Title: Impact of Freezing Provider Payment Rates and Health Insurance Premiums
1Impact 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
2HCQCC 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?) -
3Policy 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
4Implementation 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
5Scenarios 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
6Hospital 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)
7Estimated 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.
8Effect 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.
9Pros 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.
10Premium 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
11Projected 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.
12Estimated 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.
13Financial 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.
14Pros 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.
15Appendix
16Methodology 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.
17Methodology 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