New Marketplace

The Massachusetts Target on Medical Spending Growth

Article · May 11, 2016

Endless health policy debates at the federal level distract us from where new policy is actually being made: in state governments. In the past two years, the Patient Protection and Affordable Care Act (commonly known as the Affordable Care Act, or ACA) and state policy action have extended Medicaid coverage in about two-thirds of the American states. Approximately 20 million people have been covered by these efforts. Largely successful in this endeavor, individual states are now looking to manage the health and wellness of the newly insured while also managing health care costs. If medical spending rises more rapidly than state governments can afford, access to care will necessarily suffer. Government budgets will be tight, and governments with no access to higher taxes will have to respond with eligibility reductions or reduced payments — which in many cases will turn into reduced access to services. Conversely, if health spending can be effectively managed, state governments will be able to sustain the coverage and access commitments made to their constituents and potentially expand health and other services without tax increases.

The Pivot on Costs in Massachusetts

Massachusetts was a forerunner in health care expansion and cost control, serving as a bellwether for the rest of the nation. Almost 10 years ago, the state paved the way for the ACA by passing a landmark law to extend health insurance coverage to more than 97% of state residents. Chapter 58 of the Acts of 2006, or “Romneycare,” was designed strictly to address care access, not health spending. Health care cost drivers, such as variations between prices paid to providers and inefficiencies in patient care delivery, persisted. By 2011, the state was hit by a triple whammy: the historically high cost of medical care in the state, a mild increase in spending due to the coverage of almost all residents, and a severe revenue shortfall associated with the Great Recession. Because the state government had committed to ensuring financial access to health insurance for virtually all residents, health service reductions were not a realistic option. Instead, services were significantly curtailed in other areas. Executive and legislative leaders agreed that a new phase of Massachusetts health care reform was necessary to address cost containment.

Chapter 224 of the Acts of 2012, or the state’s health care payment reform law, sought to tackle high spending through several mechanisms. Two new government agencies, the Center for Health Information and Analysis (CHIA) and the Health Policy Commission (HPC), would be responsible, respectively, for compiling and assessing health care data and issuing policy studies and recommendations. The HPC also was tasked with reviewing proposed mergers and affiliations in the provider market in order to ensure that potential consolidation would not lead to increased health spending. Chapter 224 aimed to drive the Massachusetts market away from the traditional “fee-for-service” model of payment, which does not promote collaborative and value-based patient care. The law incentivized the adoption of alternative payment methodologies (APMs) in both the commercial and public markets, establishing a certification process for Accountable Care Organizations (ACOs) and setting annual targets for the number of covered lives within Medicaid APM plans. Through an assessment on payers and high-cost providers, grant funding was made available for community hospitals that provide high-value care in a lower-cost setting but often receive lower commercial insurance reimbursement. The law also reformed medical malpractice to promote conversation over litigation, required providers to implement interoperable electronic health records in order to more closely monitor patient health history and reduce wasteful redundancies in paperwork and service delivery, and promoted price and quality transparency in order to empower consumers to make value-based health care decisions.

A central element of Chapter 224 required the HPC and CHIA to establish an annual “cost growth benchmark” for the health care industry. With this requirement, a first among states, Massachusetts made a commitment that medical costs would increase no more rapidly than the economy for five years and would rise less rapidly than the economy for at least five years thereafter. The economic growth target is the growth of the potential Gross State Product (GSP), which is an estimate of how rapidly economists think Massachusetts will grow on average. Potential GSP growth is an essential underpinning of any economic projection; for example, the federal Congressional Budget Office estimates potential Gross Domestic Product for the nation to guide its forecast of federal revenues and spending. Potential GSP is likely to be close to the long-run average growth rate of the economy, and thus economists look to the historical record when setting the potential growth rate. Because of the benchmark’s focus on potential growth, not actual growth in any year, neither recessions nor economic booms automatically affect the growth of medical spending. In practice, potential GSP has been estimated to be 3.6% annually since 2013. This is 1 to 2 percentage points below the prior rate of cost increases.

Importantly, the target applies to all medical spending, both public and private. Private payers know well what happens when states cut Medicaid alone: the cost shortfalls are passed along to private payers as providers will seek to recoup losses from uncompensated care through increased commercial payment rates. A combined target eliminates this cost shifting.

Meeting the Target

The economics behind tying medical spending growth to the economy are straightforward. Tax revenue rises roughly with the state economy, as do revenue for the typical business and income for the typical family. Thus, targeting medical spending to the growth of the economy ensures that medical care will not exceed its current share of government, business, and family incomes over time.

The ability to meet this target was not in question. A variety of studies have shown that as much as one-half of medical spending is not associated with improved health. Virtually no one in Massachusetts argued that reducing the growth of medical spending would harm the quality of care for citizens of the Commonwealth.

Starting in 2013, the state’s health spending was measured against the cost growth benchmark. Success was achieved in 2013, with statewide total health care expenditures growing at 2.3%, far below the target. However, 2014 brought some market chaos:

  • An overhaul of the state’s insurance exchange website aimed at providing real-time eligibility data to applicants caused the entire system to crash. Massachusetts officials chose to expand eligibility to MassHealth, the Medicaid program, and thousands of residents were enrolled in state-subsidized plans until paper applications could be reviewed. This expansion in public coverage was not associated with any obvious reduction in private coverage.
  • Expensive new medications such as the hepatitis-C drug Sovaldi, priced in the national market beyond the scope of Massachusetts officials, drove up 2014 total pharmaceutical spending by nearly 2 percentage points.
  • Because of these factors, 2014 total health spending grew at 4.8%, exceeding the benchmark. Unanticipated MassHealth enrollment accounted for one-third of state spending growth, with another one-third due to rising prescription drug costs.

However, the growth of health care spending in 2014 should not be viewed as an indication that the state benchmark failed; on the contrary, it has succeeded. In both 2013 and 2014, the growth of medical spending in Massachusetts was slower than that in the rest of the country, with family insurance premiums in Massachusetts falling from $2,000 above the national average in 2011 to $1,000 above the national average in 2014. The 2014 growth rate of non-pharmaceutical services for continuously insured state residents, the metric that informed the creation of the target, was below 1.5%. The Massachusetts market is on notice.

By and large, the reduction in cost growth has had a lot to do with reduced price increases. Payer and provider rate negotiations are now conducted in light of the 3.6% target, and both payers and providers are aware that they will be subject to a performance-improvement plan through the HPC if their high spending could potentially jeopardize the Commonwealth’s ability to meet the benchmark. With an expected utilization increase of about 2%, payers and providers generally agree on annual price increases of about 1.5%. The volume of services has fallen as well, although not to the same extent. Hospital readmission rates in the Commonwealth are declining markedly, and many provider organizations have put in place high-cost case-management programs.

The many tenets of Chapter 224 have created an environment to offset unexpected market disruptions. Since 2012, commercial health plans’ use of APMs has increased by 8 percentage points, and MassHealth is now preparing for the rollout of its new ACO program. The HPC has reviewed more than 60 proposed provider affiliations and acquisitions, sending 4 to further review. Two were referred to the Attorney General as likely to increase spending and ultimately were dropped. The state health information exchange, the Mass HIway, is up and running and allows patient information to be shared between unaffiliated providers. The missing of the 2014 benchmark has provided an opportunity to dive more deeply into the various components of health spending and to inform policy and regulatory decisions for subsequent years. CHIA is currently assessing 2015 data, and Massachusetts will find out in the fall whether the state will meet or exceed the 3.6% target.

While less tumultuous than 2014, 2015 brought some market transition. As the ACA required health plans to reduce the number of rating factors used to determine risk, many members of the individual and small-business markets saw premium increases. Payers have increasingly promoted tiered-network and high-deductible health plans in order to drive consumers to lower-cost care-delivery settings. Finally, a push by a state health care workers’ union to allow the government to set limits on the highest payer and provider rates highlighted the continuing discussion around price disparities between high-quality, lower-cost community hospitals and more-expensive academic medical centers.

Chapter 224 is explicit that no agency of state government can order specific price or quantity changes. At least part of the reason for this restriction on price setting is that health care reform in the Commonwealth has been a collaborative effort, and government took it on good faith that payers and providers would make their best effort to moderate spending increases. The legislation was designed to create a roadmap by which the market could move itself.

When the legislature debated Chapter 224, various alternatives were considered. In general, these alternatives come down to a single question: is the government willing to force payment rates to fall when spending rises? If so, spending can be guaranteed to remain within the benchmark. If not, there is no guarantee that the target will be met. While rate regulation is still discussed in Massachusetts, policymakers have decided not to force payment rates to fall. The collaborative nature of care-delivery reform is the main reason for this decision. Since the passage of Chapter 224, the slowdown in medical spending increases has largely quieted that discussion.

Massachusetts was a model for the country in covering people without other access to insurance and is now leading the nation in efforts to reduce costs. Given the history of health care reform in the past decade, it makes sense for stakeholders across the country to pay attention to the Bay State.

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