Insurance Payments Tied to Medicare Intrigue States, Employers

Hospital Administrator Reacts To News

Montana’s state employee plan went from a projected $9 million deficit to $112 million in reserves by the end of 2017.

  • Employer groups in Indiana and Colorado plan to negotiate based on Medicare rates
  • Few hospitals signed onto proposal for North Carolina state employees plan

States and private employers are moving ahead with initiatives to peg insurance payments to what Medicare pays despite a recent setback in North Carolina.

All but a handful of North Carolina’s hospitals refused to take part in a plan by the state treasurer that would have paid them nearly double what Medicare pays. But advocates of setting rates using Medicare as a reference still see it as a powerful tool to bring down spiraling costs.

The fight in the Tar Heel State is a likely harbinger of battles between health-care providers, who argue that Medicare rates are too low to cover their costs, and employers and insurers, who say relying on carefully vetted Medicare rates is a reasonable way to start controlling costs.

State Treasurer Dale Folwell (R) had proposed proposed paying hospitals as much as 196% of Medicare rates in 2020 to cover the state’s 727,000 employees in an attempt to save $300 million for the state health plan, which is projected to run out of money by 2023.

But only four hospitals signed onto the program along with about 28,000 independent physicians, forcing the state to dramatically scale back its proposal.

The proposal, called the Clear Pricing Project, faced vehement opposition from the North Carolina Healthcare Association, which represents the state’s 130 hospitals as well as the more than 60% of its physicians who are employed by the hospitals.

Move to Value-Based Care

“The problem isn’t the percentage,” Cody Hand, senior vice president and deputy general counsel of the North Carolina Healthcare Association, said in an interview. “Any percentage would have been a problem as long as its Medicare referenced.”

Insurers and state Medicaid programs are moving to value-based care payments based on outcomes rather than Medicare’s fee-for-service system, Hand said. Those programs are reducing costs, he said.

“This would have kept the state health plan with 700,000 state employees on basically what is rapidly an antiquated fee-for-service model,” he said.

But Hand also lamented how hospitals and other providers are reimbursed by Medicare.

“For a lot of the procedures that are highly utilized by Medicare, the reimbursement rate is around half the cost of care,” he said.

Medicare rates are set by panels of health-care providers, but the providers aren’t based in North Carolina “and so our individual needs and individual demographics are not taken into account,” he said.

But Robert Broome, executive director of the State Employees Association of North Carolina, said the Clear Pricing Project would have saved money for the state and its employees. The association, which represents about 50,000 state employees, advocated for a reference-based pricing plan based on Medicare rates.

Hospitals “are terrified of the idea of reference-based pricing because it would make transparent the cost of health-care and bring accountability to a system that they broke,” Broome said.

Progress in Montana

Despite the outcome in North Carolina, other states are forging ahead.

Montana and Oregon are basing the rates they pay hospitals for their state employees’ coverage on Medicare prices. Delaware also is considering pegging payments for its state employee plan to Medicare rates.

Montana started basing hospital rates on 220% to 245% of Medicare rates in 2016, Marilyn Bartlett, special projects coordinator in the state auditor’s office, said in an interview.

Bartlett disagrees with the contention that Medicare doesn’t pay adequate rates.

“The more efficient hospitals are making a profit at Medicare,” she said. In addition, “the hospitals with the higher quality are hospitals that are more efficient.”

Moreover, hospitals that cover a large number of low-income patients received Disproportionate Share Hospital payments, as well as payments to supplement low Medicaid payments, Bartlett said.

In contrast with North Carolina, Bartlett was able to get all 11 acute care hospitals in Montana to sign on to the Medicare reference pricing plan. Partly as a result, she said, Montana’s state employee plan went from a projected $9 million deficit to $112 million in reserves by the end of 2017.

Private Employer Groups

Private employer groups also are moving forward on using Medicare rates as a basis for their payments.

In Indiana, where private employers pay more than 300% of Medicare rates, some employers are working with insurer Anthem Inc. to negotiate Medicare-based rates, Gloria Sachdev, president and chief executive officer of the Employers’ Forum of Indiana, said in an interview. The organization represents 15 employers covering about 350,000 people.

Hospitals “charge whatever they want,” Sachdev said. That is the current base from which health plans negotiate prices down, she said.

A better way is to negotiate prices upward from Medicare rates, Sachdev said. Financial incentives can be added to reward high quality, she said.

The new rates are expected to be in place in 2020, she said.

In Colorado, another state where private employers pay very high rates relative to Medicare, a group of employers intends to start negotiating contracts for 2021 based on Medicare charges, Robert Smith, executive director of the Colorado Business Group on Health, said in an interview.

The group, which represents 17 employers covering about 135,000 people, is becoming a purchasing coalition. Its goal is to negotiate rates for large self-funded companies as well as small companies and insurers that are willing to pass savings onto employers, Smith said.

“Medicare very carefully calculates both operating and capital expenses on an individual hospital basis,” Smith said. “We think that Medicare provides a reasonable methodology.”

To contact the reporter on this story: Sara Hansard in Washington at

To contact the editors responsible for this story: Fawn Johnson at; Brent Bierman at