State health care budgets are driven by many costs that are difficult and, in some cases, impossible to predict. For instance, an unexpected economic downturn can lead to massive job losses, thereby driving up the number of people on public health care programs. Moreover, under these circumstances, states experience a double whammy as tax revenue drops while costs to care for the newly eligible enrollees increases. States are responding to this by trying to cap health care costs by tying them to public program cost benchmarks.
Under reference-based pricing (RBP), also referred to as value-based purchasing, payers set specific price ranges for each health care service instead of negotiating the prices on an individual basis. Using a reference point (such as Medicare reimbursement rates), payers can set a budget for the consumer.
It makes total sense for states to steer enrollees into high-quality, affordable health plans. Policymakers must thoughtfully consider how quality and cost are evaluated to make certain that the best interests of the patient come first.
Montana showed through analysis of its public programs that the shift to reimbursing hospitals as a multiple of Medicare rates generated as much as $47.8 million in health care savings over the two year period from 2017 to 2019. The reference-based pricing for Montana was calculated using a cap of 220 percent to 250 percent of Medicare prices to arrive at a budget for state-purchased services for employees and their families.
However, in the years since, Montana has backed away from this successful model. One of the largest payers, Blue Cross, is seeking “custom alternative payment arrangements with providers.”
Oregon enacted RBP legislation in 2017 that capped payments of the Oregon Educators Benefit Board and the Public Employees’ Benefit Board to 200 percent of Medicare for in-network care and 185 percent for out-of-network care. In 2021, $112.7 million was saved utilizing this cost containment method. Over 2020 and 2021, Oregon limited health cost growth to less than 2 percent, while the cost of commercial insurance went up 6 percent.
In 2024, Indiana will require certain nonprofit facility pricing with a benchmark of 285 percent of Medicare rates and report back to a newly created health care cost oversight board.
The American Academy of Actuaries projected that as much as 28 percent of service costs could be saved through RBP. The value of state experience in legislation enacted over the past decade highlights the need for policymakers to be intentional about goals and mindful of rational market forces that occur in the years following enactment.
Incredibly, health care costs can vary by as much as 10-fold within the same hospital and by 31-fold across hospitals within the same state for common medical procedures. It just makes sense to bring this into some rationality by setting upper limits, with cautious implementation of RBP and other blunt tools currently being tried throughout the country.
The following documents provide additional information on RBP:
Obamacare Has Doubled the Cost of Individual Health Insurance
State Actions to Control Commercial Health Care Costs
How Reference Pricing Could Boost Consumer Health Care Choices and Reduce Costs
Background: What is reference-based pricing?
Overview of States’ Hospital Reference-Based Pricing to Medicare Initiatives
State Reference Pricing Can Lower Health Care Costs Equitably
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the The Heartland Institute’s website,
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