Hospital payment caps could save millions of dollars for state employee health plans

PROVIDENCE, R.I. [Brown University] — State employee health plans could have saved $7.1 billion nationwide by capping hospital payments at 200% of Medicare rates in 2022, a study led by researchers at the Brown University School of Public Health found.

“States are under growing budgetary pressure due to rising health care spending, primarily through increases in hospital and drug prices,” said study author Roslyn Murray, an assistant professor of health services, policy and practice at Brown. “Our findings show that hospital payment caps could save state employee health plans millions of dollars, helping ease budgetary strain without causing significant disruptions to hospitals.”

Hospital payment caps are a way to limit the prices that hospitals can charge for their services, Murray said. Capping payments at 200% of Medicare rates means that the state employee health plans would pay hospitals no more than twice the amount that Medicare pays for similar services. For example, if Medicare pays $1,000 for a service, the state health plan would pay no more than $2,000 under this cap. The approach aims to keep costs down for state budgets while ensuring hospitals are paid fairly, Murray said.

Led by researchers from Brown’s Center for Advancing Health Policy through Research, the analysis builds on the team’s earlier study of the state of Oregon, which implemented hospital payment caps in 2019. 

By capping in-network payments at 200% of Medicare rates and out-of-network payments at 185%, Oregon saved $107.5 million over 27 months, which was equivalent to 4% of plan spending. Importantly, Murray noted, all hospitals there remained in-network, demonstrating that well-designed payment caps can achieve significant savings without compromising access to care.

In the new study, published in Health Affairs, the savings represent about $150.2 million per state based on data from 46 states and Washington, D.C. The savings would have a nominal impact on hospital operating margins and ranged from $2.7 million in Rhode Island to $933 million in California according to the analysis, which examined data from multiple sources, including the National Academy for State Health Policy Hospital Cost Tool.

When combined with state budget constraints and limits on deficit spending, the growing expense of employee health plans leads to difficult concessions between funding state operations and social services, according to the study authors.

“Overall, the new study highlights a critical path forward as state employee health plans — which provide coverage for legislators, the executive branch, municipal employees, and public school and university teachers and their dependents — are commanding an increasing portion of state budgets as a result of rising premiums, drug and hospital prices,” Murray said. 

While the study focused on state employee health plans, the researchers found that extending similar caps to the broader commercial market could yield substantial savings. Extrapolated data, for instance, suggests a potential savings of $87.7 billion annually for the entire commercial market under the same cap levels.

The researchers recommend that policymakers should tailor caps to local market conditions, setting rates that maximize savings without placing undue financial strains on hospitals. 

The researchers also stressed that clear legislative language is essential to prevent unintended consequences, such as hospitals increasing prices for services that are currently priced below the cap. They recommend that states should consider exemptions for financially vulnerable hospitals, and the benefits of these savings should be directed toward enrollees through lower out-of-pocket costs, reduced premiums or enhanced plan benefits, ensuring that policy delivers tangible improvement in affordability and access to care.

To support policymakers in these efforts, the team developed the Hospital Payment Cap Simulator, an interactive tool that provides insights into how much state employee plans across the U.S. could save from hospital payment caps and the impact on commercial hospital operating margins.