Members of the North Carolina General Assembly will face tough decisions on important health care legislation in the current session. Many bills have already been introduced. For example, there have been efforts in the N.C. House and Senate to expand the state’s Medicaid program under the Affordable Care Act. Also, legislation has been introduced to amend the state’s insurance code to increase the freedom of small businesses, sole proprietors, and self-employed owners to band together and purchase health insurance.

However, one of the most contentious issues to come up for debate in the General Assembly this session is the State Treasurer Dale Folwell’s proposed changes to the State Health Plan (SHP).

The SHP is a self-insured plan that uses Blue Cross Blue Shield NC (BCBSNC) and UnitedHealthcare to administer the plan and pay claims. In utilizing a commercial-based plan, the SHP relies on the provider networks and negotiated prices of BCBSNC and UnitedHealthcare. The State Treasurer wants to bring more transparency to these pricing methods by using a reference-based model. In a reference-based model, the SHP would pay, on average, 177 percent of what Medicare pays for the same service (For more information on this plan, see my State Health Plan Primer).

In 2018, the treasurer announced that he would be changing how the SHP pays for services by moving from a commercial-based plan to a reference-based plan. Members of the General Assembly have filed a bill that would keep the current reimbursement method in place until 2021.

The Treasurer’s Office is concerned about the long-term solvency of the SHP, which provides benefits for over 700,000 state employees, retirees, and their families. As of last year, the plan had just over $1.1 billion in reserves, while it spent almost $3.5 billion on claims. The unfunded liability of the plan is nearly $30 billion.

The SHP Board of Trustees voted unanimously to approve these changes with the goal to save $300 million a year while giving roughly $60 million in out-of-pocket reductions to the members of the SHP.

The North Carolina Healthcare Association (NCHA) – formerly the North Carolina Hospital Association – claimed that the changes could impede the ability of some providers to care for patients. Given North Carolina’s unique rural population compared to other states, this concern is not unfounded.

However, the benefits of the reference-based reimbursement method have been documented previously. The California Public Employees’ Retirement System implemented something similar to Treasurer Folwell’s proposed plan for 450,000 members in 2011. Health economist Austin Frakt discussed the results:

The results of knee and hip replacement surgery reference pricing were striking, as were those for cataract removal, arthroscopy and colonoscopy. In a series of studies, James Robinson and Timothy Brown, University of California, Berkeley, health economists, found that under reference pricing, Calpers patients flocked to lower-priced hospitals and outpatient surgical centers. Prices and total spending for the procedures plummeted.

For knee and hip replacements, lower-priced hospitals saw their market share increase by 28 percent. As higher-priced ones lost market share, many chose to reduce their prices. Prices for the procedures fell by an average of more than 20 percent, saving Calpers and its patients $6 million over two years.

Under reference pricing for cataract removal surgery, the average price paid also dropped by nearly 20 percent, saving $1.3 million over two years. For colonoscopies, $7 million was saved — a 28 percent drop. And for knee or shoulder arthroscopy, prices fell by about 17 percent. For these procedures, Calpers reduced patient cost-sharing if they chose a free-standing, outpatient surgical center, as opposed to a much more expensive hospital.

These results should not be surprising. As there is more information for market actors to make decisions, the ability for consumers to link prices to quality increases. The U.S. health care system suffers from a lack of necessary information about prices. The lack of direct purchasing at the point of sale has dramatically distorted the market for health care services. By making prices public and letting facilities and providers compete for the customers, prices are more in line with market value and patients are better off.

However, there are limitations to the reference-based proposal that make it challenging to implement. For example, there needs to be a fair amount of competition between hospitals, but very little competition exists due to protectionist policies. Information about prices must be readily available. The Trump Administration required hospitals to post their chargemasters, which is a document that lists prices for each service, but the information is still misunderstood by the typical health care shopper.

Despite these issues, Treasurer Folwell has shed light on important problems. Why is there so little transparency in hospital pricing? Why do consumers have such little power in the health care purchasing process? What can we do to combat surprise bills and balance billing?

The NCHA has proposed switching the State Health Plan to a value-based reimbursement model. Some North Carolina hospitals have been able to create some savings by using this reimbursement method. It remains unknown, however, how much savings the SHP would realize by switching to this type of reimbursement model. As Dr. James Robinson, professor of health economics, pointed out, “Reference pricing has a remarkable short-term, immediate impact on consumer choices moving toward cheaper options. While I don’t see it as a long-term solution to all of the ills of the health care system, it is a way of getting patients engaged and offering a market reward to providers who choose to price their services more affordably. The market reward is that if you lower your price, you get more customers; reference pricing helps that happen.”

While the stakeholders in this debate continue to weigh benefits and costs of the Treasurer Folwell’s proposed plan, everyone in the health care sector should be asking how we can make the system more affordable and more consumer friendly.