For more than a decade, Rhode Island has used a unique insurance rate review approach to keep hospital costs from rising any more than inflation plus 1 percent. As states confront COVID-19 and its accompanying budget crisis, Rhode Island’s approach that allows regulators to oversee hospital costs and requires insurers to invest in the state’s health priorities offers a new model for curbing health care costs.
From Medicare reference-based pricing to cost-growth benchmarks, states are exploring a number of innovative approaches to stabilize health care costs. Hospital costs are a particularly significant driver of insurance premiums rates. As health care consolidation increases, costs rise and insurers may be less likely to exert negotiating power to lower those costs.
As states renew their focus on health care costs, Rhode Island’s affordability standards, which require the inflation plus 1 percent cap in insurers’ negotiated prices with hospitals in order to have their premium rates approved, offers an avenue for health care cost controls. While the degree of regulatory oversight over insurance markets varies across the country, many states may be able to replicate Rhode Island’s approach.
The scope of rate review varies across states – some states only have authority over individual and small-group markets while others also have authority over the fully insured, large-group markets as well. Some states have “prior approval” authority, which allows them to reject, approve, or reduce proposed premium rates, while others have “file-and-use” oversight, which gives officials the authority to review, but not reject proposed increases. Whether states have prior approval or file-and-use authority can also vary based on the market – states typically have less oversight over the fully insured, large-group market than the individual and small-group market.
In 2015, Health Affairs reported that adjusted premiums in the individual market were lower in states that had “prior approval” authority along with MLR requirements from 2010 to 2013. While more stringent rate review is shown to keep premiums lower, some states have expanded the scope of their rate review processes to tackle issues of accessibility and affordability. Since 2010, Rhode Island has been using its unique regulatory structure with the Office of the Health Insurance Commissioner (OHIC) to better control rising hospital costs through insurance rate review.
Rate Review as a Cost Containment Tool
In 2004, Rhode Island enacted a law that split the Office of the Health Insurance Commissioner (OHIC) from the rest of its insurance department in order to better understand and oversee the relationship between insurers and providers. In Rhode Island, the health insurance commissioner has oversight over the individual market, the small-group market, and fully insured, large-group markets. Although the ACA required the OHIC to complete a more comprehensive review of consumer protections in the individual and small-group markets, the OHIC has the authority to review and approve rates for all three markets – including for fully insured, large-group plans.
The legislature also charged the newly created health insurance commissioner with promoting greater accessibility, quality, and affordability in the health insurance market – a unique charge compared to other states – that ultimately led insurance regulators to oversee negotiated rates between insurers and hospitals. The OHIC’s work to oversee hospital costs largely relies on a “public interest” criterion in the state’s insurance statutes. The rate review statute requires proposed rates to be, “consistent with the proper conduct of its business and with the interest of the public,” and the public has an interest in affordability. The 2004 statute also created the Health Insurance Advisory Council, which was responsible for making recommendations on a number of issues, including requiring that the market for small businesses be affordable and fair.
The council led efforts to better understand health care cost drivers in Rhode Island and found that hospitals were a main “pain point” for affordability. Insurers argued they did not have the leverage to negotiate lower rates in contracts with providers. In 2009, the council reviewed the state’s options to address these cost drivers and eventually developed the Affordability Standards and Priorities for Rhode Island Commercial Health Insurers, which emphasized the need for reduced insurance costs, and by extension, reduced hospital costs. In 2010, the insurance commissioner documented significant variances between the rates of payment for inpatient costs across health systems in Rhode Island, prompting additional questions about the contracted rates between insurers and providers. This finding, combined with a lack of insurer-motivated payment reforms, spurred the commissioner to adopt a set of four “affordability standards” for insurance rate review.
Rhode Island’s Affordability Standards
With the adoption of the affordability standards, the commissioner directed insurers to comply with four new criteria in order to have their premium rates approved:
- Expanding and improving primary care infrastructure;
- Spreading the adoption of the patient-centered medical home model;
- Supporting CurrentCare, the state’s health information exchange; and
- Working toward comprehensive payment reform across the delivery system.
The primary care criteria required insurers to increase their share of medical spending on primary care by 1 percent from 2010 to 2014, while not increasing consumer premiums. The additional investments also couldn’t lead to increased overall medical expenses – and instead were intended to reflect a shift to new payment strategies. Beyond primary care, the standards required insurers to provide financial support for the Rhode Island Chronic Care Sustainability Initiative, the all-payer, patient-centered medical home pilot project, and CurrentCare, the state’s health information exchange
As far as cost containment, the most striking change to Rhode Island’s rate review process was the implementation of the fourth standard – comprehensive payment reform. In order to set measurable goals to hold insurers accountable for this, the commissioner put six conditions into place that insurers had to adopt in their hospital contracts. The conditions included:
- Paying for inpatient and outpatient services using “units of service” that encourage efficient resource use.
- Limiting the average annual effective rates of price increase for both inpatient and outpatient services to a weighted amount equal to or less than Centers for Medicare & Medicaid Services’ National Prospective Payment System Hospital Input Price Index (“IPPS”) plus 1 percent for all contractual years.
- Giving hospitals an opportunity to increase total annual revenue based on meeting mutually agreed upon quality goals.
- Including contract terms to meet agreed upon obligations for administrative simplification.
- Including contract terms that promote and measure improved care coordination.
- Including transparency for these six terms in contracts.
The #2 condition, requiring insurers to limit the average price increases for hospital services, was groundbreaking in its impact on the contractually agreed-upon prices paid by insurers to providers. In addition to tagging rate increases to IPPS, the affordability standards also required that at least 50 percent of the annual hospital rate increases be earned through the agreed-upon quality measures. These hospital contracting provisions were an early and still innovative approach to regulating hospital costs.
Impact of Affordability Standards
A 2019 Health Affairs review found that implementation of Rhode Island’s affordability standards led to a net reduction in per enrollee spending by a mean of $55 from 2010 to 2016. The study showed that outpatient and inpatient utilization did not significantly change, but spending per encounter decreased in Rhode Island compared to a control group. Quarterly fee-for-service spending actually decreased by $76 per enrollee, but the requirement to increase non-fee-for-service primary care spending raised per enrollee spending by $21, netting out to a quarterly savings per enrollee of $55. In addition, patient cost sharing was lower in Rhode Island after the affordability standards were implemented compared to a control group.
Quality metrics did not change with implementation of the standards. In fact, interviews conducted for a 2013 review of the standards found that the “at-least-50-percent” provision for hospital contracting caused a “culture shift” among hospitals by focusing their attention to meeting quality measures.
The one challenge in understanding the impacts of Rhode Island’s affordability standards is that it is impossible to totally untie the provisions around hospital contracting from the primary care investments, making it somewhat difficult to know how a state might fare if it only enacted standards around payment reform without the primary care investment.
Since implementation in 2010, Rhode Island has updated its affordability standards over time to align with other goals, such as further promoting the patient-centered medical home model and alternative payment methods that emphasize value rather than volume. The most recent affordability standards, adopted in 2016, require insurers to spend at least 10.7 percent of their annual medical spend on primary care. Among other requirements, the standards also maintain the hospital contracting provisions. The standards require insurers to limit hospital rate increases so that the average rate increase is no greater than the Urban Consumer Price Index (CPI) (less food and energy) percentage increase plus 1 percent.
Future of Rate Review as a Cost Containment Tool
Rate review is a promising tool for cost containment. As evidence shows it can keep premiums low but can also be used to impact payer-provider negotiations as in Rhode Island. Placing responsibility for hospital cost containment alongside insurance rate review not only allows for coordinated reform across insurers, but also gives an insurance department, like OHIC, insight into where unintended consequences might occur or other costs might pop up as the state works to control other health care cost drivers.
States have begun to mirror Rhode Island’s affordability standards in their insurance rate review process to advance health policy goals. In 2019, Colorado enacted HB 19-1233, which established a Primary Care Reform Payment Collaborative that, among other things, was tasked with creating an affordability standard to require additional investment by insurers in primary care.
The collaborative recommended that commercial payers be required to increase the percentage of total medical expenditures (excluding pharmacy) spent on primary care by at least one percentage point annually through 2022. The collaborative said the Insurance Commissioner will have to address the risk of costs being passed on to consumers when the affordability standards are promulgated. This standard is similar to Rhode Island’s work to invest in its primary care infrastructure. Importantly, the Colorado collaborative noted in its recommendations that the Insurance Commissioner must include this new affordability standard alongside an effort to reduce overall health care spending. Otherwise, health care costs could rise in the state.
Similarly, Delaware enacted SB 116 in 2019 to create an Office of Value-Based Health Care Delivery within its Department of Insurance. The office’s goal is to reduce health care costs by providing high quality, cost-efficient health insurance products with stable, predictable, and affordable rates. To achieve this mandate, the new Delaware office has been working alongside the Delaware Primary Care Reform Collaborative to develop affordability standards and targets for primary care spending for carriers. In November 2020, the office presented draft affordability standards that would set targets for primary care investment, unit price growth for non-professional services, and the adoption of alternative payment models. Modeling Rhode Island’s work, the targets for primary care investment and capping unit price growth would be enforced through insurance rate review. The draft standards recommend using a phased approach to cap unit price growth beginning in 2022 and would decrease over time, eventually reaching Rhode Island’s cap of CPI plus one percent by 2025. According to a timeline in its November presentation, the office plans to publish the draft standards and accept public comments in February 2021.
With the implementation of Rhode Island’s affordability standards, the state was able to successfully cap growth in hospital costs and thereby constrain premium growth. Rhode Island’s use of rate review to control hospital costs can be a model for other states interested in curbing health care costs. The National Academy for State Health Policy will continue to track state efforts to implement affordability standards and will convene states interested in exploring this policy.