Health Affairs This Week

Health Affairs' Jeff Byers welcomes Nathan Hostert of The Center for Advancing Health Policy Through Research at Brown University to the pod to discuss a recent Forefront article on how states are utilizing hospital price caps to save money.

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Health Affairs This Week places listeners at the center of health policy’s proverbial water cooler. Join editors from Health Affairs, the leading journal of health policy research, and special guests as they discuss this week’s most pressing health policy news. All in 15 minutes or less.

Jeff Byers:

Hello and welcome to Health Affairs This Week. I'm your host Jeff Beyers. We are recording on 11/04/2025. As I'm sure you're aware, we recently released our third trend report for Health Affairs Insiders. It's on the influence of private equity in health care.

Jeff Byers:

There's some discussion of what state governments have been doing to take regulatory action in the PE space. And for his insider newsletter, Brent Fulton in October wrote about state's actions to regulate health care consolidation, one of them being state health care cost commissions. And with the current administration's actions on Medicaid, there's a lot of talk about states footing the bill for that program more and more. So today on the pod, we have Nathan Hoster to talk about this. He and colleagues wrote an article in Forefront titled, how states are using hospital price caps to save money.

Jeff Byers:

Nathan, welcome to the program.

Nathan Hostert:

Hi. Thank you so much for having me.

Jeff Byers:

For for our listeners, again, you know, I I say this all the time, but this might be someone's first episode. This might be first someone's first moment into exploring the wild wild world of health policy. Can you briefly describe the health care fiscal situation for states' budgets?

Nathan Hostert:

Yeah. Absolutely. So states are facing a very complex budgetary picture right now. On the revenue side, states are seeing less money coming in the doors. They're either seeing, the revenues stagnating or they're seeing outright, revenue shortfalls.

Nathan Hostert:

And this is the result of a number of factors, including a wavering economy as well as the passage of numerous tax cut bills across states following the end of the COVID nineteen pandemic. And at the same time as states are facing these revenue challenges, they're also seeing increases in expenses, especially when it comes to health care costs. So rising prices for hospital care and for prescription drugs are causing state employee health plans to take up larger and larger chunks of state budgets. And also as a result of the twenty twenty five federal reconciliation bill, which we all know about, states will are gonna be finding it harder and harder in the coming years to finance their Medicaid programs both because of new restrictions on the provider taxes that states use to fund their Medicaid programs as well as from reductions in federal matching funds as a result of expected declines in Medicaid enrollment. So as a result, states are in a kind of a tricky position, and many are seeking out innovative policies to cut costs, especially in health care.

Jeff Byers:

I know we're gonna talk about what some states are doing to try to curb these costs. But is there any details you can give us about, like, what kind of percentage of Medicaid spending is for certain states?

Nathan Hostert:

The percentage of of state budgets that goes towards Medicaid spending? Mhmm. So that's generally, states spend, like, around a third of a third of their budgets on on their state Medicaid programs.

Jeff Byers:

Okay. Great. And so what is the literature of hospital spending currently?

Nathan Hostert:

Yeah. So The United States spends more per capita on health care than any other country, and that and the spending is rapidly increasing at a rate that is outpacing all of our peers. And research has repeatedly shown that the single largest driver of those increases in health care spending is rising hospital costs. Commercial hospital prices, which account for about a third of health care spending in The United States, have increased by more than 220% since 2000, which is nearly three times the rate of inflation growth during that same time period. And one of the main reasons for that is that hospital markets are highly concentrated.

Nathan Hostert:

We've seen more than 2,000 hospital mergers across The US since 2001, and almost every single hospital market in The United States can be classified as highly concentrated under definitions used by the federal government. So this consolidation has allowed hospitals to charge higher prices without corresponding improvements in quality or outcomes, And this has lead led to increases in insurance premiums, decreases in employment benefits, and it's caused wage growth to stagnate as employers pay more for health care and less on wages.

Jeff Byers:

And when you talk about that concentration, is there a difference between rural and urban areas with that concentration, or is it the same all over?

Nathan Hostert:

That's a good question. I I wouldn't wanna answer that without, like, without, like, the specific research pulled up in front of me. Okay. But I it genuinely is. It's like pretty much almost every single hospital market, as is defined by the federal government, is currently highly concentrated.

Nathan Hostert:

But another note that I think is important to bring up here is that not all hospitals are the same. The story of hospitals in The United States is really a story of the haves and the have nots, in which the highly concentrated hospital systems have been able to continuously increase their rates and build up substantial reserves, while safety net hospitals and rural hospitals have struggled to even keep their doors open. So as a result, policies that are seeking to to reduce the prices, in the health care sector, have focused more on the haves than the have nots, which are these these highly concentrated hospital systems.

Jeff Byers:

In your piece, you point out a couple examples of states deploying, price caps to help curb these rising costs. Can you briefly explain state employee health plan price caps in Oregon and Washington, which is what you note in your article.

Nathan Hostert:

Absolutely. So states are obviously concerned about these rising health care costs, both because, a, they they want their residents to be able to get access to the health care that they need. But, b, states are also employers. They need to help pay for their employees' health care premiums just like all other employers do. But as health care costs have been increasing, states have been spending more and more on their state employee health plans, and so states have been looking for innovative ways to reduce, the cost growth in their state employee health plans.

Nathan Hostert:

So through legislation, Oregon and Washington have capped the price that their state employee health plans will pay hospitals for health services that are provided to their members. These policies essentially cap the amount that the state will pay at 200% of the amount that Medicare would pay for the same service for hospitals within the state plan's network. So for example, if Medicare would have paid a hospital $19,000 for a hip replacement, the state employee health plan is saying, we will pay that hospital no more than $38,000 if that service is provided to one of our members. And to encourage hospitals to stay within the plan's network and not to say, you know, we don't wanna have to deal with this price cap, both states have instituted a lower price cap for out of network hospitals, capping payments to those hospitals at a 185% of the amount that Medicare would pay for service. So both states also require that the expected cost savings from these policies are passed along to their employees through lower health care premiums.

Nathan Hostert:

And Oregon did this. They became the first state to institute this policy back in 2017, went into effect in 2019. And Washington became the second state to do this by legislation, earlier this year.

Jeff Byers:

So what's the difference between what these price caps, plan to pay hospitals versus the Medicare, which I I think you said was 200?

Nathan Hostert:

Right. Yeah. Yeah. Essentially, those two states have said that we will pay no more than, like, two times of what Medicare pays you for a service for services when they're provided to our members.

Jeff Byers:

Yeah. So in general, like, how much is that affecting, like, a hospital's bottom line?

Nathan Hostert:

Yeah. So that's a great question. So my my colleague, Roz Murray, has studied the effect of of the policy as it was rolled out in Oregon and found that it saved the state more than a $100,000,000 in the first two years of being in effect. And the policy saved money for state employees as well by reducing out of pocket costs for outpatient services by 9.5%. In addition to all of that, all of the hospitals ended up staying in network in the state plan.

Nathan Hostert:

And my colleague, Ros Murray, has a paper coming out in the December issue of Health Affairs, that is a further analysis of of how of how this policy has or has not affected hospital finances in the state.

Jeff Byers:

Okay. Yeah. I understand you don't wanna scoop yourself. I don't wanna break an embargo when we don't have to, but listeners, check out the December issue of health affairs for more information on that. I guess, like, one of the things I'm thinking of is, like, when you kinda see these policy tricks or one of these policy regulations, I don't know, it's not maybe not a trick.

Jeff Byers:

Whatever. Halloween's on the brain still. I wonder how it affects, like, patient steering or networking to certain avenues, services of care, sites of care.

Nathan Hostert:

Right. Well, that's a great question. I mean and one of the great findings of the policy as it was rolled out in Oregon is that every single hospital that was in the state plans network prior to the policy being implemented stayed in the state employee health plans network after the policy being implemented. So every single hospital said, okay. Fine.

Nathan Hostert:

We will take these lower costs or okay. Fine. We will take these these lower payments, and we'll still participate in in the State Employee Health Plans Network, which is a huge finding and and is one of the reasons why Washington moved forward with this policy. And it's another reason why bills to do this exact same thing were filed this legislative session in Colorado, in Nevada, in New Jersey. And we expect that similar legislation will be filed in even more states next year.

Jeff Byers:

Why do you think that is? Why do you think they keep playing? You know, no one likes losing money. So do you have a sense of why them that pattern might happen?

Nathan Hostert:

Right. Well, yes. Essentially, most hospitals in The United States have very healthy operating margins currently. And the research done by Roz Murray and my colleagues at the Center for Advancing Health Policy Through Research have found that the reductions in hospital revenue as a result of these sorts of caps on payments under state employee health plans do not deal a major blow to hospital operating margins. And in fact, we actually we put together a hospital payment cap simulator on our website that allows states to see how much a cap on payments under state employee health plans would save their state for a variety of different of different price cap levels.

Nathan Hostert:

And in that tool, you can also see how that policy would affect the operating margins at every single hospital within the state in which it's implemented.

Jeff Byers:

So we talked about how much this has saved the state of Oregon, but do you get a sense of, like, how much it could save even though it's only using state employees?

Nathan Hostert:

Absolutely. Ros Murray and and my colleagues at the center that I work for have found that this policy would save the average state a $150,000,000 annually through a reimbursement cap at 200% of Medicare rates.

Jeff Byers:

Okay. Great. Sort of shifting gears, can you explain the hospital price cap plan, in Vermont and Indiana?

Nathan Hostert:

Absolutely. So Vermont and Indiana essentially looked at what happened in Oregon and said, we wanna go even further than that. So both Vermont and Indiana enacted bills this year that established hospital price caps that apply to all commercial payers, not just state employee health plans. And while these laws both address a similar issue, they are unique in how they are designed. So Vermont's law directs the Green Mountain Care Board, which is the state's independent board that regulates and evaluates the state's health care system to establish upper limits on the amounts that hospitals can charge for medical services.

Nathan Hostert:

So the the board must establish these limits, must be based on a percentage of Medicare rates by hospital fiscal year 2027, and the law directs that the board ensure that savings are passed along to ratepayers through lower premiums and that the board report annually on how much residents are being saved as a result of these price caps. Indiana's law differs from the Vermont law both in terms of the hospitals that it covers as well as the reference price for the cap. Indiana's law requires that the state's major nonprofit hospital systems bring their aggregate average prices under the statewide average by June 2029 or risk forfeiting their nonprofit status until they can lower their prices. This law kind of reflects the unique health care situation in Indiana where there are five large nonprofit hospital systems that have caused the state to become the eighth most expensive state in the country for hospital care. And while the Indiana law is structured slightly differently than the Vermont law, it is still a nation leading law that will give the state unprecedented tools to control costs.

Nathan Hostert:

And the other thing that I like to point out here is is kind of obvious, which is that Indiana and Vermont are very different states politically. The passage

Jeff Byers:

of Vermont's been trying for a long time to curb costs.

Nathan Hostert:

Absolutely. Absolutely. And the passage of price cap policies in both of these states shows that there's clear bipartisan agreement that there's work to be done to address health care costs.

Jeff Byers:

Yeah. So Indiana, Vermont, different states, different locales, these are a couple different examples of, trying to curb costs within the states for for health care plans. What are some of the other levers states are looking for for this? I know some states look to increase antitrust enforcement, for example. Like, what are the other levers?

Nathan Hostert:

Well, payment caps are one research backed policy tool for states to consider here. They are only one tool in the tool belt. There are a number of other more targeted cost containment policies that states could choose from. For example, Indiana and Connecticut have both instituted bans and facility fees, which are the add on fees that hospitals charge for services delivered in hospital settings. These bans address the issue of essentially hospitals acquiring physician groups and then tacking on hospital facility fees to their services even though those services have not changed since the groups were acquired.

Nathan Hostert:

And states could also consider site neutral payment policies, which essentially set a payment cap as a percentage of Medicare rates for a subset of services that can safely be provided in office based settings. The Fair Pricing Act, has been filed in New York State, is a good example of what this policy could look like. But in addition, we know that consolidation, usually in the form of mergers and acquisitions, has been one of the key drivers of increases in hospital prices over the years. So in order to reduce health care costs, states can increase their authority to regulate these mergers and acquisitions. Oregon has one of the strongest transaction review laws in the country and is a great example of this by requiring prior approval from the state for mergers and acquisitions involving hospitals, insurers, or essentially any health care entity making over a $110,000,000 a year.

Nathan Hostert:

But these laws can come in a bunch of different shapes and sizes. My colleagues and I wrote in the Health Affairs Forefront piece earlier this year discussing how Massachusetts bulked up its health care transaction review process at the end of last year by giving the state the authority to review transactions involving management service organizations and private equity entities. And New Mexico made strides in the space this year when the state enacted a law giving the state prior approval authority for hospital mergers, changes of hospital control, and ensure acquisitions of health care practices. So states have a bunch of different tools here. There's not one silver bullet for reducing hospital costs, and states are trying a bunch of different policy levers to make sure that that the residents can afford health care.

Jeff Byers:

Yeah. Yeah. So you mentioned a lot of examples, and I appreciate it. I just kinda wonder, like, what might this patchwork look like in the future?

Nathan Hostert:

Yeah. So in the coming years, I think we are going to continue to see states take the lead on making health care more affordable. States are actively dealing with this health care affordability crisis, and this crisis is not going anywhere without policy action. Think I it's remarkable that we saw both Indiana and Vermont, which are two completely different states, come to the same conclusion during this legislative session, and those two states are not alone. Bills to cap hospital prices across the commercial market were also filed this year in Montana, in Oklahoma, and Massachusetts.

Nathan Hostert:

And as Indiana and Vermont demonstrate, I think we will continue to see states experiment with their own unique approaches, that are specific to their own state contexts. And the great thing about these unique approaches is that we can evaluate the results of these unique policies as they are being implemented. So as states continue to take action here, we will continue to develop a better sense of which policies can make health care more affordable for Americans.

Jeff Byers:

Yeah. Well, with that, Nathan Hoster, thanks again for joining us on health affairs this week. It sounds like lots more to come in the pages of Health Affairs and Health Affairs forefront on this topic. Yeah.

Nathan Hostert:

Thank you so much. Really appreciate it. Thank you so much for having me.

Jeff Byers:

Yeah. No problem. And if you, the listener, enjoyed this episode, please send it to the Hoosier in your life. And thanks, and we will see you next week.