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Impact of Freezing Provider Payment Rates and Health Insurance Premiums

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Time to implement. Could not impact Medicare rates or premiums ... Healthcare Research and Quality (AHRQ), Medical Expenditure Panel Survey (MEPS) ... – PowerPoint PPT presentation

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Title: Impact of Freezing Provider Payment Rates and Health Insurance Premiums


1
Impact of Freezing Provider Payment Rates and
Health Insurance Premiums
  • September 2009
  • Prepared at the Request of
  • the Cost Containment Committee of
  • the Health Care Quality and Cost Council

2
HCQCC Cost Containment Committee Assignment to
DHCFP
  • QCC desire to find a short-term solution to the
    stress that employers and individuals are
    experiencing as a result of rising health care
    costs
  • QCC asked DHCFP to model potential savings that
    could be achieved via rate freezes and provide
    information on potential impact of such actions
  • Exercise provides a glimpse, but not whole
    picture. For example
  • Provider rate freeze model focused on hospitals
    because of available data
  • Cannot predict exact response of carriers to
    premium freezes (e.g., will they reduce reserves,
    reduce rates to providers, combination of both?)

3
Policy Implications
  • Provider rate freeze may impact financial
    stability of providers
  • Hospitals and other providers have many fixed
    costs that are increasing
  • Premium freeze may result in diminished insurer
    reserves
  • Underlying health care costs will continue to
    increase
  • Insurers may have limited ability to change
    contractual provider rate increases built into
    existing contracts
  • Provider rate freeze would maintain current
    market inequities
  • Providers with the most leverage, such as
    well-paid specialists and those with large market
    share, will maintain higher rates
  • Historically lower-paid providers (e.g., PCPs and
    mental health) will continue to have
    disproportionately lower rates
  • Provider rate freeze may impact providers
    differently depending on age of contract

4
Implementation Challenges
  • Would require significant new state
    infrastructure to establish regulatory rules,
    reporting requirements, and monitoring mechanisms
  • New administrative staffing and other costs
  • Time to implement
  • Could not impact Medicare rates or premiums
  • Could not impact self-insured plan premiums

5
Scenarios and Assumptions for Modeling
  • Scenario 1 Freeze Hospital Inpatient and
    Outpatient Rates
  • Assumptions
  • Rates frozen beginning in 2010 for all payers
    except Medicare Medicare rates would continue to
    be set nationally with an assumed annual increase
    of 4.8
  • Hospital volume would continue to increase at the
    current rate of increase resulting in a 1
    increase in non-Medicare net patient service
    revenue
  • Hospital patient service expenses would not
    change in response to rate freeze and would
    continue to increase at 6.3 (i.e., labor
    contracts and inflation in fixed costs could not
    be adjusted downward in such a short timeframe)
  • Scenario 2 Freeze Health Insurance Premiums
  • Assumptions
  • Premium freeze would impact the fully-insured
    commercial population only would not impact
    self-insured (representing roughly 50 of private
    group enrollment), which would continue to grow
    at 6.3
  • Ability for insurers to re-negotiate provider
    contracts would be limited in near term. Savings
    would likely come directly from insurer reserves
    and/or profits or only partially from medical
    claims spending

6
Hospital Rate Freeze - Modeling Results
  • Two-year savings potential estimated at 2.8
    billion
  • Impact on hospital operating margins
  • 26 hospitals (40) who had negative operating
    margins in 2008 would sink even further
  • 7 hospitals (11) would have operating margins
    less than -10 in 2012
  • 20 hospitals (31) who had positive operating
    margins in 2008 would drop to just break even
    (lt1)

7
Estimated Savings Due to Freezing Non-Medicare
Hospital (inpatient and outpatient) Rates 2.8 B
Projected2010-2012 6.3
Projected 2008-2010 8.4
1994-2008 6.3
2.1
2004-2008 8.4
Total Net Patient Service Revenue in Billions
Source DHCFP 403 Cost Report. See Hospital Rate
Freeze Methodology Details slide for background
information. Assumptions 2.1 annual spending
increase due to continuing volume increases and
Medicare rate increases.
8
Effect of Hospital Rate Freeze on Operating
MarginsBy 2012 as many as 97 of hospitals could
have operating margins below northeast region
median of 1.5
May not add up to 100 due to rounding. Source
DHCFP 403 Cost Report See Hospital Rate Freeze
Methodology Details slide for background
information.
9
Pros and Cons of Provider Rate Freeze
  • Pros
  • Regulatory mechanism to get sure cost savings.
  • Targeted to a major cost driver increases in
    prices.
  • Savings for a hospital rate freeze alone are
    projected to amount to 2.8 billion over two
    years.
  • Cons
  • Only deals with problem in short term. Doesnt
    make changes to underlying system to allow for
    long-term cost containment.
  • Continues inequities in the system (e.g., as
    evidenced by wide spread in hospital operating
    margins).
  • Difficult to enforce and monitor.
  • Rate freeze encourages increased utilization of
    services, which could limit savings.
  • Providers that were doing poorly financially
    before the freeze will sink further.
  • Providers are at different points in their
    contracting cycles, which could compound system
    inequities.

10
Premium Freeze - Modeling Results
  • Two-year savings potential estimated at 2.4
    billion
  • Health plan spending would likely continue to
    increase as a result of underlying health care
    cost trends
  • Continuing increases in utilization
  • Provider rate increases built into existing
    contracts
  • Health plans would have two options to absorb
    savings
  • Cut into reserves and profits
  • Reduce provider rates may be limited in
    short-term due to contractual obligations
  • Impact on insurer reserves for five large local
    health plans
  • Savings generated from five large plans could cut
    into as much as 83 of these insurers reserves
    and profits

11
Projected Private Group Premiums
Projected2008-2012 6.3
FreezePremiums
1996-2008 6.3
Single Premiums for Private Group Insurance
Sources Agency for Healthcare Research and
Quality (AHRQ), Medical Expenditure Panel Survey
(MEPS)-insurance component. 2007 premium is
estimated using the mid point between 2006 and
2008.
12
Estimated Savings Due to Freezing Insurance
Premiums for Fully-Insured Private Group
Insurance 2.4 Billion in 2011-2012
Savings1,602Million
Savings777Million
Total Premium Revenue in Millions
Sources Agency for Healthcare Research and
Quality (AHRQ), Medical Expenditure Panel Survey
(MEPS)-insurance component. 2007 premiums were
estimated using the mid-point between 2006 and
2008. DHCFP, Health Care in Massachusetts Key
Indicators, May 2009.
13
Financial Impact of Premium Freeze on Five Health
Plans
Sources Massachusetts Division of Insurance
Annual Financial Statements Membership reported
to DHCFP by plans. 1,050 total saving 2,379
million / total number of fully-insured enrollees
2,264,910. Assume health plans are able to
pass 50 of the savings cost to providers.
14
Pros and Cons of Premium Freeze
  • Pros
  • Regulatory mechanism to get sure cost savings.
  • Savings are projected to amount to 2.4 billion
    over two years.
  • Implementation would be somewhat more manageable
    than provider rate freeze due to smaller universe
    of actors that would need to be regulated.
  • Cons
  • Only deals with problem in short term. Doesnt
    make changes to underlying system to allow for
    long-term cost containment.
  • Underlying cost increases resulting from
    utilization increases and contractual obligations
    would need to be funded at least in part out of
    insurer reserves.
  • Insurers would likely only be able to alter
    currently open contracts.
  • To the extent that insurers freeze provider
    rates, current provider financial inequities
    could be perpetuated or exacerbated
  • Difficult to enforce and monitor.

15
Appendix
16
Methodology Details Hospital Rate Freeze
  • Estimating 2009 2012 Net Patient Service
    Revenue (NPSR)
  • We calculated the average annual percent change
    for 1994-2008 (6.3), and 2004-2008 (8.4) from
    the 403 hospital cost data.
  • For frozen and non-frozen models, we applied the
    2004-2008 average percent increase to estimate
    2009 and 2010 NPSR (8.4).
  • For the non-frozen model, we applied the
    1994-2008 average percent increase to estimate
    2011 and 2012 NPSR (6.3).
  • For the frozen model, we broke apart NPSR by
    Medicare and non-Medicare. For the Medicare
    portion, we applied the 2004-2008 average percent
    increase in Medicare NPSR (4.8). For the
    non-Medicare portion, we applied a 1 volume
    increase, which was estimated from hospital
    discharge data.
  • Estimating 2009 2012 Patient Service Expenses
  • We calculated average annual percent change for
    1994-2008 (6.3) and 2004-2008 (7.8) from 403
    data. Patient service expense accounts for total
    patient and overhead expense including capital.
  • We applied the 2004-2008 average percent increase
    to estimate 2009 and 2010 expenses (7.8). We
    applied the 1994-2008 average percent increase to
    estimate 2011 and 2012 expenses (6.3).
  • Estimating Impact of Frozen Rates on Individual
    Hospital Operating Margins
  • We calculated patient service revenue residual by
    subtracting patient service expense from NPSR.
  • We then calculated the percent of residual to
    NPSR.
  • We assumed that individual hospital operating
    margins would remain stable through 2008-2010. To
    estimate 2011 operating margins, we calculated
    the state-wide percent change in residual NPSR
    percentage between 2008 and 2011 (-31.8). To
    estimate 2012, we calculated the state-wide
    percent change in residual NPSR percentage
    between 2011 and 2012 (-65.5).
  • We applied the same percent changes (-31.8 and
    -65.5) over 2008 hospital operating margin to
    obtain individual hospital operating margins in
    2011 and 2012.

17
Methodology Details - Premium Freeze
  • Estimating single premiums for private group
    insurance
  • The annual growth rate of single premiums for
    2008-2012 is assumed to be at the average annual
    growth rate of 6.3 experienced in the period of
    1996-2008.
  • Estimating the number of enrollees in private
    group health insurance
  • The total number of private group enrollees for
    2009-2012 is assumed to remain at the level of
    4,441,000 in 2008.
  • The proportion of the fully-insured enrollees for
    2009-2012 is assumed to remain at the level of
    51 in 2008.
  • Estimating savings due to premium freeze
    (2011-2012)
  • Total premium revenue without freezing premiums
    projected single premium x total number of
    enrollees
  • Total premium revenue due to freezing premiums
    (frozen premiums x number of fully-insured
    enrollees) (projected premium x number of
    self-insured enrollees)
  • Estimating impact on health insurance reserves
    and/or profits
  • Savings per fully-insured enrollee 1,050 total
    savings 2,379 million (2011-2012) / total number
    of fully-insured enrollees in private group plans
    2,264,910
  • Impact on individual plan number of
    fully-insured enrollees in a plan x saving per
    enrollee 1,050
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