In 2010, Rhode Island attempted a lively experiment in health care costs by limiting how much hospitals could increase the prices they charge.
Fifteen years later, a new study led by a team of Brown University researchers suggests the hospital price growth mandate worked, not only cutting hospital prices directly, but also flowing downstream to lower consumer spending on health plan premiums.
By 2022, fully insured plan premiums in Rhode Island were $1,000 lower per member annually than they would have been without the cap, and hospitals saw a 9.1% average price drop between 2010 and 2022, according to the study published May 5 in the journal Health Affairs.
“No other states in recent history had attempted to regulate commercial prices in this way,” Andrew Ryan, the study’s lead author and a professor of health services, policy and practice at Brown’s School of Public Health, said in a recent phone interview.
Ryan, who also directs the school’s Center for Advancing Health Policy through Research, said the study looked at both the impact of the hospital price growth cap on insurance premiums and on costs to employers and workers.
The hospital growth cap is part of the state’s affordability standards, which are set and overseen by the Office of the Health Insurance Commissioner (OHIC). Using part of the statutory authority it was granted by the General Assembly, OHIC led a Health Insurance Advisory Council in 2009 that in turn authorized the 2010 creation of the regulatory package known as the affordability standards.
OHIC released its own annual health care spending report last Monday, and found soaring prices for hospitals in 2023 and a widening price gap between treatments delivered to hospital outpatients and those offered in other settings like standalone clinics.
In an interview ahead of the OHIC report’s release, Health Insurance Commissioner Cory King acknowledged the Health Affairs study and called the findings “significant,” as they underscore that even amid increased inflation and demand for medical services, the state still has “some levers in place to mitigate spending growth or cost growth” when it comes to hospitals.
Alas, not all consumers and companies have saved money under the 2010 affordability initiative, as not all health plans are made equal. The study found only “a modest impact on overall commercial premiums” because of differences in employee health insurance.
Employers generally offer two kinds of health plans. Rhode Island’s affordability standards only apply to fully insured plans, in which employers pay a fixed premium to an insurer and the insurer assumes the financial risk. This type of plan, Ryan said, might be chosen by smaller companies who “could go bankrupt if they have an employee who has a huge medical expense.”
But larger companies are more likely to possess the capital to pay claims outright. That’s why big companies may opt to offer their employees self-insured plans, in which the company pays health claims directly, and contracts with insurance companies only to manage plan benefits. In this arrangement, insurers serve as third-party administrators who are paid fees to manage benefits and process claims.
“The standards worked as intended in a fully insured market…but we didn’t really see that dynamic happen in the self-funded market,” Ryan said.
The study authors observed price reductions in the self-insured market.“There was kind of a spillover of the policy,” Ryan said. “Hospital prices fell in lockstep in the fully insured market.”
But, he added, “When we looked at the effects on insurance premiums, we saw only a reduction in the fully insured market, not in the self-funded market.”
Before the affordability standards were enacted, there were on average, 295,883 Rhode Islanders in fully insured plans. After the standards, the average dropped to 189,500 members. Today, OHIC data shows that self-insured plans account for about 60% of employee health plans statewide.
Self-insured plans are largely shielded from state intervention by the Employee Retirement Income Security Act of 1974 (ERISA), which established national rules so self-insured plans can operate under the same standards nationwide — a plus for companies that do business across state lines.
“For a company like Home Depot that has stores all over the country, that’s going to be self-funded, but there won’t be a Rhode Island premium equivalent,” Ryan said. “There’s like a national premium equivalent. Even if their own employees are spending less in Rhode Island, that reduction in spending is kind of being spread across their entire set of employees.”
ERISA rules preempt states from mandating more rigorous reporting or price controls, leaving local regulators in an awkward position — and largely in the dark, too — since data on what employers or contracted insurers do with possible hospital savings is limited, Ryan said.
“You hear employers really struggling to get reliable information from their third-party administrators about just basic things, about the prices that different providers are charging,” Ryan said.
Out-of-pocket spending decreased for both fully-funded and self-insured plans, for example — by about $2.9 million and $5.3 million annually, respectively— but it was hard to surmise exactly how those savings materialized.
The study had to rely on estimations of self-funded costs, Ryan said, because self-insured plans don’t have to submit detailed spending data to state regulators like OHIC.
“Part of the issue here is these ERISA standards that basically make this segment almost totally unregulated,” Ryan said. “I think that this is, frankly, in need of revision, so that the whole number of stakeholders can have greater insight into what’s happening in that self-funded market.”
Hospitals take a hit
More obvious was the financial hit hospitals suffered. The researchers estimated that Rhode Island hospitals lost a combined $158.3 million in commercial revenue per year since the affordability standards were introduced — outpacing the $87.7 million in annual savings enjoyed by fully insured employers and their employees.
“When you reduce prices, you’re taking revenue from hospitals. It’s a simple calculation,” Ryan said. “If there’s a drop-off in clinical care or important operational capacity, then we worry about the impact of this kind of revenue loss. I think it’s still an open question, what kind of impact does this have on quality and operations.”
Since the OHIC standards debuted, Ryan and his team found that Rhode Island hospital operating margins averaged −0.4% by 2021, compared to a national average of 4.8%.
Reduced revenue’s effects on hospital services or access was not within the study’s scope, nor could the study determine if the pricing caps were too high or the hospital margins too low.
“Whether Rhode Island hospitals’ margins are ‘too low’ can be determined only with more detailed financial information that was not available in our study,” the authors note. “Nonetheless, hospital price growth caps under the standards may need to be periodically recalibrated to avoid undue financial strain for hospitals.”
Ryan said people tend to think hospitals charge excessive prices.
“It doesn’t mean that all hospitals are doing great, and that some massive revenue losses can all be handled equally by hospitals,” Ryan said. “That’s certainly not the case.”
Howard Dulude, interim president of the Hospital Association of Rhode Island, said in an email Friday that the association has not yet reviewed the Health Affairs report in full but offered a succinct take on the affordability standards..
“Rhode Island’s affordability standards have, over time, contributed to Rhode Island’s growing health care crisis,” Dulude wrote.
Dulude pointed to two pieces of legislation in the House and Senate’s Health Care Action Package that he called “an important first step in addressing this challenge and beginning to stabilize a system under increasing strain.”
Bill H5832 would expand OHIC’s authority to review and approve hospital contract rates with insurers, especially if annual increases exceed the Consumer Price Index plus 3%. It was heard before the House’s Health and Human Services Committee on April 1 and held for further study.
Senate resolution S0873 would appropriate $90 million from the state’s general fund to raise Medicaid reimbursement rates for physicians and advanced practice providers. The resolution was introduced and referred to the Senate Committee on Finance on March 21. It is not directly related to OHIC or the affordability standards.
This story was originally posted by the Rhode Island Current.
