Massachusetts Proposed Legislation to Curb Health Care Costs by Regulating Hospital Reimbursement Rates

In a previous blog post, we began to dissect the new Massachusetts State Senate bill, “An Act Furthering Health Empowerment and Affordability by Leveraging Transformative Health Care,” and focused on a provision that would ban hospitals from billing payors for many common outpatient hospital services.  In this second of a multipart series, we review how this bill proposes to improve the affordability of health care in the Commonwealth.

During the debate before the Massachusetts Senate Working Group on Health Care Costs and Containment Reform, the Senate Working Group stated that this proposal will curb costs associated with health care and predicted a savings of $425 million by 2020 to achieve goals including slowing the rate of premium increases.

Setting a Target Hospital Rate Distribution to Help Moderate Costs

One of the primary ways the bill proposes to moderate costs is by establishing a hospital alignment and review council which will set a “target hospital rate distribution,” the minimum floor payment that an insurance carrier must reimburse a hospital for services. The Senate Working Group hopes that setting a floor payment for carriers will address the price variation across hospitals in the Commonwealth and subsequently stabilize the market. During the hearing, Senators requested industry feedback on setting the rate at 0.9%. Some argue that setting a floor will help hospitals that currently receive lower reimbursement rates to “thrive and survive.” Others assert that setting a floor is not sufficient, rather, a cap on reimbursement rates should be implemented as well to compress rates and control spending.

To make sure that the target hospital rate distributions are met, Section 111 tasks insurance carriers with submitting annual certifications to the review council. If a certification uncovers that any hospital received an increase in reimbursement, all other hospitals contracting with that carrier must have received a similar increase.

Other Items to Achieve a Slower Growth Rate

The proposed bill provides the review council with other tools to achieve a slower growth rate. One such measure is that the council will set a “target growth in hospital spending.” In the event that hospital spending is greater than the target rate, the council may penalize the top three hospitals that contributed to above target spending. Each of these three hospitals will be required to pay its proportional share of the difference between the actual growth in hospital spending and the council’s target growth in hospital spending. Some view this penalty as needed government intervention to correct price variation in the market. In contrast, others argue this is penalty unfairly attacks three hospitals and will create perverse incentives for hospital spending just below the top three.

Setting a target hospital rate distribution will be one mechanism for addressing price variation, but the Working Group is still collecting industry feedback to determine the ultimate amount of governmental control needed in the Commonwealth’s health care market.

This bill is currently open for comments.  Any interested parties should strongly consider commenting on the State Senate bill.