How the States Can Reform Health Care

Almost everyone who writes about health policy these days 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 that 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 heath 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 its revelations.

States Can Start with Their Employee Health Plans

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 in the aggregate, but many do not know how much they are paying for procedures at different hospitals. Even if they do 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, that state was paying more than six times the Medicare rate in some instances.

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.

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 that its charges for hip and knee replacements varied from about $15,000 to $110,000 at various hospitals across the state.

To deal with the problem, California began an approach called “reference pricing.” It worked like this. 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 that they would not pay more than $30,000.

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 out into the market armed with the knowledge that all they had to spend in insurance company money was $30,000.

California Uses the Market to Cut Costs

This was one of the most striking experiments in the history of medical pricing. And it had a happy ending. Within two years, the average cost of hip and knee replacements—across the whole state of California—fell below $30,000!

There are two other pieces of good news. First, California is now using reference pricing for other medical services, and one study finds that there are 350 shoppable services that are 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.

Another reform that is long overdue 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 that CON laws raise costs and lower quality. For that reason, 15 states have repealed all, or almost all, of them.

In contrast, Hawaii has CON barriers to entry for 28 services, with North Carolina (27 services) and the District of Columbia (25 services) following close behind.

There are other areas where state governments have a spotty record:

• There is no reason why patients should not have access to specialists all over the country by means of phone, Skype and Zoom; yet prior to the Covid pandemic almost no state allowed this.
• Although the pandemic led to a relaxation of many of these restrictions, deregulation in most places is tied to Covid—when the virus goes away, telehealth freedom will also go away.
• There is no reason why pharmacists should not be able to prescribe contraceptives and many generic drugs; yet state law stands in the way in most places.
• Walk-in clinics managed by nurses are located in large cities all over the country; but they are rarely seen in rural areas because they would be too far away from the doctors that are required to supervise them under many state laws.

States Can Create Alternatives to Obamacare

One area where there are radical differences among the states 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 benefits from his or her health plan.

Fortunately, there are alternatives. Some states exempt plans sold through the Farm Bureau from state insurance regulation. Since federal regulation, like Obamacare, only applies 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.

Another alternative is called “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.

The Obama administration was very hostile, however, and used its executive authority to restrict the insurance period to three months, with no opportunity to renew. The Trump administration reversed course, restoring the 12-month period, and allowing renewals for up to three years. Further, people are allowed to buy a second type of insurance which bridges the gap between three-year periods—creating the opportunity for insurance with an indefinite life span.

Critics charge that short-term plans will pull healthy people out of the Obamacare exchanges and destabilize the individual market. However, a study by Paragon CEO Brian Blase found that in half the states that are allowing short-term plans to take full advantage of the Trump reforms, the overall market is actually working better.

I cannot in this short article do justice to the full range of reform opportunities that are 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.