Part III – Spending Growth Targets

This is the third in a four-part series on the Health Affairs Council on Health Care Spending and Value’s newly released report, “A Road Map for Action.” Each piece details one of the four priority areas within the report, which provides recommendations on how the U.S. can take a more deliberate approach to moderating health care spending growth while maximizing value. Part three focuses on our recommendations on setting spending growth targets. Read parts one and two here and here.

The Health Affairs Council on Health Care Spending and Value looked to states to be laboratories for policy experimentation and innovation. One area the Council members spent time investigating, with presentations from experts over several meetings, is state efforts to set spending growth targets. Two states in particular have led in this area: Maryland and Massachusetts.

The Maryland Example

Maryland has a long-standing history of setting growth targets dating back to the 1970s when they established all-payer rate-setting for hospital payments. Enabled by a Medicare waiver, Maryland was exempted from certain federal health care regulations in exchange for ensuring that Medicare inpatient payments per admission grew at a rate below the national growth rate. The state set rates for hospital inpatient services, and all third parties paid the same rate. This effort evolved in 2014 to a global hospital budget that encompassed inpatient and outpatient hospital services. Under what became known as the Maryland All-Payer Model, the state created a prospective annual budget for each hospital based on historical spending trends, whereby annual revenues were subject to a fixed cap. Hospitals continued to receive fee-for-service payments, but had the ability to adjust their rates nominal amounts throughout the year to stay within budget.

As we considered this innovative model, we turned to the data. Our group found compelling a 2019 report from CMS evaluating the Maryland All-Payer Model that demonstrated over five years a 2.8 percent slower growth in Medicare expenditures than in a matched comparison group, which yielded nearly $1 billion in savings to Medicare (relative to comparison group expenditures). Another positive outcome CMS found was that “nearly all hospitals invested in care coordination, discharge planning, social work staffing, patient care transition programs, and systematic use of patient care plans” in response to the model. In 2019, Maryland built on its success and transitioned to a Total Cost of Care model which expanded its rate setting further to non-hospital providers. We are still learning the impact of this new iteration.

The Massachusetts Example

In Massachusetts, another approach to slow health care spending has been undertaken by the Massachusetts Health Policy Commission (HPC), an independent state agency established by legislation in 2012. With the state’s health care spending rates historically exceeding the national average, Massachusetts tasked the Commission to keep it in line with the state’s overall economic growth. The HPC Board of Commissioners sets an annual health care cost growth benchmark, a statewide target for the rate of growth of total health care expenditures, which includes all medical expenses paid to private and public payers, patient-cost sharing amounts, and net cost of private insurance. Additionally, the Commission has monitoring and enforcement powers to address spending outliers. So far the state has had mixed results, consistently and successfully keeping growth below the national average, but in some years exceeding the benchmark.

One of our own Council members, Harvard health care economist David Cutler, sits on this Commission and shared his meaningful experiences with our group.

David told me: “Having a spending growth target focuses the attention of clinical personnel and payers on the urgent need to save money. It represents a commitment to maintaining health care affordability that spells out what the public expects from the health care sector. It also helps government to understand what the health sector needs in order to reduce costs.” He continued, “In Massachusetts, we have found the target and the surrounding actions inspired by it to be essential in reducing the growth of medical spending.”

Report Recommendations

Considering the convening actions of Maryland and Massachusetts, we reflected in our report that: “A missing ingredient in US efforts to moderate health care spending growth is a locus for collective action.” Some other states seem to agree. In addition to Maryland and Massachusetts, California, Connecticut, Delaware, Nevada, New Jersey, Oregon, Rhode Island, and Washington are considering or actively implementing initiatives to moderate health care spending through target setting.

The Council encourages this type of state action, with federal support, to convene stakeholders to engage in the necessary data collection, analysis, and discussion that may spur the establishment, monitoring, and enforcement of health care spending growth targets that are appropriately gauged against economic growth. Our report details four recommendations to enable this approach:

· Data-Supported Spending Growth Target Setting – States are encouraged to develop health care spending growth target rates relative to the size of their economy, and in line with state goals of equity, affordability, and access. This can be done individually, in coordination with other states, or with the federal government, and the mechanism can be a commission similar to those used in Maryland or Massachusetts, or through other dedicated or pre-existing structures. Governance must be by diverse stakeholders and with public transparency. Growth targets can be pegged to a key economic indicator, such as the gross state product, household income, wage, or Consumer Price Index.

· Data-Supported Monitoring of Spending Growth – States adopting spending growth targets should develop a monitoring entity – granted power through legislation or executive action – to compel data from stakeholders and track performance relative to the target. This component is needed to understand spending variation and high growth rates and their drivers, identify specific stakeholders experiencing high spending or growth, and detect disparities among population subgroups.

· Data-Supported Enforcement of Spending Growth Targets – For targets to be effective, there needs to be an enforcement mechanism. Enforcement actions can vary depending on the entity (such as payer or health system) and the desired outcome, and can include public reporting of data, public justification of spending or prices, performance improvement plans, or direct fines and other penalties. Massachusetts’s Commission has predominantly used a “naming and shaming” strategy as a way to encourage payers and providers to rein in outlier spending, although more recently the Commission implemented a performance improvement plan for one large health system. As Massachusetts’s experience demonstrates, enforcement mechanisms may need to be adjusted to address differing situations.

· Federal Support for Data Infrastructure – The data infrastructure needed to implement spending growth targets is costly, and requires highly trained staff. We recommend federal support for states committed to undertaking this work. The federal government can also provide common data standards and dissemination of best practices.

We focused on states due to their pre-existing activity in this space and their ability to implement these policy changes more nimbly, as well as their nuanced understanding of their population’s needs. However, there are also downsides to a state-led approach, including creating an even larger patchwork of differing data and reporting requirements for payers and providers that have multi-state presences. We would also see variation in implementation as some states – as with Medicaid expansion – will choose not to participate.

There are also some areas of health care prices where states have minimal control, including the actions of self-insured employers and trusts, and aspects of drug prices including federal patents. For these reasons, the Council encourages states that engage in this work to seek federal coordination and interoperability among states to reduce reporting burdens for multi-state actors.

Minority Report

These concerns were part of the reason a subset of Council members issued a minority opinion on state-set spending growth targets, which was included in the final Health Affairs report. Due to some doubts that these models would be an appropriate fit for all states, given the wide range in geographic diversity, population size, state budgets and political climate, the full Council did not get behind this approach. It is the one segment of recommendations where a minority report was registered, which I co-signed.

The minority viewpoint did not reject spending growth rates outright, but instead recommended waiting on more data before encouraging participation from all 50 states. We noted, “It seems most prudent to look to these first movers to generate the needed evidence in support or rejection of setting targets so that the remaining states can learn from their experience.” With some states seeing growth rates as low as one percent over the 2013 – 2019 period, they may not be an appropriate fit for the largescale data infrastructure, staffing, and health care system investments needed to effectively adopt growth targets.

We also expressed concern that this approach was at odds with some of our other report recommendations – namely, reducing administrative costs and avoiding pricing interventions in competitive health care markets.

Looking Ahead

As more and more states embark on the challenge of setting spending growth targets, we’ll have the opportunity to learn from a significant uptick in data collection and monitoring that will inform our health care decisions, and allow us to better serve our patient populations. Whether we adopt growth targets in all states, on a federal level, or strictly on an as-needed basis, this is a tool that should be further evaluated when looking at ways to moderate outsized, systemic health care spending growth.