Hospital rate caps could slash health costs by $1T over a decade

The case for hospital rate-setting

Researchers used the Urban Institute's Health Insurance Policy Simulation Model, a detailed microsimulation of the healthcare system designed to estimate the cost and coverage effects of proposed health policies. They ran several scenarios through the model, including capping hospital rates at Medicare plus 200%, 150%, 100% and 60%.

They found that the U.S. could save billions on healthcare costs in every case, and even by just limiting hospital rates in the nongroup market alone. The latter results in savings between $2.9 billion and $14.9 billion.

However, capping both nongroup and ESI markets would yield the greatest savings, reducing overall spending by at least $19.5 billion if rates were limited to Medicare plus 200%. Overall spending reductions would increase to $205.7 billion, though, if hospital prices were limited to Medicare plus 60%.

Meeting the middle, researchers reported that hospital rates at Medicare plus 100% would reduce nonelderly hospital spending by 10.6% and overall hospital spending by about 7.1%.

This rate cap would also reduce the number of uninsured people by about 1.0 million, with another 300,000 people entering the nongroup market and 700,000 entering the ESI market. Researchers said this shift is due to employer-sponsored insurance becoming more affordable under rate caps, prompting more people to opt into their employers' plans.

Exempting rural, safety-net hospitals

Hospitals have strongly opposed the use of rate-setting systems to reduce healthcare costs, claiming that this approach threatens their ability to cover the high fixed costs of delivering care and restricts their negotiating power with payers. Hospitals especially rely on higher commercial payer rates to offset losses from government programs like Medicare and Medicaid, which often underpay actual costs.

Putting a cap on hospital prices across the board would especially harm rural and safety-net hospitals, hospital lobbyists have argued.

Urban Institute researchers found that exempting rural hospitals from a Medicare-plus-100 % rate cap would yield slightly smaller overall healthcare savings of $6.1 billion. Meanwhile, exempting areas with the greatest concentration of safety-net hospitals based on percentage of Medicaid patients, disproportionate share hospital status and uncompensated care would yield $6.5 billion in savings.

They also ran a scenario in which hospital rate caps applied only to highly concentrated hospital markets, since hospital consolidation has been linked to larger price increases. In this case, a limited application of rate caps would reduce overall healthcare spending by $7.6 billion.

Hospital spending would also shrink in all three scenarios, they said, to 9.9% if rural areas were exempt, 10.3% if the policy focused on concentrated areas and 10.0% if areas with a large presence of safety-net hospitals were excluded.

Although the research indicated there'd be potential savings even when exempting specific provider types or areas from rate caps, the researchers still acknowledged that this level of savings would be a challenge for hospitals.

More states pursue hospital price caps

Hospital lobbyists have been successful in stopping hospital rate caps that several states implemented from the mid-1970s to the early 1990s, when health maintenance organizations and managed care plans became popular strategies for cutting costs.

Maryland is the only state that still uses a hospital rate-setting system, although it has switched to a global budget for hospitals since 2014.

The approach may be coming back into vogue, as several state and federal policymakers are actively considering hospital rate limits and global budgets to control rising healthcare costs. Vermont, for one, plans to implement global hospital budgets and reference-based pricing next fiscal year. Indiana is also placing caps on the state's largest nonprofit hospital systems at or below 260% of Medicare for direct contracts with employers.

The federal government has stayed away from a national rate-setting system, instead opting for price transparency mandates, site-neutral payment policies and greater antitrust enforcement to cut healthcare costs. However, critics say these measures haven't been tough enough to tackle the unsustainable rate of U.S. healthcare spending.

Jacqueline LaPointe is an Executive Editor at Xtelligent Healthcare Media, covering revenue cycle management, healthcare payers, health policy and health IT since 2016.