Challenging the relevancy of the health cost benchmark

Perhaps it's time to view, treat cost growth in a different way

CLARIFICATION: Soon after this article was published, I heard from Steve Walsh, the president of the Massachusetts Health and Hospital Association, who said I misrepresented what he said at the Health Policy Commission’s March benchmark hearing. He said he never called for the state to abandon the use of a cost-growth benchmark measure.  Steve suggested at the hearing that the benchmark should be “re-imagined to regain its relevance and its meaning,” noting that the current benchmark “does not reflect the realities of the day.” To the extent the original version of my article suggested he wanted to eliminarte the benchmark entirely, I was wrong and I apologize to him and to all readers. My intent t in using the phase “doing away with the benchmark” in my commentary was that I interpreted Walsh’s testimony to mean something closer to how David Seltz, the executive director of the commission, described it at the April board meeting–as a suggestion to “revisit the state’s cost containment framework.”   It would be most accurate for the reader to see my words referring to Walsh’s discussion of the ‘benchmark’ as really akin to what Seltz was describing.

THE HEALTH POLICY Commission last month set the 2024 healthcare cost growth benchmark at 3.6 percent. Some commissioners wanted to go lower, arguing that affordability is already a pressing challenge, and that the health care industry should be pressured to make the hard decisions on expenses so that the revenue spigot could run slower. But none showed any interest in wanting to do away with the benchmark entirely—something that Steve Walsh, the president of the Massachusetts Health and Hospital Association, had recommended in March.

In his March testimony, with legislators from the Joint Committee on Health Care Financing present, Walsh advocated for doing away with the current benchmark and related process as the anchoring measure to guide the state’s efforts to control health care spending growth.

He argued health care industry dynamics have changed since the benchmark accountability process was created in 2012, and that the current benchmark concept—though now being adopted with some tweaks by six other states—is no longer relevant.

I suspect Walsh’s real intent is to free hospitals and health systems from any attempt by the commission to require them to comply with cost-cutting performance improvement plans when their affiliated physician groups have spending growth that exceeds the benchmark. His goal is to shield them from any accountability for the very large multi-year price increases they have obtained from insurers, which will likely push spending up for this year, and likely through 2025.

David Cutler, a Harvard economist who sits on the commission, said the Congressional Budget Office estimates inflation already peaked in 2022 at 7 percent, and is headed down now towards a rate between 3 percent and 4 percent this year, and likely heading back toward the 2 percent range in 2024.

Cutler said such bursts of inflation can result in the need for providers to raise prices for a short-term period, and in so doing cause cost-growth measures of a provider group to exceed the benchmark in a given year. But Cutler noted the commission would take such special circumstances into account when deciding whether to place a provider on a performance improvement plan. That means any referrals from the Center for Health Information and Analysis for exceeding the benchmark would not trigger a cost-cutting plan for 2021 or 2022, and even likely for 2023 unless the provider group revenue growth was so significantly above the benchmark target that it would be deemed unreasonable even after considering workforce shortage and inflation factors.

But for years starting 2024 and beyond, Cutler suggested, healthcare may be back to a more stable inflationary environment in which to evaluate spending growth. If that happens, referrals from the Center for Health Information and Analysis could trigger cost-cutting performance improvement plans.  This is what Walsh fears for the constituency he represents.

David Auerbach, the research director at the Health Policy Commission, analyzed hospital finances for the first quarter of fiscal year 2023 and found solid improvement with positive margins fueled by bounce backs in investment returns and greatly improved operating margins at most hospitals.  He displayed a key graph showing decreasing labor costs, presumably as expensive travel nurse pressures subside along with moderation in overall growth of other hospital expenses.

While one quarter does not a year make, my sense is that state hospital industry leaders don’t want to talk about an improving financial picture. That’s especially true for Mass General Brigham, which reported a $500 million profit in the first quarter and is facing a union-organizing effort targeting its 2,600 residents and fellows.

One area where I could agree with Walsh is his call for a broad group of industry, business, and consumer representatives to come together to talk about what could in fact replace the benchmark and related performance improvement plan process.

His suggestion made me think about how Connecticut and Colorado are considering cost growth in a different way – targeting family health care affordability rather than only spending growth. Affordability is measured by calculating health insurance premium costs and out of pocket expenses as a percent of annual household income.

I especially like the Colorado concept of placing some sort of assessment fee on hospitals and health plans, and to then using those dollars to help fund a pool (an affordability pool) that would subsidize commercially insured families whose total premium and out of pocket spending is above around 8 to 10 percent of their household income.

Translating that concept to Massachusetts, I would maintain the annual cost growth benchmark target but do away with the performance improvement plan process.  Instead, I would track physician group total medical expenditure spending over three years, and then give the Health Policy Commission power to assess that provider and its affiliated health system an amount up to the full excess in spending growth over the benchmark level, with the money placed into an affordability pool. Those providers whose spending growth is under the benchmark could gain a credit that could be used against any assessment made against them for excess spending in the subsequent three-year period.

I would then obtain some additional affordability pool dollars each year from a hospital or specialist provider, based on a penalty for their having relative prices greater than 15 percent above the median.   For insurers, I would add additional penalties if they failed to offer at least two deeply discounted plans (25 percent discount to the standard premium)—a limited network and an aggressively tiered one—both of which would need to achieve some minimum level of enrollment.  For both providers and insurers who fall into these additional assessment categories, I would give the Health Policy Commission flexibility to determine how much of a penalty should be paid into the affordability pool.

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I really like the idea that our Health Policy Commission would be empowered to determine the size of the pool used to give monies back to those financially stressed by the commercial payment system—in so doing, balancing the needs of providers and insurers to have adequate resources for their missions against family affordability for health care services.

Paul A. Hattis is a senior fellow at the Lown Institute.