Addressing Price Variation In Massachusetts

Massachusetts has been a national leader in ensuring access to high quality coverage and health care and, with the passage of Chapter 224 of the Acts of 2012, the Commonwealth took steps to lead the nation in slowing the growth of health care costs. Those steps included increasing transparency of health care spending; creating a statewide target for health spending growth in line with growth in state domestic product; increased oversight of provider market changes with the potential to increase health care spending; and strengthening incentives for employers, consumers, providers, and patients to make value-driven choices about health care services and providers. The Massachusetts Health Policy Commission was created by Chapter 224 (henceforth, “the HPC”) to carry out this mission in partnership with other agencies and stakeholders across the health care landscape.

While the state has made progress on a number of fronts such as accelerating the movement away from fee-for-service payment, slowing rates of health care spending growth, and interrupting merger plans deemed to significantly increase costs for residents, one substantial ongoing challenge is the significant variation in provider prices for the same sets of services; variation not tied to measurable differences in quality, complexity, or other common measures of value. This price variation, which persists despite a number of reforms to date, is coupled with disproportionate volume at higher-priced providers, resulting in increased health care spending and undermining the goals of health care access and affordability for all residents.

This variation in provider prices was brought to the forefront by the state Attorney General’s Office (AGO) in 2010, which found that prices paid to hospitals and physicians by the same commercial insurers for the same services varied by a factor of two or more. The AGO found that this variation was not related to quality, patient acuity, teaching status, or payer mix, but was related to market share. Subsequent reports by the AGO and other state agencies have found similar variation in recent years.

Analysis Of Price Variation

In 2014, the HPC analyzed variation among providers in total spending per episode of care for low-acuity hip and knee replacements. They found that the average episode spending for routine hip replacements varied from $26,200 for the lowest-cost hospital to $41,700 for the highest-cost hospital; for knee replacements, this variation ranged from $22,300 to $38,000. The overwhelming majority of this variation stemmed from procedure prices—not utilization—and there were no systematic differences in quality or safety outcomes between high and low-priced providers.

In 2016, the HPC extended similar analysis to low-risk maternity episodes, including both vaginal and caesarean deliveries, and found that episode spending varied from below $12,500 at lower-cost hospitals to over $18,500 at the highest-cost hospital, with a median cost of $13,500 among the 15 hospitals with the highest commercial volume. Again, variation in procedure prices accounted for the overwhelming majority, approximately 85 to 90 percent, of the variation in episode-level spending.

Average spending per delivery episode for normal deliveries by hospital, selected hospitals in Massachusetts, 2011-2012

Note: This chart is limited to the 15 hospitals with the greatest number of normal deliveries paid by commercial payers in 2014. Both vaginal and C-section deliveries are included. “D” indicates that the hospital declined to voluntarily submit rates. C-section rate is the nulliparous term singleton vertex (NTSV) C-section rate.

Source: HPC analysis of the Massachusetts All-Payer Claims Database, 2011-2012. HPC analysis of Center for Health Information and Analysis Inpatient Discharge Database, 2014: Leapfrog group.

The two highest-priced hospitals in the state, Brigham and Women’s Hospital and Massachusetts General Hospital (both part of Partners HealthCare System) together accounted for 20 percent of privately-insured births in the state. C-section rates did not systematically vary between high- and low-priced hospitals, nor did rates of neo-natal injury or obstetrical complications.

In other research, the HPC examined hospital prices levels using multivariate methods, which confirmed that higher hospital relative prices were not generally associated with higher quality or other common measures of value. However, higher prices were associated with hospital system size and affiliation with certain systems, such as the Partners system. Finally, the HPC reported that not only has the extensive price variation found by the AGO in 2010 persisted through 2014, but that patient care is also highly concentrated among higher-price hospitals and physician groups. This concentration of care among higher-priced providers has generally increased from 2010 to 2014.

Current Efforts To Reduce Price Variation

There are a number of ongoing efforts in the state (and nationally) designed to boost competitiveness and dampen this unwarranted price variation. Some efforts focus on the demand side — strengthening information and incentives to encourage consumers to choose high-value providers.

For example, Chapter 224 required payers to publish prices on their websites for common services and procedures. However, those websites have had little consumer traffic since they became operational in late 2014 and thus, in the current market environment may not meaningfully shift volume to lower-priced providers.

The state also leverages its employee purchasing pool by implementing tiering for specialist providers (at a minimum) in all state employee plans and has incentivized employees to choose limited network products through premium incentives. Researchers have found that these products do shift volume to lower-priced providers (which could, in turn, pressure higher-priced providers to lower prices) — yet the penetration of tiered products has only reached one in six of the state commercial market thus far, not enough to noticeably shift volume away from higher-cost providers. The HPC is currently leading a series of stakeholder discussions that have included other options whereby consumers would reap savings for using lower-cost providers or pay more for using higher-cost providers (such as reference pricing).

Other efforts focus on the supply side — creating an incentive for providers to make high-value choices in their own practice and referrals. The state has made a large commitment to moving away from fee-for-service payment in favor of global payment models which may, for example, incentivize providers to refer their patients to high quality but lower priced hospitals and specialists. In 2015, more than half of the state’s health maintenance organization (HMO)-covered lives were under a global payment mechanism, of which the largest was Blue Cross Blue Shield of Massachusetts’s (BCBS) Alternative Quality Contract (AQC). In 2016, BCBS extended payment reform to preferred provider organization (PPO) contracts by making providers responsible for total cost of care and patient outcomes. However, these global payment models may also serve to perpetuate historic pricing disparities insofar as global budgets are based largely on historic pricing.

Further Action Is Needed

Recognizing the persistence of unwarranted provider price variation and a lack of evidence that the market will rectify this dysfunction in response to current incentives, many in the state have also begun to discuss options for directly limiting the extent of price variation in payer networks. For example, the Massachusetts chapter of the Service Employees International Union (SEIU) has proposed a ballot initiative that would regulate insurance contracts so that most hospitals’ prices would be limited to a range between 20 percent above and 10 percent below the payer’s network average. The final meeting in the series of HPC stakeholder discussions (May 19) will focus on this and other options to directly limit price variation.

Whether demand- and supply-side payment reform strategies can ultimately move the market significantly remains to be seen. Based on its research and that of other state agencies, the HPC has recommended that additional, direct policy action be undertaken to address unwarranted price variation.

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