The North Carolina State Employees Health Plan’s (SEHP) proposal to pay network hospitals less than in the past has been blocked this year by the state’s hospital community, precipitating a visible, high-drama dispute that promises to percolate into the future. State employees will have stable benefits for now.
But with a health plan that will run out of money in 2023, Dale Folwell, the state’s treasurer overseeing the SEHP, worries that hospital costs have become unreasonably high and that the system is designed to prevent managers from knowing what they’re paying for. The hospital community has publicly warned that lower rates will force hospital closures, harming care and diminishing patient access to critical services. These arguments have been alarming, but health care finance is famously complex and there have been few efforts by either side to provide context or clarity.
A central question here is whether employer and union health plans already pay too much for hospital services. If the answer is yes, then another question is “What is a fair rate?”
Medicare reimbursement, which nearly all hospitals accept, is an important, established reference point in this discussion. In recent years, many private purchasers have negotiated reimbursement rates based on a percentage of Medicare.
A problem is that Medicare doesn’t pay enough. Studies conducted by the Medicare Payment Advisory Commission (MedPAC), an independent agency advising Congress, found that Medicare reimburses hospitals at about 10% less than cost. Efficient hospitals lose about 2% on each Medicare patient, while the three-quarters of hospitals that lose money in Medicare lose about 18% on each patient. Intended or not, nongovernment payers subsidize Medicare’s below-cost reimbursements.
Hospitals compensate for Medicare losses by enforcing much higher pricing with employers and unions. A recent RAND Corporation study found that, on average, private health plans paid hospitals a staggering 234 percent of Medicare in North Carolina. Said another way, North Carolina’s private employers pay $2.34 for every dollar that Medicare paid hospitals for care.
Folwell originally proposed that the SEHP would pay hospitals 177 percent of Medicare. Subsequent revisions raised the proposed rate to 196% of Medicare. This is nearly 80 percent higher than hospitals’ cost, a margin most businesses can only aspire to. Folwell’s last proposal would give hospitals $116 million more than his first offer but still save taxpayers and state employees $200 million relative to previous contracts.
There are a couple of takeaways here. First, the state’s hospitals appear to have rejected the SEHP proposal, not because it is unreasonable, but because they don’t want to make less money. That’s understandable, but rational businesspeople would only reject a margin of that magnitude if they’ve become accustomed to much higher returns.
Second, statements like the one this one from Cone Health to the Raleigh News & Observer, “The new State Health Insurance Plan will not pay what it costs to provide patient care,” are misleading. Even Folwell’s first proposal left plenty to pay for quality care with enough available to support ancillary programs and participating hospitals’ ongoing financial health.
Hospitals’ larger concern is that if the SEHP succeeds in reducing its rates, the state’s other employers and unions will want lower rates as well. To purchasers that are trying to keep up with relentlessly skyrocketing cost, the lack of a solid rationale other than “making what the market will bear” smacks of gouging and will breed long-lasting employer resentment and ill will.
Most disturbing is that there is little indication that the state’s hospitals are concerned about the burden their excessive costs place on the SEHP or North Carolina business generally. There appears to be no interest in health care costs’ toll on classrooms, on the state’s infrastructure or its economic competitiveness.
Tying hospital reimbursements to Medicare rates is among many smart tactics that purchasers have found effective in curbing health system abuse and driving new health care value. With more than 720,000 covered lives at stake, the battle over how the SEHP pays for hospital services has far-reaching implications for the state and the businesses domiciled here. It is in all our interests for North Carolina’s business leaders to lend their support to Folwell’s efforts, encouraging the state’s hospitals to take the long view and to buy into pricing and quality that can nurture rather than impede the state’s growth and prosperity.
Brian Klepper, Ph.D., is a health care analyst and EVP of the Validation Institute.