How Montana got hospitals to accept Medicare-based payment rates

• Montana hospitals were pushed to agree to payment rates ranging from 200% to 230% of Medicare rates.
• Officials argued that the hospitals’ Medicare and Medicaid revenue would nearly cover costs when supplemental payments were included. 
• State negotiators used a range of pressure tactics, including union-led phone and email campaigns.

Montana hospitals were strongly opposed to a state official’s efforts to move them to Medicare-based payment rates, but they relented after she deployed a variety of tactics.

Marilyn Bartlett was hired in 2014 as special projects coordinator for the Montana Commissioner of Securities and Insurance to improve the deteriorating finances of the state-employee health plan, which was facing a projected $9 million shortfall by 2017.

Right away, Bartlett focused on hospital rates.

“I was able to show how utilization was not the issue, price was the issue,” Bartlett said at a recent healthcare policy gathering in Washington, D.C., describing her initial analysis.

The state-employee plan was spending 42% of its outlays on hospital care, 87% of which went to 11 acute care hospitals. The hospitals that received the other 13% of expenditures all were critical access hospitals.

A new state law required Bartlett to balance the plan’s books for state employees to be eligible for raises.

“So, I knew I had to get the hospitals down,” Bartlett said.

The Montana initiative is part of an increasing trend, with Oregon also moving to Medicare-based payment rates and Delaware considering a similar approach.

Bartlett started by analyzing hospitals’ payment rates for health plans, using data from the Health Care Cost Institute, and found:

• Rates at the 11 hospitals that received the bulk of spending ranged from 191% to 611% of Medicare rates.
• The lowest-cost, highest-quality hospital was the state’s only for-profit hospital.

Bartlett identified target rates of 200% to 220% of Medicare for inpatient services and 220% to 230% for outpatient services. Next, she launched individual negotiations with each hospital in the state, starting not from the point of a hospital’s chargemaster rates but from the Medicare-linked rates.

And between mid-2015 and mid-2016, hospitals accepted the Medicare-linked rates, as well agreeing to limit future rate increases to those approved by Medicare.

Points made during negotiations

In rate negotiations with hospitals, Bartlett used various data sources to counter hospitals’ longstanding arguments that they needed higher commercial plan rates to offset steep losses on Medicare and Medicaid patients.

Bartlett used Medicare cost reports for the acute care hospitals to calculate the share of cost that Medicare rates covered and then added in the hospitals’ Medicare supplemental payments, which raised Medicare rates to 92% of their costs.

Similarly, she challenged the hospitals’ claims that Medicaid payments covered only 40% to 60% of costs by adding in federal supplemental payments, which brought the average Medicaid payment for the 11 hospitals to 97% of costs.

She also highlighted the financial benefits of the state’s Medicaid provider tax, with hospitals paying $18 million and receiving back $180 million in federal funding. Those totals this year were $60 million in tax payments and $400 million in federal funds.

Bartlett also targeted hospitals’ complaints about their uncompensated-care costs, which totaled $169 million in 2014. She pointed out that the largest component of those costs was the difference between their chargemaster rates and either their health plan-negotiated rates or Medicare rates.

Although the $59 million in charity care provided by the not-for-profit hospitals exceeded their $56 million in tax benefits, Bartlett noted the cost of that care was based on their chargemaster rates and some bad debt expenses.

Hospitals disputed the accuracy of her analysis, so a customized hospital charge index was used to analyze their rates. The tool incorporated total claim charges and was adjusted for resource intensity and cost of living to demonstrate how hospital inpatient and outpatient charges compared with those of peers.

“And I’ll be darned, the index came back and lined right up with the Medicare repricing,” Bartlett said.

Other leverage used

Beyond the extensive data analytics used in negotiations, Bartlett credited state officials’ efforts to transparently share all of their data as key to getting hospitals to lower their rates.

But she also used other negotiating tactics, including approaches that were unfamiliar to at least some hospitals. Those included:

• Threatening to use out-of-state centers of excellence as care sites for state employees
• Planning to publish the wide-ranging rates that hospitals negotiated with health plans
• Adding a transportation benefit
• Publishing the personal emails and cell phone numbers of the hospitals’ board members, CEOs, and CFOs
• Coordinating with the state employees’ union to pressure hospital leaders

The unions “did a massive campaign, 24-7 I think, and they signed,” Bartlett said.

Rather than raising eyebrows, the unconventional pressure campaign drew praise from at least one policy advocate.

“That’s amazing and a real model for other states,” Avik Roy, president of the Foundation for Research on Equal Opportunity, said at the D.C. event.