States' Uphill Battle to Stop Runaway Health Care Costs

February 9, 2023

(Peter Spiro/Getty Images Pro)

Eight states are following Massachusetts’ lead and trying to strike the right balance of slowing health care spending without causing too much pain to industry.

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Massachusetts General Brigham (MGB), the state’s premier hospital system, is in the midst of cutting nearly $200 million in costs. It’s reducing prices, limiting unnecessary care and shifting patients to lower-cost clinics – after being called out for blowing past state spending targets.

This is the first time the decade-old Massachusetts Health Policy Commission, the state agency responsible for monitoring health care spending, is using its enforcement power to try to rein in skyrocketing costs that make health care unaffordable for many.

Last year, the commission determined MGB was responsible for nearly $300 million in what it called “excessive spending” and required the system to come up with a “performance improvement plan” to control its spending.

“This is the first performance improvement plan like this that I know of in the entire country,” said David Seltz, the commission’s executive director. “It is thrilling to see how this process will continue to play out.”

Spending on health care in the United States has spiked over the past 50 years. Yearly health insurance premiums for a family of four can cost as much as a new car. As health care has gobbled up a larger share of the national budget, there’s less for other essentials like schools, roads or emergency response.

The Massachusetts commission’s sanction is what it looks like to slow down health care spending. Eight other states are following its blueprint to try to put brakes on their own health care spending without causing too much pain to doctors, hospitals and insurance companies.

The story behind Massachusetts’ plan

While the rest of the country was just getting ready to launch Obamacare in 2012, Massachusetts had already insured nearly all its residents and moved on to trying to control ballooning costs.

Then-Gov. Deval Patrick signed a state law that tied annual health spending growth to the state’s annual economic growth. The goal was to shrink hospital and physician profits so they would eat up smaller shares of household, business and state budgets.

The newly created Health Policy Commission’s task was to balance making care affordable without harming the industry so vital to the state’s economic health. The Boston metro area is home to 25 hospitals, a plethora of biotech companies and consistently gets more federal research dollars than any other U.S. city.

“One person’s health care cost containment is another person’s revenue reduction,” Seltz said. “You don’t want to overstep and hurt an industry that is really important.”

To figure out what was causing spending to swell, the commission first needed to get inside the black box of health care costs. Formerly confidential pricing and claims information revealed that a combination of utilization, administrative overhead and especially prices were behind the rise in health spending.

The commission also planned to evaluate the impacts of major business deals as the agency tried to create market conditions so spending and prices level out with minimal interference from the state.

This new standard altered how hospitals, doctors and insurers thought about mergers, acquisitions or expansions, said Seltz. “They know that they’re going to have to come to us and they’re going to have to make a case about why is this in the public interest.”

MGB, formerly named Partners HealthCare, abandoned plans to buy South Shore Hospital in 2015 after the commission scrutinized the deal. In 2018, a merger between Beth Israel Deaconess Medical Center and Lahey Health only moved forward with strict pricing limitations.

Over the commission’s first five years, spending on average grew slower than the state’s economy and the national average. The commission calculated that saved Massachusetts consumers and businesses $7.2 billion between 2013 and 2018.

As news of Massachusetts’ success spread, other states started passing laws to implement similar strategies. Delaware, Rhode Island and Oregon passed legislation in 2018 and 2019, and five other states in the Northeast and along the West Coast followed.

Limits to cost containment

The philanthropic group the Peterson-Milbank Program for Sustainable Health Care Costs and private consultant Michael Bailit are working with most of these states to help get their programs off the ground.

“I think it’s a powerful catalyst,” Bailit said. “I think first it creates high level visibility [and] transparency on health care spending.”

Rhode Island, for example, publishes which insurers meet state spending growth targets and which exceed it. That information is kept confidential in Massachusetts, unless the commission votes to penalize a hospital.

Laws in Oregon and California, give their state agencies the power to penalize hospitals, physicians or insurers based on their size and how much they overspent. Massachusetts can only fine organizations up to $500,000 for exceeding the benchmark in limited circumstances. This fine is pennies for some systems with billions in revenue.

Most programs in other states are too new to report meaningful progress. And Bailit cautions that it’s become clear in Massachusetts that setting a target alone isn’t enough to drive down spending for the long run. After a few years of initial success, commercial prices increased in Massachusetts, more patients sought out care at the more expensive providers and the industry started to exceed targets.

The Massachusetts Health & Hospital Association says the target was never meant to be a rate cap. The organization testified last year the spike in labor costs, inflation and other COVID-related care changes make meeting the target right now unrealistic.

Going after prices directly

As has been clear for 20 years, the main drivers behind high health care spending are prices.

After years of lighter touch policies aimed at preserving competition to allow markets to keep prices down, economists are now coming around to the idea of going after prices directly.

In a 2020 Brookings Institution paper, Harvard University economist Leemore Dafny and her co-authors suggested states set an upper limit of how much hospitals can charge for their services or a limit on how much prices can grow each year.

“What we have is unsustainable,” Dafny said. “We want to experiment and see if we can, frankly, substitute regulation for competition because the competition that we currently have isn’t delivering prices that we consider to be affordable.”

Health systems and providers abhor the idea of price caps. But the method has had some early success among state employee health plans in Montana and Oregon, which tie prices to a percent of Medicare rates. Also, Rhode Island has used its insurance rate approval process to limit how fast commercial prices can increase each year.

Now the Massachusetts Health Policy Commission is recommending lawmakers consider setting price caps because care is becoming too unaffordable.

“Massachusetts is among the most high-income states in the country. And yet almost 50 percent are doing things like cutting pills, skipping doctor’s appointments because of the cost of care,” Seltz said. “To me, that is unacceptable.”

The commission is also recommending lawmakers give them more tools to contain spending, including oversight of prescription drug prices and the ability to levy higher fines for organizations that exceed annual spending targets.

While efforts to slow spending growth are incremental, Seltz looks at how much has changed in the last decade: Prices went from tightly held secrets to the subject of one of the biggest public meetings in the state.

“I can’t imagine that 10 years ago a hospital CEO would testify under oath about what they’re doing to control health care costs, about their profits and to be held accountable to this state goal,” said Seltz. “That’s literally the conversation we’re having in Massachusetts every day: How do we make progress together?”

Tradeoffs’ coverage of health care costs is supported, in part, by Arnold Ventures and West Health.

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Episode Resources

Selected Reporting and Research on Health Care Cost Containment Strategies:

Making Health Care More Affordable: A Playbook for Implementing a State Cost Growth Target (January Angeles, The Peterson Program for Sustainable Health Care Costs, 01/10/2023)

The Massachusetts Health Care Cost Growth Benchmark and Accountability Mechanisms: Implications for State Policymakers (Debra Lipson, Cara Orfield, Rachel Machta, Mathematica 10/28/22)

‘Prices are Wrong’ Caps on Hospital Costs in US Gain Ground (Carey Goldberg, Bloomberg, 9/13/2022)

States Watching as Massachusetts Takes Aim at Hospital Building Boom and Costs (Harris Meyer, Kaiser Health News, 05/03/2022)

A Proposal to Cap Provider Prices and Price Growth in the Commercial Heath-Care Market (Michael Chernew, Leemore Dafny, Maximilian Pany, The Hamilton Project, 03/10/2020)

National Health Spending 1960-2013 (Aaron Catlin, Cathy Cowan, Health Affairs, 11/23/2015)

Episode Credits


Michael Bailit, MBA President and Founder Bailit Health

Leemore Dafny, PhD, Bruce V. Rauner Professor of Business Administration, Harvard Business School, Professor of Public Policy, Harvard Kennedy School

Amy Rosenthal, MPH, MPA Executive Director Health Care For All

David Seltz, Executive Director Massachusetts Health Policy Commission

This episode was reported by Alex Olgin and mixed by Andrew Parrella. Editing assistance from Cate Cahan.

Additional thanks to: Rachel Block, Christine Haran, Debra Lipson, Sarah Bartelmann, Cory King, Paul Hattis, Vicki Veltri, Mike Chernew, David Cutler, Stuart Altman and AnnaLisa Gellermann and the Tradeoffs Advisory Board and our stellar staff!