by Jordan Roberts
Former Director of Government Affairs, John Locke Foundation
Legislation has been filed to stop Treasuer Dale Folwell form instituting his proposed changes to the reimbursement model the State Health Plan uses. The battle over how the state’s largest purchaser of healthcare will pay for claims is now making national news.
ModernHealthcare, a healthcare business news site, featured an article about the proposed changes. The Treasurer says the SHP must cut rates to remain financially solvent. The hospitals who oppose the changes say their bottom lines will be reduced substantially, threatening their ability to provide services.
Here is a small excerpt in which a former CMS official and Urban Institute senior fellow gave his take on the proposed changes:
Some health policy experts doubt the reference-pricing model will endanger North Carolina’s hospitals. Robert Berenson, a senior fellow at the Urban Institute and a former CMS official, said the treasurer’s plan is “very responsible and generous.” Medicare rates typically cover 92% to 93% of a provider’s cost to care for Medicare beneficiaries. Paying hospitals an average rate of 177% of Medicare should more than cover their costs, he said.
That’s not to say hospitals won’t lose revenue, requiring them to make changes to their businesses. Thanks to provider consolidation in the state creating massive healthcare companies, some hospitals have used their scale to secure much higher commercial rates.
“The hospitals are used to a gravy train,” Berenson said.
In general, North Carolina medical and surgical hospitals are profitable, with operating margins averaging 9.5% in 2017—above the national average of 1.9%, according to Chapin White, an adjunct senior policy researcher at RAND Corp. They also roughly break even on Medicare business, he said. RAND’s data includes critical-access hospitals. Modern Healthcare’s own analysis using Modern Healthcare Metrics found that total profit margins for short-term North Carolina hospitals in 2017 was 11.7%, up from 10.5% the year before. The analysis excludes critical-access hospitals.
The article goes on to address some shortcomings if the plan were implemented immediately. However, there is optimism about the long-term effects of the plan:
But Berenson cautioned that there’s wide variation between hospitals; those already struggling financially and dependent on commercial coverage to subsidize other payers’ rates may be squeezed by the new payment model. However, many hospitals would see “windfall increases in their commercial reimbursements.”
Paul Hughes-Cromwick, co-director of sustainable health spending strategies at Altarum, agreed that hospitals with tight margins would be in trouble if North Carolina’s reference-based pricing model went into immediate effect. But longer term, it is “absolutely” possible for the hospitals to make it on the proposed rates if they become more efficient, he said.