Earlier this year, Indiana passed legislation aimed at controlling healthcare costs by limiting what its largest nonprofit hospital systems can charge employers for care by mandating direct-to-employer contracts with a price cap tied to Medicare rates.
While the state is the first to enact such legislation, the move has drawn criticism from healthcare pricing experts, who argue that the policy may not actually address the underlying drivers of high healthcare costs.
Four notes:
1. Narrow networks limit the number of hospitals or providers available to a patient under their health plan or their employer’s direct contract with the provider in an effort to control costs.
2. In May, Indiana Gov. Mike Braun signed a bill requiring the state’s five largest nonprofit hospitals to offer direct-to-employer contracting arrangements with price caps set at or below 260% of Medicare’s reimbursement rates for inpatient and outpatient services, starting Sept. 1.
Rather than offering traditional health plans, employers can contract directly with the hospitals, tying health benefits to the capped prices. Hospitals can meet the cap requirement by participating in narrow networks that limit the hospital options available to employees.
By June 30, 2029, hospitals must offer prices at or below the statewide hospital price average. Failure to comply could result in losing nonprofit status for at least one year.
3. The law was introduced following RAND studies that showed Indiana employers pay more for hospital services compared to the national average. In 2022, the national average was 254% of the Medicare rate, while Indiana’s average was 297%.
4. On July 2, Trilliant Health President and CEO Hal Andrews published a critique of the new legislation, arguing that narrow networks and price caps don’t address underlying issues with healthcare costs. Trilliant is a healthcare data and insights firm.
“Narrow networks based on a system or group affiliation do not deliver maximum value for money because they cannot,” Mr. Andrews wrote. “Why? For the obvious reason that no hospital is excellent, much less the best, at everything. Likewise, there is a discernible range of quality in every large physician group.”
The Trilliant piece argues that price controls will lead to unintended consequences, including a reduction in care quality and possibly incentivizing providers to cut corners to meet the pricing benchmarks. Mr. Andrews also noted that Medicare-based pricing is imprecise, with the Medicare payment system being complex and variable across different systems, geographies, and patient demographics.
“Putting aside the numerous issues implicated by a legislative body forcing a commercial enterprise to deliver products and services that their customers may not want or need, [the legislation] is a reminder that the road to hell is paved with good intentions,” he wrote. “Instead of even more government interference with and distortion of the largest sector of the U.S. economy, Congress should consider how a true consumer market — Americans using their own money to make their own choices about their healthcare, the most personal financial decision they make — could provide the transformation that America’s health economy desperately needs.”
