How the States Can Reform Health Care – Book Review

Almost everyone who writes about health policy today assumes we have a national system that needs national reform.

Republicans would like to repeal laws. Democrats would like to pass new ones. Yet, both seem to agree any reform worth talking about must be federal.

The reality is quite different. We have not one but 50 health care systems, and they are not alike. Without any change in federal law, some states are making radical changes that are lowering costs, increasing quality, and making health care delivery more efficient.

To get the full picture of what is happening and for recommendations for what states can do, consult Don’t Wait for Washington, produced by the Paragon Health Institute. What follows are some of their revelations.

Easiest Place to Start

In most places, the state employee health plan is one of the largest, if not the largest, health plan in the state. So, state legislators who want to reform health care should start with the one plan over which they have a great deal of direct control.

State governments know what they pay for employee health care overall, but many do not know how much they pay for procedures at different hospitals. Even if they have those data, they tend to pay whatever the hospitals charge—leading to vastly different payments for the same procedures, depending on where the patients happen to get treated.

In Montana, for example, the state payment for inpatient procedures at some hospitals was more than three times the Medicare rate. For outpatient procedures, the state sometimes paid more than six times the Medicare rate.

The solution? The state negotiated with all the hospitals and got a new deal. It now pays a little more than two times the Medicare rate for all procedures—regardless of where the patient gets treated.

Take It or Leave It Pricing

Negotiating with hospitals can be time-consuming. So, California found a way to save money without doing that. California state employees, retirees, and their families are enrolled in CalPERS —one of the largest employee benefits plans in the country. With the help of the health insurer Anthem, CalPERS discovered its charges for hip and knee replacements varied from about $15,000 to $110,000 at various hospitals.

To deal with the problem, California began an approach called “reference pricing.” CalPERS agreed to pay the full cost for beneficiaries who got a joint replacement at any one of about 40 hospitals that routinely charged $30,000 or less. Employees were free to go to any other hospital of their choice, but CalPERS announced it would not pay more than $30,000 toward the cost.

Neither CalPERS nor Anthem sent a single letter to a hospital or made a single phone call arguing about hospital charges. Instead, they sent thousands of patients into the market armed with the knowledge they had only $30,000 in insurance company money to spend.

There are two other pieces of good news. First, California now uses reference pricing for other medical services, and one study finds there are 350 shoppable services well-suited to this type of buying strategy. Second, there is evidence that when one large buyer implements reference pricing there are spillover benefits to other patients in the market who have conventional insurance plans.

Don’t Block Competition

Another long-overdue reform is the elimination of certificate-of-need (CON) laws, which create huge regulatory obstacles to newcomers who want to open a hospital or a nursing home, a drug and alcohol rehabilitation center, or even an ambulance service.

Studies show CON laws raise costs and lower quality. For that reason, 15 states have repealed all, or almost all, of them.

Obamacare Alternatives

One area where the states differ radically is in creating alternatives to Obamacare. As is well known, Obamacare has transformed the individual health insurance market into one where people face extraordinarily high premiums, high deductibles, and narrow provider networks.

For example, the average premium for an individual last year was $7,100 and the average deductible was $4,364. That means the average individual (not getting a subsidy) had to pay more than $11,000 before getting any health plan benefits.

Fortunately, there are alternatives. Some states exempt plans sold through the Farm Bureau from state insurance regulations. Since federal regulations only apply to plans regulated by states as insurance, Farm Bureau plans are not subject to Obamacare regulations.

These plans can exclude applicants because of health conditions. But once enrolled, membership is guaranteed to be renewable, regardless of any change in health status. Premiums and deductibles are far more affordable than under Obamacare and member satisfaction is very high.

Cheaper, More Affordable Insurance

Another alternative is “short-term insurance.” This type of plan has been around for many years—serving as gap insurance for people moving between jobs, from home to school, or from school to a job. Traditionally, these plans last for about 12 months, and most Obamacare and state-imposed mandated benefits don’t apply. The result: cheaper, more affordable insurance that meets limited needs.

I cannot in this short review do justice to the full range of reform opportunities open to state governments. But would-be reformers will not be disappointed if they get the full Paragon Institute report and read it cover to cover.

John C. Goodman (johngoodman@johngoodmaninstitute.org) is president of the Goodman Institute for Public Policy Research and co-publisher of Health Care News. A version of this article appeared in Forbes on December 4, 2021. Reprinted with permission.