Using Medicare as a Baseline Could Reduce Variation in Commercial Insurance Payments

A new analysis using data from the Colorado All Payer Claims Database (CO APCD) shows millions in potential savings for Coloradans with commercial health insurance by using Medicare and average commercial payments as a baseline. Reducing variation using similar reference-based pricing models has proven effective in other states and this study shows Colorado could benefit as well.

Commercial health insurance payers often negotiate rates based on expected discounts on what providers and facilities charge. These charges, however, are determined differently by each provider or facility, making it difficult for payers to determine if they are receiving a reasonable rate. Conversely, as a public payer, Medicare pays providers what it considers to be a rate that should adequately cover costs for high quality, efficient providers.

Accommodating the need for providers, including hospitals and other facilities, to make a profit on commercial insurance in order to care for patients with public insurance, this analysis used payments of 1.5 and 2 times current Medicare payments and the current median statewide commercial paid amounts as potential reference points for the top 12 inpatient and top 10 outpatient services by volume and price.

Results indicate a potential reduction of $49-$178 million in annual spending across commercial health insurance payers in Colorado using one of the three scenarios. Additional savings would be possible if a similar pricing model was applied across all inpatient and outpatient services in the state. 

“This analysis shows the power of using a baseline other than charges as a mechanism to reduce variation and spending in Colorado,” said Ana English, President and CEO of Center for Improving Value in Health Care (CIVHC), the non-profit that conducted the study. “Other benchmarks exist, but payers and purchasers should consider new models like this in order to positively impact health care for Coloradans.”

In addition to the white paper, detailed data is available through an interactive report that highlights variation in facility fee payments for individual services regionally, by payer, and by provider. The interactive report also shows variation in fees paid directly to providers for common services like doctor’s office visits.

Developed in partnership with the Colorado Business Group on Health (CBGH) with funding from the Department of Health Care Policy and Financing (HCPF) CO APCD scholarship, this analysis can be used by employers, plans, providers, policy makers and others looking for ways to reduce health care spending.

“Employer purchasers in other states like Montana and North Carolina have started using Medicare as a baseline for negotiating payments and have seen millions in cost savings,” stated Robert Smith, Executive Director of CBGH. “With health care premiums inflating significantly faster than the Consumer Price Index, driven in large part by hospital and pharmacy prices, self-insured employers in Colorado facing enormous increases in health insurance costs year after year. Now is the time for them to change how they purchase insurance to lower annual spending by moving to a benchmarked pricing model.”

The report also suggests that payers and providers seeking to implement a reference-based pricing model should consider the unique characteristics of each patient population to ensure access to high quality care isn’t negatively impacted for vulnerable populations.

Categories: CO APCDNews