Imagine that you are purchasing a new car. Two dealers in your town are selling the car that you want, but one of them is charging 50% more. You wouldn’t choose the more expensive dealer, right? And yet, in health care, Vermonters frequently use (often without knowing it) the more expensive option, seeing providers that charge double, triple, or more for the exact same procedure. For a number of reasons, health care does not operate like other markets, and patients may not be able or incentivized to seek out a better deal. But when patients use more expensive providers, it increases the cost of health care for patients, employers, and taxpayers.

The State employee health plan covers more than 25,000 members and works like ordering from an a la carte menu. Each time someone covered by the plan receives a medical service, the State pays a provider-specific price for that service. If a more expensive provider of, say, an MRI is used, then the taxpayers pay more than they would if a lower priced option was used. Conversely, each time a State employee, retiree, or their family member uses a lower priced provider, taxpayers save money compared with higher priced options.

In our new investigative report, we examine the extent to which the State employee health plan pays different prices to different medical providers for the exact same services.

The term used to describe this is “price variation.” While some price variation may be warranted (e.g., variation due to the severity of a patient’s illness), unwarranted price variation increases overall health care costs without offering better value or societal benefits. Basically, the price is just higher. We then examine two strategies Vermont could pursue to reduce health care costs by addressing price variation.

State plan pays significantly different prices for the same health care services
We found significant variation in prices paid by the State plan to providers for health care services frequently used by State employees.

In our sample,the highest priced provider for a given service was paid an average of 3.5 times more than the lowest priced provider for the exact same service. For some procedures, the difference between the highest and lowest priced provider was even more extreme, such as a CT scan (5.8 times) and an echocardiograph (9.3 times!). What’s more, State employees are (often without knowing it) using higher cost providers for nearly 40% of services.

Utilization of higher cost providers – and the resulting increase in health care spending – matters because State employees’ health care is a significant and growing expense. Between 2010 and 2019, annual medical payments covered by the State plan grew 51%, from $94 million to $142 million, while the number of covered lives grew by just 16%. Reducing the cost of employee’s health care would free up resources that could be directed to other State efforts or ease the pressure on taxpayers.

Limiting price variation could result in significant savings for the State, employees, and taxpayers.

Drawing on examples from Montana and New Hampshire, we used price data from the Vermont State plan to estimate savings if Vermont implemented two strategies to limit price variation: reference-based pricing and an incentive program.

1. Reference-based pricing: Reference-based pricing occurs when a health care purchaser, in this case a state, sets a maximum price for what they are willing to pay for a service rather than merely paying the prices negotiated by insurance companies and hospitals. We estimate that if reference-based pricing was implemented for just the 39 services in our sample, savings could reach $2.3 million annually, with an average savings of 13% per service. If this level of savings was achieved across all procedures, total savings could reach $16.3 million annually.

2. Incentives to select cost-effective care: Under this model, insurers provide employees with comparative price information and a cash incentive when an employee selects a lower priced provider. We estimate that if the State implemented this type of program for just seven types of shoppable services in our sample, savings could reach approximately $202,000 annually, with an average savings of 3% per service; with each added procedure (there are hundreds), the State would enjoy additional savings.

Both models achieve notable savings – especially reference pricing – without negatively impacting employees in any way. It is also worth noting that there has been no detectable impact on the hospitals in either Montana or New Hampshire as a result of these initiatives.

The details of either cost-saving strategy would need to be worked out. However, the status quo is not sustainable. The ever-rising cost of State employees’ health care strains the State’s budget. As the second largest employer in Vermont, State action could also help drive needed change across Vermont’s health care system. Either a reference-pricing system or an incentive-based program should encourage higher priced facilities to become more efficient and reduce prices where nearly all other health care policies have failed.

Sincerely,