP officers responding to our survey report experiencing foot-dragging and resistance from TPAs over different cost-control methods they’ve tried to implement; they could encounter comparable reactions to a reference pricing initiative, requiring a shift to extra agile and prepared companions for this effort.

Lastly, a trade-off that SEHP directors may have to contemplate is whether or not, or to what extent, a reference pricing program and its reliance on a fee-for-service reimbursement chassis inhibits using various or progressive fee fashions. Such fashions can promote inhabitants well being administration, high quality enchancment, and whole-person care. Reference pricing mustn’t preclude such efforts, however plan directors should contemplate how the 2 sorts of fee strategies can coexist.

Trying Forward

The price of employer-based insurance coverage is rising at an unsustainable tempo, and SEHPs usually are not immune from price pressures. The first driver of those price will increase is high and rising provider reimbursement rates. The lack to maintain these charges down is forcing troublesome decisions for employers, resulting in larger deductibles and value sharing and an epidemic of underinsurance. Certainly, 23 percent of people with year-round health insurance are thought of underinsured; 66 p.c of those people are coated by an employer-based plan.

For SEHPs, provider-based reference pricing is usually a viable technique to constrain price development, keep the worth of protection for employees, and generate financial savings for taxpayers. The success of reference pricing in states as various as Montana, Oklahoma, Oregon, and South Carolina means that it may be replicated in a variety of states. Moreover, a state-led reference pricing program holds the potential to be leveraged by private-sector employer purchasers, who’re equally determined for a solution to hold prices in test and keep reasonably priced protection for employees and their households.

Writer’s Notice: The authors’ time drafting this put up was supported by a grant from Arnold Ventures.

Sabrina Corlette and Karen Davenport “State Highlight: The Use Of Supplier-Based mostly Reference Pricing In Oklahoma And South Carolina,” January 28, 2025, https://www.healthaffairs.org/content/forefront/state-spotlight-use-provider-based-reference-pricing-oklahoma-and-south-carolina. Copyright © 2025 Well being Affairs by Mission HOPE – The Folks-to-Folks Well being Basis, Inc.