by State Auditor Doug Hoffer Last week Vermont’s Tax Commissioner issued a letter announcing that education property tax bills are expected to increase by approximately 18.5% next year. Among the chief contributing factors is a more than 16% increase in teacher health care costs.
The governor, legislators, the unions representing teachers and state employees, and school administrators do not have to sit by and let these health care cost increases continue to strain public budgets.
Fortunately, there are strategies to save money that would not hurt teachers or students, and which can be applied to the state employee health plan as well. We discuss one of them, “reference-based pricing,” below.
Before we turn to reference-based pricing, though, you may be wondering how much teacher health care costs are to begin with.
According to the Vermont Education Health Initiative, through which most teachers receive their health benefit, the plan paid out approximately $262 million for claims submitted during Fiscal Year 2023 (through 6/30/23). While FY24 figures will not be known until the summer, it is likely they will be higher.
A 16 % increase over the FY23 cost of the plan represents $42 million added to the bottom line of education spending.
State employee health care faces the same pressures. Total spending for the Vermont state employee health plan has risen significantly since 2019, and at a faster pace than had been anticipated by Administration officials. The chart below shows the total claims paid from 2010 to 2022.
The 2020 claims dropped to $134.7 million which was typical during COVID. Cost growth returned to its earlier pattern in 2021and has now grown by 82% since 2010, while the number of covered lives has grown just 17.5% in the same time period.
Is Vermont hopeless in the face of ever-rising health care costs? Must these price increases eat into public education and services, or result in large tax increases? The short answer is “no.”
In 2021 my office outlined a strategy that could save as much as $16.3 million each year just for the state employee health plan. Even larger annual savings would be possible in teacher health care.
The strategy would utilize what’s called “reference-based pricing.” In the simplest terms, reference-based pricing establishes a fair price for a particular medical service, and then pays only that amount (or a fixed percentage of it) to any provider performing the services to people on the health plan. In other words, it sets a maximum price for which the plan will pay for a service rather than merely paying the byzantine prices negotiated by insurance companies and hospitals regardless of whether they are excessive.
What’s the problem reference-based pricing solves? The administrators for both the State employee and teacher health care plans pay a wide range of prices at hospitals for the exact same procedures.
In fact, our research found that the highest priced provider for a given service was paid an average of 3.5 times more than the lowest priced provider for the same service. For some services, the difference between the highest and lowest priced provider was even more extreme, such as an echocardiograph (9.3 times).
In our research sample, State employees used higher priced providers for approximately 40% of services. Currently, the plan administrators are indifferent to these price differences - the health plans just pay the price, whatever it is.
The State is self-insured, which means that it pays a la carte for every medical service utilized by a state employee. When a state employee chooses a relatively high-priced provider, the taxpayer funded plan pays the high price; when the same employee chooses a lower-priced provider, the plan saves money.
Reference based pricing basically weeds out excessively high prices and pays a fair price for a service on behalf of a plan’s members.
Take one service as an example. We learned that the range of prices paid to different hospitals for a CT Scan of the abdomen or pelvis was $1,075 to $3,505 with the mid-point price of $2,615 (range = 3.3). The mid-point price is the amount paid to the hospital right in the middle of the price range, Hospital D in this case (see Table).
Clearly, half of Vermont’s hospitals have demonstrated that they can and will perform this procedure at $2,615 or less.
Estimated savings using the midpoint price for this one procedure would have been $190,853.
By paying no more than that midpoint price moving forward, the high-cost providers would be forced to consider how they can reduce their costs to perform the procedure to be closer in line with what the state or teacher plan will now pay. In some cases, they may merely lower their price because it was artificially high in the first place.
In others, they may better manage expenses. But no matter how they react, they will have to assess their current performance against a clearly attainable standard price, and taxpayers will save.
These effects are entirely consistent with the goals of Vermont’s current health care reform efforts – notably global budgets and value-based care.
Have any other states adopted reference-based pricing and, if so, has it worked? Yes, and a resounding yes.
- The State of Montana has used reference-based pricing for inpatient and outpatient services at acute care hospitals for their state employees since 2017. Independent researchers determined Montana saved $47.8 million in state fiscal years 2017 to 2019 (avg. $15.9m per year).
- The State of Oregon has reported on their experience with reference-based pricing for state employees and teachers. The audit they conducted based upon 2021 claims estimated $112.7 million in savings for their plan due to reference based pricing.
- In both states, there was no reduction in health care choice for state employees or teachers, and no observed impact on hospital operations.
We strongly encourage representatives from the Scott Administration, school administrators, and the unions representing the state employees and state teachers to sit down to explore reference-based pricing as one tool to mitigate the upward pressure on education property taxes and the state budget. Montana and Oregon, two states with very different political cultures, are reaping the significant financial benefits of such a collaboration. Vermont can join them.
