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.
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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.
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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.

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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