Surprised that the national average rate that employer-sponsored health plans pay hospitals is 2.5-times higher than Medicare’s reimbursement rate? Or that there is actually no relationship between the volume of publicly covered patients a hospital serves to the prices it charges commercially-insured patients? This price transparency is important as states and employers work to rein in health care spending, but what do health care purchasers know about a hospital’s costs for providing patient care?
The Hospital Cost Tool developed by the National Academy for State Health Policy (NASHP) with support from Arnold Ventures can be used as a complement to recent findings reported in RAND Corp.’s Nationwide Evaluation of Health Care Prices Paid by Private Health Plans to help purchasers and regulators better understand hospitals’ costs, their public and commercial payer mix, and their cost recovery from Medicare, Medicaid, and commercial payers.
State officials responsible for cost containment strategies, including administrators of state employee health plans, and employers can use NASHP’s hospital cost tool to understand the relationship between health plans’ hospital payments and the hospital’s reported costs. Understanding the difference between a hospitals’ costs and the payments it receives is critical data that can be used to initiate informed conversations about appropriate payment reimbursements.
The tool uses Medicare cost report (MCR) data that is annually submitted by hospitals to the federal government to calculate a number of cost variables for individual hospitals, including cost-to-charge ratios, profit margin, and more. There is no additional reporting burden on hospitals for states and employers to use this tool. The tool includes detailed instructions and has embedded formulas to help users access and leverage critical information from MCRs, which are often hundreds of pages long for each hospital. The MCR is the only nationally available, public information that provides hospital cost data.
The federal reporting instructions are standard for all hospitals so the information in each hosptial’s MCR is comparable across hospitals. While all hospitals receiving Medicare payments must submit these reports to the federal government, some may be hard to find. Some states require hospitals to submit their MCRs to a certain state agency that is permitted access to the data. Also, there are organizations that provide these reports in a well-organized manner for a fee (annual and/or per hospital MCR). For more information on MCRs, read the NASHP blog, Why Compare What Employers Pay to What Medicare Pays?
While the tool can be used to analyze hosptials’ costs, it is not currently designed to provide analysis about a hospital’s level of efficiency or whether the costs are appropriate given the quality of care provided. However, because the tool uses the MCR data, comparing multiple hospitals is one way to account for efficiency. For example, in comparing two hospitals in a state, if the data from Hospital A shows that Medicare covers 88 percent of its costs, and at Hospital B Medicare covers 103 percent of its costs, that could indicate that hospital B uses its reimbursements more efficiently to provide patient care.
However, there may be additional criteria to consider— some of which is highlighted in the tool – such as payer mix. The tool uses weighted data to account for each payer’s proportion of the population served by the hospital so that comparisons across hospitals with different payer mixes can be made. But, other considerations may be necessary. For example, it may useful to review a hospital’s MCR data over time using the tool to identify a cost trend. Has a hospital made capital investments, such as building or purchasing new facilities, in recent years that increased its costs? Such information could be useful in considering a hospital’s certificate-of-need application. NASHP will continue to refine this tool to integrate potential efficiency and quality measures, but the data on costs is a valuable place to start. The tool’s goal is to provide data to inform discussions between purchasers of care and hospitals.
Officials from several states have reviewed the tool and expressed interest in leveraging what they are learning from its analysis of their hospitals in different ways, such as:
- Pursuing a more robust insurance rate review process to help contain health care cost growth;
- Further informing hospital global budget parameters; and
- Negotiating hospital reimbursement as a reference to Medicare rates.
An early version of this tool, with more limited calculations, was used by the Montana State Employee Health Plan to negotiate with hospitals and providers to establish a reimbursement rate based on Medicare rates.
While the tool includes numerous metrics for analyses, there are several that stand out:
- Financial statements. Net income, reserves, and profit margins are reported for the entire hospital, with no adjustments made for Medicare-disallowed costs. (Medicare disallowed costs include those unrelated to patient care, like research and lobbying, as well as non-patient care-related revenues such as those from hospital cafeterias and parking lots.)
These data points are clearly important to a state or other purchaser in gaining an understanding of some basic information on the financial health of a hospital when pursuing cost-containment measures, as the goal of this initiative is to stem rising health care costs, not impoverish hospitals.
- Cost-to-charge ratio (CCR). The CCR shows the percentage of charges that represent actual operating costs during a one-year period. The ratio generated by the tool is displayed in two formats:
- CCR: This ratio equals costs divided by charges. For example, a CCR of 25 percent means that a hospital’s costs are 25 percent of charges. The lower the percentage, the larger the profit margin on its charges.
- Charges as percentage of costs: This ratio equals charges divided by costs. A ratio of 500 percent means costs are multiplied by – or grossed up – by 500 percent to establish charges.
These ratios are useful when evaluating insurer or third-party administrator (TPA) network discounts off a hospital’s chargemaster rates, which are like list prices for a car and often bear little relation to what providing services actually cost. Insurers often boast about their negotiated discounts with hospitals, but if a hospital’s costs are only 25 percent of its charges, is a discount of 30 percent off chargemaster rates really a good deal?
- Charity care/bad debt/uninsured patients: The NASHP tool specifically uses a hospital’s costs – and not its higher chargemaster rates – for this calculation. Typically, hospitals report their expenses for charity care, bad debt, and services for the uninsured at their chargemaster rates. However, recent changes in accounting rules require these calculations to now be based on costs and, as a result, in their audited financial statements hospitals may no longer report the higher chargemaster rates. While the Centers for Medicare & Medicaid Services and the Internal Revenue Services have not adopted the new accounting rules requiring costs – not chargemaster rates – to be reported, the tool does report at the cost level.
Using costs to indicate a hospital’s uncompensated care is a more accurate representation of this category and can be used to more clearly understand a hospital’s overall profit margin.
- Payer mix: Payer mix is the percentage of hospital patient care charges attributable to Medicare, Medicaid, and commercial – which represents insurers, employer self-insured plans, Veterans Administration, and self-pay, etc.
When assessing hospital costs to develop meaningful cost-containment strategies, the payer mix is important as it helps clarify the hospital’s recovery of costs from each category of payer.
- Profit/loss: NASHP’s tool calculates profit and loss by payer type. Using the global CCR applied to specific payer-type charges, the tool is able to calculate the related costs for each group and its profit margins.
It is important to look at payer mix and profit/loss together. Consider the example highlighted by a NASHP analysis using the tool of one hospital in Colorado:
- The hospital’s data showed a 40 percent loss for Medicaid, but because Medicaid was only 9 percent of the hospital’s payer mix, the loss was limited to only that relatively small portion of the facility’s patient population.
- The same hospital showed a 13 percent profit for Medicare, which comprised 21 percent of its patient population.
- And it reported a 54 percent profit for its commercially-insured patients, who made up 70 percent of its patients.
On the whole, this hospital is profitable. By looking at the payer mix and profit/loss indicators or measures in tandem, policymakers can achieve a clearer, more holistic picture of the financial health of a hospital.
- Multiples of Medicare: The tool also includes hospital payments and costs for commercial payers (commercial insurance, employer self-funded plans, etc.) It calculates the required payments from this segment to allow the hospital to break-even.
- The break-even point is the point at which revenue equals costs, which would result in zero profit and zero loss. Break-even is calculated in the tool in the following way:
- Level 1: Commercial patient costs plus any balance of government program payments, charity care, and uninsured.
- Level 2: Level 1 plus all Medicare-allowed costs.
- Level 3: Levels 1 and 2 plus all Medicare disallowed costs. Physician direct patient costs are not included in the add-back of disallowed costs, as related reimbursement is processed through other channels, such as the Medicare resource-based relative value-scale (RBRVS) physicain payment system, fee schedules, etc.)
- Level 4: Levels 1, 2, and 3 plus hospital non-operating income and expenses.
- The break-even point is the point at which revenue equals costs, which would result in zero profit and zero loss. Break-even is calculated in the tool in the following way:
As states develop budgets for state employee health plans and other public purchasers, and consider developing public option health plans, this tool can be useful to lower costs by developing rates using Medicare as a reference, negotiating increases above Medicare reference rates to account for public payer balances, but that are still lower than their current spending. The tool also helps states find an appropriate rate that can achieve savings but still keep hospitals financially viable. What better data to use than a hospital’s own reported costs?
NASHP staff is available to state officials who may need technical assistance in using the tool, contact Maureen Hensley-Quinn (firstname.lastname@example.org).
Results from a new RAND Corporation study – Nationwide Evaluation of Health Care Prices Paid By Private Health Plans – show commercial payers reimburse hospitals about 2.5-times more than does Medicare. As expected, hospital officials responded, claiming that public payers underpay for medical services and that it is inappropriate to challenge hospitals now as they battle the pandemic. However, the RAND study revealed a very significant finding – there is no relationship between a hospital’s prices charged to commercial payers and its volume of Medicare and Medicaid patients.
There is never a good time to take on hospital prices, but that task is essential if the nation is ever to get a grip on health care costs. Hospitals are large employers and provide an essential service, never more important than during the pandemic, but they also comprise the biggest chunk of health care spending, driving up insurance premiums and out-of-pocket costs.
Additionally, most hospital markets are now consolidated, creating an imbalance in bargaining power and driving up costs. A growing trend in vertical consolidation – when hospital/heath care systems purchase physician practices and other ancillary services – has resulted in increased costs, in part through the addition of facility fees for non-hospital-based services.
Policymakers are often pressured to protect their local hospitals and avoid the much-needed discussion of what is an adequate payment to sustain quality hospital care. The RAND study provides a great place to start that discussion and the first step is understanding just how Medicare sets its rates. The National Academy for State Health Policy (NASHP) offers this overview on Medicare rates and will soon release more tools to help states take on the important policy question of what is an appropriate hospital payment.
How Are Medicare Rates Calculated?
Since the passage of the Social Security Amendments Act of 1983 that created Medicare, the federal health insurance program covering 40 million older and/or disabled adults has primarily reimbursed providers through prospective fee-for-service (FFS) payments. Under the federal Prospective Payment System (PPS), Medicare reimburses each provider a predetermined amount for each service.
Medicare Advantage plans – established in 1997 as privately administered alternatives to traditional Medicare – are a notable exception from the standard FFS system. For these plans, the Centers for Medicare & Medicaid Services (CMS) pays a private health plan a prospective lump sum based on the number of beneficiaries enrolled in the plan. The health plan then uses these funds to reimburse providers and administer benefits to enrollees.
Medicare payments to some plans are negotiated from a benchmark based on a county’s per capita Medicare spending compared to the national average, as well as plan quality indicators. For other plans, the benchmark is a weighted average of the average county rate and the average health plan’s bid. CMS publishes the statutorily derived formulas for these payments.
Under the PPS for inpatient admissions, CMS bases the amount of reimbursement on a patient’s diagnosis-related group (DRG). Each patient’s case is assigned a different DRG code based largely on five main factors, including the type and severity of their illness. Generally, the more resources (e.g., medical supplies) required to treat a patient, the greater the reimbursement. This amount can vary based on local wages and cost of living, and additional payments are made to teaching hospitals and those that treat a high percentage of low-income patients.
Under the PPS for hospital outpatient services, payments are similarly based on resource costs and complexity. Additionally, hospitals can receive payments for using certain new drugs/devices, providing particularly costly services, or if the hospital is a cancer, children’s, and/or rural hospital. To determine these reimbursement rates, CMS receives recommendations from an advisory panel of 16 full-time hospital employees and outpatient PPS providers.
An important recurring factor in CMS’s payment methodology is its consideration of stakeholder recommendations. Under the Resource-Based Relative Value Scale (RBRVS) FFS payment system, CMS considers recommendations from a 31-member physician committee when quantifying the value of each service rendered, based on the following geographically adjusted costs:
- Physician work – the time, skill, and mental/physical effort required to perform the service
- Practice expense – the cost for the service to be rendered at the specific site of care
- Professional liability insurance – the amount a provider spends on malpractice insurance, based on claims data
The Medicare Payment Advisory Commission (MedPAC) – the independent 17-member Congressional advisory commission of health care delivery and finance experts – meets publicly with beneficiary advocates, researchers, and providers to consider their input before submitting an annual report to Congress detailing the payment adequacy in meeting patient care and provider cost needs, in addition to considering any inequities that may result from payments.
According to MedPAC’s March 2020 report, Medicare payments covered 8 percent more than hospitals’ allowed variable costs (costs that can change based on utilization of services), which allows for this additional percentage to contribute to coverage of fixed costs. This method provides incentive for hospitals to lower their costs and encourages them to treat Medicare beneficiaries, as an increase in the number of patients a hospital treats results in an increased contribution to fixed costs while covering variable costs.
Medicare payments are determined in part through these various stakeholder recommendations. However, this input is not the sole means by which Medicare rates are set. CMS also collects quantitative data through the Medicare cost report, which is the primary data collection to assess provider costs.
How Does CMS Collect Provider Cost Data?
The costs that a provider’s PPS reimbursement are based on are collected through a publicly available Medicare cost report (MCR). These annual reports, due five months after a fiscal year ends, are required from all Medicare-reimbursable facilities, including hospitals, skilled nursing homes, home health agencies, home offices, hospices, rural health clinics, federally qualified health centers, and comprehensive outpatient rehabilitation facilities.
Each report includes information on hospital revenues, capacity, discharge volume, charges, and operating costs. To ensure accuracy, an officer or administrator of the hospital must certify the reported data complies with relevant laws and regulations and that the MCR is a “true, correct, and complete statement.” These reports are the only national source for hospital operating costs reported in a uniform manner.
Critics argue that the definition of allowable costs under federal code 42 CFR 413.9(c)(3) is too narrow, classifying what some might say are appropriate costs as non-reimbursable. However, only operating costs related to patient care are reimbursable under the program. If operating costs include amounts for “luxury items or services” (more expensive than those generally considered necessary for the provision of needed health services), such amounts are not allowable.
Physician costs are often the largest “disallowed” appropriate costs, according to critics. However, while some of these costs are disallowed by Medicare through the inpatient/outpatient PPS, this is only because they are reimbursed through other payment methods. The MCR splits physician costs into three buckets:
- Non-reimbursable services: These services, of which research is the most common component, are disallowed as they do not provide patient care and are usually reimbursed by other funding.
- Professional services to individual patients: These costs are disallowed as professional service reimbursement is provided through other channels, such as RBRVS, Medicaid/Medicare fee schedules, and commercial network agreements, etc.
- General services that provide benefit to hospital patients: These costs are allowed and reimbursed under the MCR. General services may include emergency room, intensive care unit, and other areas of general care that are not reimbursed through another channel.
The transparency surrounding these allowed and disallowed costs enables states to use tools such as NASHP’s upcoming Hospital Cost Tool, which utilizes data from MCRs to provide a comprehensive view of a hospital’s financial status. This can inform a state’s provider reimbursement negotiations and other cost-containment strategies.
Building on the Progress
Medicare rates are based on provider-attested costs while allowing for a transparent, standard payment system that can evolve. For example, the Medicare Access and Children’s Health Insurance Program Reauthorization Act of 2015 (MACRA) reformed Medicare to replace the population growth-rate based spending cap with two pathways – the Merit-based Incentive Payment System and the Advanced Alternative Payment Models – to base providers’ reimbursements on their performance against various quality and cost measures.
The methodology of Medicare rate determination is annually updated, geographically adjusted, and publicly available through the CMS website that also publishes a complete listing of fees used to pay providers/medical equipment suppliers and a regularly updated tool that allows users to estimate PPS payments based on claims data and provider cost reports.
Multiple stakeholder groups have helped Medicare, the largest health care purchaser in the country, promote equity and transparency in covering nearly every service and paying for health system costs rather than charges.
A hospital does not have to abide by any formula or legal requirement for setting its charges nor does it have to disclose mark-ups on hospital-purchased services or medical supplies, and it may change them at any time. As a result, chargemaster rates (what hospitals list as prices for their services) present an inaccurate benchmark for assessing costs and negotiating reimbursements between commercial payers and providers, resulting in costly bills for patients.
However, when the transparent and standardized Medicare rates are used as the benchmark, states can achieve savings while still covering providers’ costs and they can better explore innovative strategies to improve health care affordability.
- Align hospital investments with the needs of their communities;
- Address the lack of focus on equity in existing community benefit strategies and investments; and
- Ensure responsible use of the nonprofit hospital charitable tax exemption.
How Hospitals Address COVID-19 Inequities
Hospitals are on the front lines of this pandemic; many struggle to meet surge demands for care, which are straining hospital staff and budgets. Despite these challenges, some hospitals are also reaching out to their communities and creating partnerships to improve access to COVID-19 testing and treatment for populations that have been disproportionately impacted.
The Catholic Health Association has outlined how hospitals can shift their community benefit programs to respond to the pandemic through community health improvement activities, such as:
- Promoting awareness and education activities for the community and first responders (e.g., telephone hotlines, public service announcements, and media responses);
- Charging only nominal fees for services or screenings for COVID-19 and flu immunizations, and improving access through mobile units and off-site testing;
- Having executive and other employee time dedicated to planning for and recovering from the public health emergency;
- Providing community mental health services;
- Launching interventions to address the social needs of the community (e.g., social and environmental improvements, such as reducing food and housing insecurity); and
- Establishing command centers specific to disaster readiness.
These community health improvement activities have the potential to help address the underlying inequities leading to disparities in COVID-19 and other health outcomes. This represents a sea change as most hospitals have not addressed the equity concerns that communities raise, and community health improvement activities represent only 0.37 percent of total community benefit spending, according to 2014 IRS data.
There are some examples of hospitals that do address COVID-19 inequities though community health improvement services. These bright spots exemplify the importance of:
- Responding to community health needs identified by community residents;
- Partnering with community-based organizations that serve and have the trust of historically marginalized populations; and
- Leveraging hospital data to identify needs, as well as the critical importance of addressing social determinants of health, such as education and employment.
These examples demonstrate ways that hospitals can address equity.
- Children’s Hospital of Philadelphia partnered with the Philadelphia Housing Authority (PHA) and a local catering company to provide free family dinners at two PHA locations in West Philadelphia from April through June.
- MetroHealth (Cleveland) Institute for HOPE and the Greater Cleveland Food Bank are partnering to deliver fresh produce directly to patients’ homes. The hospital identified patients who most need the food deliveries by looking at its top utilizer zip codes and identifying people who had been regularly visiting its on-site food distribution.
- Kaiser Permanente has dedicated $1 million to increase capacity for preventing and treating COVID-19 among the homeless. Kaiser has partnered with National Health Care for the Homeless Council to make grants to local homeless shelters to increase their capacity for services and outreach.
Community Benefit Obligations of Nonprofit Hospitals during the Pandemic
Nonprofit hospitals have a mandated Internal Revenue Service (IRS) obligation to provide community benefit, even if they are struggling to meet the demands of COVID-19. In 2011, hospitals benefited from at least $24.6 billion in tax exemptions, according to a 2015 analysis that used the most recent data available. In lieu of these taxes, hospitals are required to provide community benefits. According to a recent study, community benefit spending remained flat between 2011 and 2017, and community benefits may shrink as hospitals grapple with diminishing bottom lines amid the pandemic.
Every three years, the IRS requires nonprofit hospitals to complete a community health needs assessment (CHNA) with input from a public health department and medically underserved, low-income, and minority populations in their communities.
It is particularly challenging to engage residents and community leaders in this time of social distancing when many hospital staff are working at or over capacity to respond to COVID-19. Some nonprofit hospitals have been granted an extension until the end of the year to complete their scheduled CHNAs. Others may choose to do a limited or rapid needs assessment to update their pre-COVID-19 assessments. However, if CHNAs are not completed or are not updated to take COVID-19 into account, it raises the question of how hospitals will respond to urgent community needs and continue to meet the requirements of their tax-exempt status.
CHNAs have been the key method states have used to ensure that hospital community benefit investments are directed toward current community needs, as expressed by communities. Some states, as detailed below, go beyond the federal requirements through legislation and licensure to explicitly require that hospitals tie their community benefit implementation plans to their needs assessments. As COVID-19 reveals long-standing health inequities, it is more important than ever that hospitals work with residents to identify and address community needs and underlying inequities.
Currently, a focus on equity in community benefit strategies and investments in CHNAs is lacking – though equity is raised when assessing community needs. A 2016 study of urban nonprofit hospital CHNAs found that 65 percent cited health disparities or health equity explicitly, 100 percent referenced health equity implicitly, and 75 percent reported that external stakeholders identified health equity as a need. Yet, only 46 percent prioritized health equity in their CHNAs and a mere 9 percent of the hospitals’ implementation strategies included activities explicitly designed to improve health equity.
States are beginning to address this disconnect because equity is a demonstrated, high-priority need that the pandemic has laid bare. Community benefit is a lever states are beginning to pull.
Current State Efforts to Leverage Community Benefit Investments
States are continuing, even now, to leverage hospital community benefit requirements and hold hospitals accountable to invest in community health improvement. They’re using a variety of state levers, including state licensure and certificate/determination-of-need approval processes.
This is especially important now because charity care – a component of community benefit – may increase due to the economic downturn. States that want hospital community benefit programs to also focus on addressing community needs and social determinants of health will need tools to communicate their expectations and monitor modifications.
States are going beyond the federal community benefit requirements to ensure:
- Authentic and meaningful community engagement and input;
- A focus on identifying, tracking, and reducing disparities identified in CHNAs;
- Community benefit spending advances state priorities as identified in CHNAs and statewide health improvement plans;
- Hospitals work with public health to align assessment and tap the capacity of public health to address health equity and social determinants of health;
- Investments in equity are in alignment with state-supported, local, cross-sector collaboratives addressing health equity; and
- Hospital community benefit reporting that makes transparent the connection between real investments and identified community needs.
Ensuring Authentic and Meaningful Community Engagement and Input
States can work to ensure that hospitals truly seek out and act on meaningful input from a wide range of community representatives. Prior to the outbreak of COVID-19, Maryland enacted legislation (effective July 1, 2020) requiring its Health Services Cost Review Commission to establish a Community Benefit Reporting Workgroup and to adopt regulations based on workgroup recommendations. This law expands on the federal requirements for community engagement by requiring that the workgroup include people impacted by hospital community benefit spending. The law also requires hospitals to not only solicit and take into account input from individuals who represent the interests of their communities, but also to conduct their CHNAs in consultation with community members, which may look different due to COVID-19, but remains critical.
In addition, four states (California, New Hampshire, New York, and Rhode Island) statutorily require that certain communities or groups, such as community organizations, members of the public, or racial and ethnic minorities, be represented in the CHNA, above and beyond what the federal government requires. A Texas statute encourages hospitals to consult with certain groups or entities when assessing community needs. Researchers have also recommended that states require engagement of community members and organizations in the development of community benefit implementation plans, in addition to the CHNA.
Community health improvement initiatives are proven to be more effective when communities are engaged throughout the process. The examples above illustrate some strategies for engaging the community in needs assessment and are feasible even during a pandemic. Hospitals can develop partnerships with community organizations that serve and have the trust of vulnerable communities. They can also analyze patient data to identify needs and combine them with direct input from community members.
Identifying and Tracking Reductions in Disparities in CHNAs
Maryland requires CHNAs to describe a hospital’s effort to track and reduce disparities in the community. Requiring efforts to address health disparities as part of state community benefit requirements is a critical policy to improve equity, yet is not a federal requirement nor are disparities even mentioned in the federal regulations.
Addressing Community Needs and Advancing State Priorities
States are working to ensure that community benefit implementation plans address the needs identified by the CHNA process using strategies for engaging the community in needs assessment. Maryland’s new law requires hospitals to submit an annual report describing how each of the activities undertaken by the hospital addresses the community health needs of the hospital’s community, a description of gaps in the availability of providers to serve the community, and a list of the unmet community health needs identified in the most recent CHNA. Although this law is new, other states may find it a useful model for tying community benefit investments to documented needs.
Some states have aligned their community benefit requirements with State Health Improvement Plans (SHIPs) developed by public health departments. New York requires that hospital Community Health Improvement Plans specifically address goals contained in its SHIP, known as the Prevention Agenda 2019-2024. New York also requires hospitals to report their community benefit spending, and how it relates to its prevention agenda. Improvement plan.
Massachusetts has aligned community benefit requirements with state health priorities by tying the Department of Public Health’s Determination of Need process to standards for community engagement and social determinant of health investing. While the process is currently underway, the Massachusetts Attorney General’s office is considering how to give nonprofit hospitals the flexibility to bring an equity lens to addressing the needs revealed by COVID-19.
Promoting Collaboration with Public Health Departments
New York encourages hospitals to work with public health departments on both their CHNAs and the related community health improvement plans. This link to public health is a key policy to ensure the capacity to address health equity, which is a foundational principle of public health. The authors of the 2016 study of CHNAs conclude that hospitals might have the will to promote health equity, but not necessarily the know-how.
Working with public health departments is also important to reduce duplication, considering both nonprofit hospitals and public health departments conduct regular community health needs assessments. Maryland requires hospitals to consider the most recent community needs assessment developed by the state or local health department when identifying community health needs. Five states go further (ME, MA, NH, NY, and TX), requiring or encouraging local public health officials to be involved in the community needs assessment process.
Aligning Community Benefit with Local Health Improvement Coalitions
In 2015, Rhode Island began implementing Health Equity Zones (HEZs) which now exist in 10 communities across the state. HEZs are geographic areas where the Rhode Island Department of Health invests a blend of funding streams to address differences in health outcomes. Local, cross-sector coalitions conduct a collaborative, community-driven needs assessment and implement a plan to address the identified needs. For example, the Southside, Elmwood, and West End Health Equity Zone in Providence galvanized residents to advocate for housing as a social determinant of health, achieving the remediation of several blighted properties, hosting a Neighborhood Housing Summit, and advancing equitable housing policy.
Rhode Island (prior to COVID-19) required two hospitals to invest in their local HEZs and collaborate with them on their CHNAs as a condition of approval for changes sought under the Hospital Conversions Act, which governs changes in hospital ownership and significant reductions in certain hospital services. Although not directly tied to community benefit, the advent of Rhode Island’s Health Equity Measures this year creates additional opportunities for alignment between the HEZs, the state’s health equity goals, measures, and hospital community benefit.
Establishing Transparent Reporting that Ties Investments to Community Need
Maryland requires nonprofit hospitals to submit an annual community benefit report including a list of the initiatives that were undertaken by the hospital and the cost of each. New York asks hospitals to report itemized community benefit spending. Connecticut, as a part of its certificate-of-need process, similarly requires that hospitals identify community benefit dollars spent on specific needs identified in their CHNAs. New Hampshire and Vermont also require hospitals to report community needs from the most recent CHNA and tie these to community benefit spending.
The Way Forward
COVID-19 has drastically altered the health care landscape in the United States. As states struggle with reduced budgets and revenue, they need to leverage every resource available for community health improvement, particularly for the most vulnerable residents. Hospitals are on the frontline in communities, leading testing and treatment. Community benefit provisions hold nonprofit hospitals accountable for investing in communities in return for the federal tax breaks they receive. As hospitals pivot community benefit investments to respond to COVID-19, states can ensure that the underlying inequities exposed by the pandemic are addressed. States can develop strategies that hold hospitals accountable while balancing the many COVID-19-related demands. States can and are going beyond federal community benefit regulations to ensure that the associated investments are responsive to the needs of their most at-risk populations to reduce glaring inequities and move, ultimately, toward long-term resilience for all communities.
Facility fees – designed originally to compensate hospitals for “stand-by” capacity required for emergency departments and inpatient services – are increasingly added to bills for diagnostic testing and other routine services and are raising health care costs. One state employee health plan’s claims show that facility fees charged for COVID-19 testing conducted in outpatient hospital settings ranged from $53 to $150 per test — culminating in $344,589 in additional costs over several months.
Model Act Summary: This model legislation prohibits site-specific facility fees for services rendered at physician practices and clinics located more than 250 yards from a hospital campus. It also prohibits all service-specific facility fees for typical outpatient services that are billed using evaluation and management codes, even if those services are provided on a hospital campus.
The act requires annual reporting of facility fees charged or billed by health care providers, delegates implementation authority to a relevant state agency, and provides three enforcement mechanisms:
- An annual facility fee audit by the relevant state agency;
- A private right of action for consumers; and
- Administrative financial penalties against health care providers for violations.
(1) Definitions. As used in this section,
(A) “Campus” means: (i) a hospital’s main buildings; (ii) the physical area immediately adjacent to a hospital’s main buildings and other areas and structures that are not strictly contiguous to the main buildings but are located within two hundred fifty (250) yards of the main buildings, or (iii) any other area that has been determined on an individual case basis by the Centers for Medicare & Medicaid Services to be part of a hospital’s campus.
(B) “Facility fee” means any fee charged or billed by a health care provider for outpatient services provided in a hospital-based facility [or freestanding emergency facility] that is: (i) Intended to compensate the health care provider for the operational expenses of the health care provider, (ii) separate and distinct from a professional fee; and (iii) regardless of the modality through which the health care services were provided.
(C) “Freestanding emergency facility” means an emergency medical care facility that is licensed under [reference to code section that regulates freestanding emergency facilities], and shall not include urgent care clinics.
(D) “Health system” means: (i) A parent corporation of one or more hospitals and any entity affiliated with such parent corporation through ownership, governance, membership or other means, or (ii) a hospital and any entity affiliated with such hospital through ownership, governance, membership or other means.
(E) “Hospital” is a hospital licensed under [code section for hospital licensure.
(F) “Hospital-based facility” means a facility that is owned or operated, in whole or in part, by a hospital where hospital or professional medical services are provided.
(G) “Professional fee” means any fee charged or billed by a provider for professional medical services provided in a hospital-based facility.
(H) “Health care provider” means an individual, entity, corporation, person, or organization, whether for profit or nonprofit, that furnishes, bills or is paid for health care service delivery in the normal course of business, and includes, without limitation, health systems, hospitals, hospital-based facilities, [freestanding emergency facilities,] and urgent care clinics.
(2) Limits on Facility Fees.
(A) Site-specific limits. No health care provider shall charge, bill, or collect a facility fee, except for: (i) services provided on a hospital’s campus; (ii) services provided at a facility that includes a licensed hospital emergency department[; or (iii) emergency services provided at a licensed freestanding emergency facility].
(B) Service-specific limits. Notwithstanding subsection (A) and whether or not the services are provided on a hospital’s campus, no health care provider shall charge, bill, or collect a facility fee for (i) outpatient evaluation and management services; or (ii) any other outpatient, diagnostic, or imaging services identified by the [Department/Commission] pursuant to subsection (C).
(C) Identification of services. The [Department/Commission] shall annually identify services subject to the limitations on facility fees provided in subsection (B) that may reliably be provided safely and effectively in settings other than hospitals.
(3) Reporting. Each hospital and health system [and freestanding emergency facility] shall submit a report annually to [the Department/Commission] concerning facility fees charged or billed during the preceding calendar year. The report shall be in such format as [Department/Commission] may specify. The [Department/Commission] shall publish the information reported on publicly accessible website designated by the [Department/Commission].
At the discretion of the state pursuing this model, Section 4 (the following language detailing reporting requirements) could be removed from legislation and instead be used to inform implementing regulations promulgated under the model act.
(4) Reporting Requirements. Such report shall include, without limitation, the following information:
(A) The name and full address of each facility owned or operated by the hospital or health system [or freestanding emergency facility] that provides services for which a facility fee is charged or billed;
(B) The number of patient visits at each such hospital-based facility [or freestanding emergency facility] for which a facility fee was charged or billed;
(C) The number, total amount, and range of allowable facility fees paid at each such facility by Medicare, Medicaid, and private insurance;
(D) For each hospital-based facility and for the hospital or health system as a whole [or freestanding emergency facility], the total amount billed and the total revenue received from facility fees;
(E) The top ten procedures or services, identified by current procedural terminology (CPT) category I codes, provided by the hospital or health system [or freestanding emergency facility] overall that generated the greatest amount of facility fee gross revenue, the volume each of these ten procedures or services and gross and net revenue totals, for each such procedure or service, and, for each such procedure or service, the total net amount of revenue received by the hospital or health system [or freestanding emergency facility] derived from facility fees;
(F) The top 10 procedures or services, identified by current procedural terminology (CPT) category I codes, based on patient volume, provided by the hospital or health system [or freestanding emergency facility] overall for which facility fees are billed or charged [based on patient volume], including the gross and net revenue totals received for each such procedure or service;
(G) Any other information related to facility fees that the [Department/Commission] may require.]
(5) Regulatory Authorization. The [Department/Commission] may promulgate regulations necessary to implement this section, specify the format and content of reports, and impose penalties for noncompliance consistent with the department’s authority to regulate health care providers.
(A) Any violation of any provision of this act shall constitute an unfair trade practice pursuant to [reference to code section for state unfair trade practices statute].
(B) A health care provider that violates any provision of this act or the rules and regulations adopted pursuant hereto shall be subject to an administrative penalty of not more than $1,000 per occurrence.
(C) The [Department/Commission] or its designee may audit any health care provider for compliance with the requirements of this section. Until the expiration of [four (4)] years after the furnishing of any services for which a facility fee was charged, billed, or collected, each health care provider shall make available, upon written request of the [Department/Commission] or its designee, copies of any books, documents, records, or data that are necessary for the purposes of completing the audit.
While billions in COVID-19 federal relief funds have been distributed to health care providers, the funding has primarily gone to large hospital systems, leaving many independent providers to suffer reductions in patient visits and revenues, making them vulnerable to acquisition by large hospital systems – known as vertical consolidation in health care. This report explores the increased financial pressure for vertical consolidation, its financial impact on states and consumers, and what policies states can implement to address the coming wave of vertical health care consolidations.
Independent physician practices are struggling to remain financially solvent in the midst of the COVID-19 pandemic. Although $175 billion has been allocated to health care providers in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other pandemic response legislation, this funding has largely gone to larger hospital systems or to direct costs of COVID-19 testing and services, and many physician practices and independent community providers have suffered significant reductions in their patient visits and revenues during widespread stay-at-home orders. One foreseeable consequence will be a further acceleration of physician practice acquisitions by large hospital systems and private equity firms, also known as vertical consolidation in health care.
This white paper discusses the increased financial pressure for vertical health care consolidation in the wake of the COVID-19 pandemic; the risks such vertical consolidation pose to states and consumers in the form of higher prices, increased spending, and reduced choice; and explores policies states may pursue to address the coming wave of vertical health care consolidation.
Rising Pressure for Vertical Health Care Consolidation and Its Risks
A. Vertical Consolidation in Health Care is Accelerating
Consolidation of independent physician practices — whether acquired by health systems or venture-backed staffing firms — has been increasing for years. Vertical acquisitions of physician groups by hospitals has increased dramatically in recent years. From 2012-2018, hospital ownership of physician practices grew 128 percent. In 2012 about 25 percent of physicians were employed by hospitals, and by 2018 that figure had grown to 44 percent. Over the 18-months from July 2016 to December 2018, hospitals acquired over 8,000 physician practices, employing 14,000 physicians. In 2018, for the first time, more physicians were employees than owners of their medical practice.
Private equity-backed staffing firms are also gobbling up physician practices. Between 2013 and 2016, private equity firms acquired 355 physician practices, targeting an array of specialties including emergency medicine and anesthesiology (who can engage in out-of-network billing strategies because patients do not select these providers), primary care physicians (who may be sources of lucrative referrals), and dermatology and ophthalmology (with significant income from elective procedures).
Layered atop these existing trends, the COVID-19 pandemic is accelerating pressure for vertical consolidation in health care. Remaining independent physician practices are under dire financial strain due to COVID-19, and even those who previously resisted acquisition face new pressure to sell to large health care systems or private equity investors for financial stability and survival.
B. Risks of Vertical Consolidation: Increased Costs, Loss of Choice, No Improvement in Quality
Evidence suggests that vertical health care consolidation leads to higher health care prices—including higher hospital prices, 14 percent higher physician prices, and 10-20 percent higher total expenditures per patient. Despite promised efficiencies, there are several ways vertical consolidation can increase health care costs. First are the addition of facility fees (described further below) that hospitals can charge for outpatient services provided by acquired physicians. Second, the consolidated entity can leverage its market power to engage in all-of-nothing bargaining and insist on anticompetitive contract terms with health insurance plans, allowing a large system to demand higher prices for all its providers. Third, acquisitions allow hospital systems to direct the referrals of captive physician practices to a greater extent than independent physicians, which increases referrals to for higher-cost (lower value) providers and services. Finally, private equity-backed staffing companies have used a strategy of going out-of-network and charging higher prices to health plans and balance bills to patients to maximize their revenues.
Increasing facility fees are an outgrowth of vertical consolidation of hospitals and physicians. The ability of a consolidated system to charge more for identical outpatient services than can be charged by independent physician practices manifests as facility fees and is a significant factor in the price increases driven by hospital-physician consolidation. When hospitals acquire physician practices, they can tack on an additional outpatient facility fee to the professional service fee that physician practice previously charged. Fees for services at physician’s offices usually include both the professional and overhead costs of the service in a single charge. By contrast, hospital outpatient departments are traditionally paid more than physicians’ offices for performing the same type of service because hospital outpatient settings receive a facility fee to compensate them for the expenses of maintaining standby capacity to service acute care needs that may present at any time in addition to the physician’s professional service fee. But there is nothing to justify a facility fee that is simply the result of the hospital’s acquisition of the physician’s practice—nothing has changed in terms of the location, supplies, technology, staffing, duration or intensity of the care, and the patients are no sicker and do not need more services than when their physician practice was characterized as a freestanding community setting. The higher price is merely the result of a change in corporate ownership, which allows the hospital to charge a facility fee for the acquired physician’s services as though it were rendered in an outpatient department of the hospital. The ability to charge facility fees is one of the main financial incentives driving hospital-physician consolidation.
Increased vertical consolidation in health care reduces consumer choice by creating larger, exclusive networks and driving patients and health plans to pay higher prices. These higher costs and reductions in choice among independent providers is not offset by higher quality or efficiency from improved care coordination. Thus, states are increasingly searching for ways to curb the rising costs and loss of choices driven by vertical health care consolidation.
State Policies to Address Vertical Consolidation in Health Care
The pressure for vertical consolidation created by the COVID-19 pandemic for the survival of physician practices means that, in many cases, states will be unable to prevent this consolidation from occurring. Rather, states must explore policies to provide robust oversight over the consolidated entities to mitigate the risks posed by vertical consolidation. Moreover, state oversight is critical because these vertical mergers fly under the radar of federal antitrust agencies because they tend to be too small in size to be reported under the Hart-Scott-Rodino (HSR) Act.
The following table lists a range of policy tools states can deploy to monitor and oversee vertical health care consolidation:
|A. Data gathering||· All-payer claims databases|
|B. Pre-transaction review and approval||· Notice of proposed transactions
· Prior review, approval, and conditions
|C. Oversight of vertically consolidated entities||· Attorney general enforcement against anticompetitive conduct
· Independent health commission
· Certificates of need authority
|D. Controlling outpatient costs||· Restrictions on facility fees
· Counteracting private equity-backed consolidation
· Global budgets
A. Data: the foundation for any policy
Policymakers need information about the drivers of health care costs, utilization patterns, and transactions to guide policies and target enforcement. States with all-payer claims databases (APCDs) have a rich source of data to inform their policies. APCDs are comprehensive databases of health care claims and data from a variety of payers, including private insurers, Medicaid, Medicare, Children’s Health Insurance Program (CHIP), state employee health plans, and others. Currently 19 states have established APCDs, and an additional four states are in the process implementation.
All of the policies described here would be guided by data — whether studying the price, utilization, or referral effects of vertical transactions; detecting targets for enforcement; providing oversight of vertically integrated entities; planning and assessing the need for new or additional services; quantifying the amount of facility fees charged; enforcing compliance with surprise out-of-network billing rules; or implementing global budgets. In states with APCDs, the data underpinning the policies would come from the APCD. In states without an APCD, each policy described here could include a data reporting requirement to facilitate implementation, such as a data submission requirement for pre-transaction review, CON applications, facility fee reporting, or as part of the global budget process. In addition, states can use data from APCDs or work with payers (e.g., the state employee health plan) to establish consumer transparency tools to help consumers choose high-value providers and to drive a range of other health care policies to improve patient care and control costs.
B. Notice, review, and approval for health care transactions
States could take a more active role monitoring or preventing vertical health care consolidation that poses risks to competition. State attorneys general (AGs), the Federal Trade Commission, and the US Department of Justice can use their parallel antitrust enforcement authority to prevent and regulate anticompetitive mergers or conduct by health care entities.
State AGs can challenge anticompetitive mergers and conduct and bring enforcement actions both independently and in conjunction with a federal action. Although historically reluctant to pursue enforcement against vertical mergers, the federal antitrust enforcement agencies have recently issued draft vertical merger guidelines in a signal that they are looking to develop tools to go after such mergers. But most physician acquisitions go unexamined by federal authorities because the dollar value of these deals is too small to be reported to federal antitrust agencies under HSR thresholds. Thus, state AGs can assume a larger role policing these mergers.
1. Notice of proposed transactions
To further antitrust enforcement and state oversight over vertical health care transactions, states may pass legislation requiring hospitals, health systems, physician groups, and private investment firms to notify the state of any significant proposed merger or contractual affiliation. Specifically, states can require reporting of transactions with dollar values less than the federal HSR thresholds. Transactions should be reported to the state AG and to a state health agency, such as an independent health care commission or the state’s certificate of need authority.
Although many states already require hospitals to notify state officials of proposed mergers or acquisitions, states could expand the requirement to transactions involving physicians. Existing state examples include Washington State, which passed a law in 2019 to require notification to the state AG of health care transactions, including those involving “provider organizations,” below the HSR (Hart-Scott-Rodino Antitrust Improvements Act) threshold. Connecticut requires 30-days’ notice to the AG and the head of the Office of Health Strategy (Connecticut’s CON authority) of any proposed transaction involving a physician practice of eight or more physicians. Massachusetts requires all provider organizations to provide the AG, the Health Policy Commission, and the Center for Health Information Analysis with 60 days’ notice of any mergers, acquisitions, or affiliations.
In 2020, lawmakers in California proposed legislation (S.B. 977) that would require health systems, private equity groups, and hedge funds to provide notice to, and obtain the consent of, the AG prior to an acquisition of or affiliation with a health system or health care provider. There is an exception for transactions between health care systems and facilities or providers valued at less than $500,000 (but not those involving private equity groups or hedge funds) or a transaction of any value involving an academic medical center, which only need to provide 30 days’ notice and need not obtain the AG’s consent. The California bill goes beyond the notice requirements in other states by specifically including transactions involving private equity and hedge fund investors, not just other health care entities.
|Recommendations on notice of health care transactions:|
2. Pre-transaction review, approval, and conditions
Although state AGs already possess the authority to challenge anticompetitive mergers under federal and state antitrust laws, state policymakers can augment the AGs’ ability to address the risks of consolidation by requiring transactions to be reviewed and approved by the AG, and allow the AG to condition approval on the parties’ competitive conduct. Although a state AG is typically the primary official tasked with approving health care transactions, states can distribute the responsibility for conducting review to other state entities, such as a health care commission or state certificate of need authority.
Waiting periods, subpoena-power. After notice of proposed health care transactions has been given, state regulators require time and the ability to gather information to review the transaction and assess its market impact. Thus, legislation should also include mandatory waiting periods to enable pre-transaction review and the authority to subpoena and obtain economic, market, and competitive information about the proposed transaction.
Review criteria. To guide review, policymakers may specify statutory review criteria to assess health care transactions, such as the extent the transaction will (1) harm health care markets and competition; (2) increase prices; (3) reduce access to health care services; (4) violate fiduciary duty requirements, especially through self-dealing or conflicts of interest; or (5) harm the public interest. Additional review criteria can be applied to specific types of transactions, such as those involving physicians, nonprofit hospitals, or for-profit entities.
Independent review. For transactions that raise competitive concerns, the state officials (AG or health agency) may seek independent review of the transaction either by a designated state body, such as a health care commission, or independent consultants. Independent review can provide more in-depth analysis to aid state AGs or agencies’ assessment of proposed health care transactions. State policymakers could require the parties to the transaction to pay for independent review to relieve the state of the financial burden of conducting complex market analyses.
Conditions. Legislative authority to review and approve health care transactions should also allow the AG to impose conditions of approval on the parties to the transaction. The range of conditions should respond to the criteria for approval and specific market concerns. For example, conditions could include requirements to keep critical facilities or services open, mandated community health investments, prohibitions on future acquisitions or employment of physicians, divesture of entities or providers to preserve competition, rate controls, refraining from charging facility fees for acquired physician practices, or prohibitions on anti-competitive health plan contracting. Even without statutory authority to impose conditions of approval on transactions, state AGs can negotiate consent decrees to settle their claims challenging anticompetitive transactions. One benefit of a statutory approval authority is that, unlike consent decrees, the AG or other state official need not go to court to enforce the conditions of approval.
Post-transactions monitoring. One of the conditions the AG can impose on approving a transaction is that the parties pay for an independent monitor to provide periodic post-transaction reports to the AG and state agencies. The monitor tracks compliance and market effects of the transaction. If the reports identify areas of noncompliance or potential abuses of market power, the state AG can bring enforcement action and seek penalties.
C. Oversight of consolidated entities
Although pre-transaction review is a critical tool, more than 90 percent of health care provider markets are already highly concentrated, so states require mechanisms to regulate anticompetitive behavior by entities that already possess market power. Different state authorities can play a role in overseeing vertically consolidated health care entities, including the state AG, an independent health policy commission, and the state’s certificate of need (CON) authority.
1. AG enforcement against anticompetitive conduct
State AGs possess broad powers under federal and state antitrust laws to challenge anticompetitive behavior of entities with market power. And unlike federal antitrust authorities, state AGs have authority over nonprofit entities.
Vertically consolidated health care entities may engage in a range of anticompetitive conduct, including using their market power to raise prices and exclude rivals, engaging in all-or-nothing bargaining with health plans to demand higher prices for all affiliated providers, and including anticompetitive terms in their contracts with health plans, such as anti-tiering or anti-steering, gag clauses preventing plans from sharing price information with consumers, or “most favored nation” provisions.
State AGs have successfully challenged anticompetitive conduct in North Carolina, California, and Washington. North Carolina’s AG joined the DOJ in a case against Atrium Health, a dominant health system, to challenge its use of anti-steering clauses in health plan contracts, which prevented private health plans from using financial incentives for patients to choose higher-value and lower cost providers. In its settlement of the case, Atrium agreed to stop using anti-steering clauses and preventing health plans from sharing costs with patients.
California AG, Xavier Becerra, brought a case against health care giant Sutter Health, alleging Sutter used its market power to raise prices in the region through its use of anticompetitive contract terms, including all-or-nothing and anti-steering clauses, the use of gag-clauses to prevent disclosure of price and quality information. In late 2019, Sutter tentatively agreed to pay $575 million to settle the case, to stop using all-or-nothing contracting, and to cap out-of-network rates. In June, however, Sutter asked the court to delay approving the settlement, citing losses from the COVID-19 pandemic, despite having received some $200 million in federal relief funding. Final court approval of the settlement is still pending.
On the heels of the AG’s action against Sutter, the California legislature sought to expand the AG’s authority to police anticompetitive conduct by health care entities in S.B. 977. The bill would make it unlawful for a health systems with substantial market power in any market for hospital or non-hospital services to take any action that would have a substantial tendency to cause anticompetitive effects, such as raising prices, diminishing quality, reducing choice or access with respect to hospital or nonhospital (e.g., physician services). Specifically, conduct involving tying or exclusive dealing by a health system with market power would be presumptively illegal.
In a case focusing on vertical consolidation, Washington’s Attorney General Bob Ferguson sued to unwind two hospital-physician transactions by CHI Franciscan health system that drove up prices on the Kitsap peninsula. The complaint alleged Franciscan violated Section 1 of the Sherman Act, Section 7 of the Clayton Act, and the State’s Consumer Protection Act. The parties agreed to settle the case in a consent decree in which Franciscan agreed to pay $2.5 million, divest of a surgery center, notify the state AG of future transactions, and agree to contractual changes, including a bar on using all-or-nothing bargaining with health plans.
In each case, the state AG was able to use enforcement authority to stop anticompetitive conduct by health care providers and enter settlement agreements that prevented the consolidated entities from continuing to abuse their market power. Though settlements included conduct remedies and even monetary relief, they meant the cases did not go to trial and establish legal precedent for future enforcement actions. These cases are resource-intensive and politically charged, but they can challenge abuses of market power by consolidated entities and send a message of deterrence against other powerful providers. State legislatures can aid enforcement by outlawing anticompetitive contracting practices, such as all-or-nothing bargaining, anti-tiering or anti-steering clauses, most-favored nation provisions, and gag clauses. In addition, statutes can augment State AGs’ enforcement authority by declaring unlawful certain anticompetitive practices by health care entities with market power, such as tying and exclusive dealing.
2. Oversight by independent commission
Several states have established independent health care cost or policy commissions, insulated from political influence, to provide analysis, recommendations, and oversight of health care market consolidation. The following states have statutorily established a health care commission or board to address health care costs: Colorado, Delaware, Maryland, Massachusetts, Oregon, Pennsylvania, Vermont, and Washington. Connecticut established the Office of Health Strategy to coordinate the state’s health care cost containment strategy. In addition, Rhode Island’s Governor and heads of their health and health insurance agencies convened the Health Care Cost Trends Steering Committee through executive action with funding from a private grant.
Market and transaction analysis. States health care commissions provide in-depth data analysis, often using data from the state’s APCD, and policy recommendations to the Governor, legislature, and executive branch agencies. In addition, health care commissions can have a role in reviewing health care transactions, making recommendations to the State AG and providing post-transaction monitoring. Beyond transaction-specific oversight, health care cost commissions can track health care cost and market trends more broadly across the state.
Health care cost growth benchmarks. Several states have given their health care commissions authority to set and monitor health care cost growth targets. Massachusetts pioneered the approach, which has been replicated in Delaware, Oregon, Rhode Island, Connecticut, and Washington. Common features include: establishing a statewide cost growth benchmark, analyzing data and calculating spending against the benchmark, reporting on cost drivers, and using hearings, transparency, performance improvement plans to encourage providers to comply with targets. While some have questioned whether these health care cost commissions possess sufficient authority to enforce compliance with health care cost growth benchmarks, the Massachusetts experience has proven fairly successful at reigning in health spending growth even with limited enforcement tools. As the model evolves, states may want to enhance the enforcement authority if soft regulatory tools prove inadequate to secure compliance with health care cost growth targets.
3. Oversight by certificate of need (CON) authority
The COVID-19 pandemic has highlighted the importance of health care planning to assure the state’s capacity to address public health crises as well as ongoing demand for health services, particularly in rural areas where a sole provider is responsible for the provision of health care services. Although debate continues over the impact of existing CON laws on competition, price, and quality in the health care market, states with CON authorities have the administrative infrastructure to expand CON from a health facility planning function to an overseer of vertically consolidated health care entities. Over a dozen states already require a CON or require notice to CON authorities for the sale or transfer of health care facilities, including nonprofits health care entities. Moreover, existing facilities often seek CON approval to add or remove services or seek affiliations. These CON requirements could be extended to vertical transactions involving physician groups and play a larger role in ongoing oversight of vertically consolidated providers.
Connecticut’s CON authority, the Health Systems Planning (HSP) office, reviews and requires a CON for all transactions involving a broad range of health care providers, including hospitals and provider groups. HSP conducts an in-depth cost and market impact review for transactions involving the sale or transfer of a hospitals in transactions of a certain size or involving a for-profit buyer and may place conditions on the approval of a CON for a hospital transaction.
To oversee vertical transactions, a state could extend the authority of the CON officials to require a CON for provider group transactions of a certain size, require some form of market impact analysis, and authorize the imposition of conditions of approval for the CON. Such conditions could include refraining from charging facility fees, limiting price increases, maintaining key services, avoiding anti-competitive contracting with health plans, limiting physician employment and exclusive contracting, and satisfying quality metrics, and investing in community and population health services. Oversight over compliance with conditions must be robust, long-term, and backed by enforcement authority, including action by the state AG for violations of conditions or anticompetitive conduct.
In many states, however, CON is highly susceptible to political influence by dominant health systems and other powerful stakeholders. Thus, if CON Authorities are given a larger role in overseeing consolidated health care entities, they need to be insulated from capture by incumbent industry leaders and publicly accountable. To engage in robust oversight of health care transactions and entities’ ongoing activities, CON authorities require financial, claims, and market data, whether submitted as part of the CON application process or from the state APCD, and have capacity for data analysis.
D. Controlling rising costs driven by vertical consolidation
Another set of tools to curb rising costs when vertical consolidation has already occurred include regulations on the outpatient fees themselves. These policies target rising outpatient costs driven by additional facility fees, out-of-network billing by investor-backed physician staffing companies, and changes in referral and utilization patterns.
1. Restrictions on facility fees
The main policy tools available to states to address unwarranted facility fees are transparency and facility fee regulation.
Facility fee transparency. Like all cost-control efforts, transparency is a first step to shine a light on the practice and put patients on notice that they may receive bills for facility fees due to corporate acquisition. However, transparency alone does not ameliorate the problem of facility fees nor does it shield a patient from incurring a facility fee. Even if they are notified of added facility fees, patients may not know what to do with the information and may be unable (or unwilling) to switch providers based on the notification about facility fees.
Examples of state laws requiring facility fee transparency come from Washington, Connecticut, Minnesota, and Texas. Washington and Minnesota’s laws require that, prior to non-emergency care, provider-based clinics that charge a facility fee must notify patients that the clinic is licensed as part of the hospital and the patient may receive a separate charge or billing for the facility component, which may result in a higher out-of-pocket expense; the health care facilities must also prominently post a statement that it is part of a hospital. Connecticut requires a similar notice and requires providers itemize facility fee charges on bills, disclose Medicare’s applicable facility fee rate for comparison, and provide information about the patient’s right to request reduction of the facility fee. Texas law requires that facilities must notify patients that the site charges a facility fee, and the disclosure must include the median facility fee at the facility, the range of possible fees, and the facility fee for each level of care. To enhance transparency, states may require annual reporting of facility fees charged or billed by health care providers, identified by location (e.g., the physician’s office) to be published on a publicly accessible website.
Facility fee regulation. Prohibiting or limiting allowable facility fee charges by providers can eliminate price differences for the same outpatient services based on the location or “site” of service. Medicare has instituted site-neutral payment, based on the view that “if the same service can be safely provided in different settings, a prudent purchaser should not pay more for that service in one setting than another.”
States could adopt policies that would limit or prohibit hospitals and health systems from charging facility fees. For the broadest impact, the state could (a) eliminate all facility fees at locations more than 250 yards away from a hospital’s main campus (a site-specific limit), and (b) eliminate facility fees for outpatient services that do not require additional standby capacity, including evaluation and management (E&M) services, regardless of whether the service is provided on- or off-campus (a service-specific limit).
Connecticut prohibits hospitals from charging a facility fee for outpatient office visits at an off-campus, hospital-based facility. But this prohibition only applies to E&M codes used for office visits, not the full range of outpatient services. In addition, Connecticut does not limit facility fees for on-campus outpatient visits. However, states could implement broader site-specific and service-specific facility fee restriction policies that cover the full range of non-emergency outpatient services and apply both on- and off-campus. For uninsured patients, Connecticut requires providers to charge no more than the applicable Medicare rate for outpatient services received at an off-campus, hospital-based facility, thereby incorporating any Medicare site-neutral payment changes into the amounts charged to uninsured patients.
Eliminating facility fees for the broad range of outpatient services (including those currently enjoying higher site payments under previously consummated acquisitions) is highly contentious and politically difficult. Connecticut legislators originally planned broader facility fee regulation, but they narrowed the requirement after facing strong opposition from powerful hospital facilities and physician groups in the state.
Connecticut’s law on facility fees also set forth a model for enforcement by making a provider’s violations of the facility fee prohibitions an unfair trade practice under the state’s Unfair and Deceptive Acts and Practices (UDAP) law. It is also an unfair trade practice for a provider in Connecticut to report a patient’s nonpayment of a prohibited facility fee to a credit reporting agency. This provides individual patients who have been charged unlawful facility fees or who have not received mandated notices about such fees a private right of action against providers. By contrast, Medicare patients do not have a private right of action if they are improperly charged cost-sharing payments for facility fees. Similarly, states can create an administrative enforcement mechanism for the relevant state agency, such as the Department of Health, to impose administrative penalties for violations of the facility fee policy. Ideally, administrative enforcement would be in addition to private remedies.
2. Counteracting private equity-backed consolidation
Although vertical consolidation between hospitals and physicians tends to reduce the opportunities for out-of-network billing (because employed physicians are more likely to participate with all the plans of their parent health system), the opposite is true for consolidation driven by private equity firms. Surprise medical billing is a key revenue strategy for private equity firms that invest in physician practices where patients are unable to choose their provider, such as emergency physicians or anesthesiologists. These companies strategically go out-of-network so they can seek higher out-of-network charges from health plans and balance bills from patients, driving up premiums and out-of-pocket bills.
Thus, states can counteract the higher costs driven by private equity investment in health care by enacting comprehensive protections against surprise medical bills. As NASHP and others have tracked, a growing number of states have enacted laws against surprise out-of-network billing, which protect many of the state’s consumers and payers from the excess costs from out-of-network bills.
Many of the tools described above — gathering data on pricing and referral trends from an APCD, pre-transaction review, and post-transaction oversight — can include particularized scrutiny for transactions involving private equity or venture-backed investors or staffing companies. An additional policy idea worth exploring is to shore up states’ prohibitions on the corporate practice of medicine to target private investment and control of physician practices by unlicensed corporations.
3. Global budgets
Three states, Maryland, Vermont, and Pennsylvania, have secured arrangements with the Centers for Medicare & Medicaid Services (CMS) and the Center for Medicare & Medicaid Innovation (CMMI) to establish global budgets for health systems within the state. Although global budgets generally target hospitals, vertical consolidation increases spending for hospitals and physicians and for inpatient and outpatient services. Thus, the global payment model could be a tool to contain rising costs posed by vertical consolidation.
Maryland’s global budget model builds on its long-standing all-payer rate setting system, administered by the Health Services Cost Review Commission under a federal waiver allowing higher Medicare payments as part of the system. In 2014, the state moved to an all-payer global budget system for all the acute care hospitals in the state. The state limits per-person hospital spending to a predetermined target growth rate, with a goal on reducing total spending growth and shifting care toward lower-cost settings and primary care. Although early results of the program were mixed, the effects may be limited in part because the program did not initially include physician payments in the global budgets. Subsequent refinements are shifting to a total cost of care model that would extend financial incentives beyond hospitals to physicians and other care settings.
Vermont’s all-payer ACO model involves most of the state’s hospitals and payers to collaborate in a statewide accountable care organization. Vermont’s Green Mountain Care Board is responsible for overseeing the ACO, setting benchmarks and budgets, and evaluating performance and cost-trends among the participating providers. The Green Mountain Care Board also oversees a hospital budget review process that establishes, publicizes, and enforces hospital budgets as a means of controlling health spending.
Pennsylvania has also launched a global budget demonstration for rural hospitals with the federal CMMI that will transition rural hospitals from fee-for-service to a global budget payment. While Pennsylvania does not rely on its Health Care Cost Containment Council to administer the global budget program, the cooperating federal and state agencies established an independent body to administer the program, the Rural Health Redesign Center Authority, though legislation in 2019.
Global budgets work best if they unify all the payers to participate in and contribute to the budget for a region’s health systems. Thus, these global budget models all involve CMS to include Medicare and Medicaid and the state’s biggest payers. In addition, with spending increasingly shifting to outpatient services and driven by physician referral patterns, to effectively control costs, the global budget model must go beyond hospitals to include physicians and outpatient facilities, whether in an ACO or a total-cost-of-care approach. Despite the significant amount of coordination and administrative infrastructure required to implement global budgets, these states have shown that health system budgets may be a way forward in rural and other areas where competition is inadequate and health systems are vulnerable to financial instability.
It is well-established that horizontal hospital consolidation and the concentration of provider market power is leading to uncontrolled increases in health care prices and spending. Yet, vertical health care consolidation between hospitals and physician groups and private equity investment in physician practices has largely gone unchecked, due to the relatively small dollar values of these transactions and pressure for health care integration. Policymakers are now starting to realize the threat posed by vertical health care consolidation, years into a wave of vertical mergers that is accelerating with the strain on independent practices from the COVID-19 pandemic.
States have a critical role in developing policy tools to address vertical health care consolidation, because these transactions escape review by federal authorities. States must consider a range of policy tools with a focus on oversight of vertically consolidated entities and broad regulatory authority over rising costs, because much consolidation has already occurred. States are at the vanguard of this policy effort to address this perennial health policy challenge: soaring health care costs driven by consolidation.
 Dep’t of Health & Human Svcs. CARES Act Provider Relief Fund, https://www.hhs.gov/coronavirus/cares-act-provider-relief-fund/index.html#:~:text=CARES percent20Act percent20Provider percent20Relief percent20Fund,lines percent20of percent20the percent20coronavirus percent20response.
 Reed Abelson, Doctors Without Patients: ‘Our Waiting Rooms Are Like Ghost Towns,’ N.Y. Times (May 5, 2020), https://www.nytimes.com/2020/05/05/health/coronavirus-primary-care-doctor.html; Daniel Horn, Wayne Altman, Zirui Song, Primary Care Is Being Devastated by COVID-19. It Must Be Saved. Stat News, April 29, 2020, https://www.statnews.com/2020/04/29/save-primary-care-devastation-COVID-19/; Rachel Weiner, Small medical practices struggle to survive amid coronavirus pandemic, Wash. Post, May 14, 2020, https://www.washingtonpost.com/health/small-doctor-practices-struggle-to-survive-amid-coronavirus-pandemic/2020/05/14/328984e6-9390-11ea-91d7-cf4423d47683_story.html; Marc Zarefsky, 97 percent of Physician Practices Feel COVID-19 Financial Sting: Where to Get Help, Am. Med. Ass’n , May 8, 2020, https://www.ama-assn.org/practice-management/sustainability/97-practices-feel-COVID-19-financial-sting-where-get-help;
 Allison Inserro, Newsroom: Hospital Acquisitions of Physician Practices Continue, Am. J. Managed Care, Feb. 26, 2019, https://www.ajmc.com/newsroom/hospital-acquisitions-of-physician-practices-continue.
 Joanne Finnegan, Report: 8,000 medical practices acquired by hospitals in 18 months, Fierce Healthcare (Feb. 21, 2019), https://www.fiercehealthcare.com/practices/consolidation-trend-continues-8-000-more-hospital-owned-practices-14-000-more-hospital.
 Carole Kane, Updated Data on Physician Practice Arrangements: For the First Time, Fewer Physicians are Owners Than Employees, AMA Policy Research Perspectives (May 2019), https://www.ama-assn.org/system/files/2019-07/prp-fewer-owners-benchmark-survey-2018.pdf.
 Jane Zhu, Lynn Hua, Daniel Polsky. Private equity acquisitions of physician medical groups across specialties, 2013-2016. 323 JAMA 663-665 (Feb. 18, 2020), doi:10.1001/jama.2019.21844; Lawrence Casalino et al, Private Equity Acquisitions of Physician Practices, 170 Ann. Internal Med. 114-116 (Jan. 15, 2019); Stephanie Cameron, Dan Zabinksi, Jeff Stendsland, Congressional Request on Healthcare Provider Consolidation, MedPAC (Nov. 7, 2019), http://medpac.gov/docs/default-source/default-document-library/consolidation-draft-3.pdf?sfvrsn=0.
 Rita Rubin, COVID-19’s Crushing Effects on Medical Practices, Some of Which Might Not Survive JAMA. Published online June 18, 2020. doi:10.1001/jama.2020.11254; Bob Herman, The Coronavirus could force more doctors to sell—or shutter, Axios (Apr. 20, 2020), https://www.axios.com/coronavirus-doctors-practices-sell-close-d59aa9f0-1e01-4a90-82f7-d4ebab26e355.html.
 Laurence C. Baker, M. Kate Bundorf & Daniel P. Kessler, Vertical Integration: Hospital Ownership of Physician Practices Is Associated with Higher Prices and Spending, 33 Health Aff. 756, 760 (2014); Cory Capps, David Dranove, Christopher Ody, The Effect of Hospital Acquisitions of Physician Practices on Prices and Spending, 59 J. Health Econ. 139 (2018); James C. Robinson & Kelly Miller, Total Expenditures per Patient in Hospital-Owned and Physician-Owned Physician Organizations in California, 312 JAMA 1663 (2014); Hannah T. Neprash et al., Association of Financial Integration Between Physicians and Hospitals With Commercial Health Care Prices, 175 JAMA Internal Med. 1932, 1937 (2015).
 See Capps, Dranove, & Ody, supra note 9 (estimating that a quarter of the 14 percent price increase associated with physician-hospital integration resulted from the addition of facility fees); Neprash et al., supra note 9, at 1937; James D. Reschovsky & Chapin White, Location, Location, Location: Hospital Outpatient Prices Much Higher than Community Settings for Identical Services, Res. Brief No. 16, Nat’l Inst. Health Care Reform, 1 (2014), http://www.nihcr.org/Hospital-Outpatient-Price.
 Amanda Cassidy, Health Policy Brief: Site Neutral Payments, Health Aff. 3 (July 24, 2014), http://healthaffairs.org/healthpolicybriefs/brief_pdfs/healthpolicybrief_121.pdf; Donna Rosato, The Surprise Hospital Fee You May Get Just for Seeing a Doctor, Consumer Reports (June 13, 2019), https://www.consumerreports.org/fees-billing/surprise-hospital-fee-just-for-seeing-a-doctor-facility-fee/;
Reschovsky & White, supra note 10, at 4.
 In 2020, the dollar value threshold for reportable transactions under the Hart-Scott-Rodino Act is $94 million. U.S Federal Trade Comm’n, Premerger Notification Office Staff, HSR threshold adjustments and reportability for 2020 (Jan. 31, 2020), https://www.ftc.gov/news-events/blogs/competition-matters/2020/01/hsr-threshold-adjustments-reportability-2020.
 Although the Employee Retirement Income Security Act (ERISA) prevents states from mandating that self-insured employer-based plans participate in the APCD, states have secured voluntary participation by these plans. NASHP, Next Steps for APCDs: U.S. Department of Labor (DOL) Rulemaking, Oct. 4, 2016, https://www.nashp.org/next-steps-for-apcds-us-department-of-labor-dol-rulemaking/.
 APCD Council, Interactive State Report Map (as of July 14, 2020), https://www.apcdcouncil.org/state/map.
 Robert Berenson, Jaime S. King, Katherine L. Gudiksen, Roslyn Murray, Adele Shartzer, Urban Institute Research Report: Addressing Health Care Market Consolidation and High Prices 11-14 (Jan. 2020), https://www.urban.org/research/publication/addressing-health-care-market-consolidation-and-high-prices; Erin Taylor & Michael Bailit, State Health & Value Strategies, Issue Brief: Leveraging Multi-Payer Claims Databases for Value (Mar. 25, 2019), https://www.shvs.org/leveraging-multi-payer-claims-databases-for-value-2/.
 Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775, 791 (9th Cir. 2015).
 Federal Trade Comm’n, Press Release: FTC and DOJ Announce Draft Vertical Merger Guidelines for Public Comment, Jan. 10, 2020, https://www.ftc.gov/news-events/press-releases/2020/01/ftc-doj-announce-draft-vertical-merger-guidelines-public-comment.
 15 U.S.C. § 18a (in 2019 the HSR threshold for notification was $90 million).
 The analyses, state examples, and recommendations in this section are drawn from an in-depth report by legal and economic researchers at the Source for Healthcare Price & Competition at UC Hastings College of the Law. Jaime S. King, Samuel M. Chang, Alexandra D. Montague, Katherine L. Gudiksen, Amy Y. Gu, Daniel Arnold, and Thomas L. Greaney, Preventing Anticompetitive Healthcare Consolidation: Lessons from Five States, The Source on Healthcare Price and Competition 11 (June 15, 2020), https://sourceonhealthcare.org/profile/preventing-anticompetitive-healthcare-consolidation-lessons-from-five-states/.
 Id. at 11.
 Act effective as of July 28, 2019, ch. 267, 2019 Wash. Laws, http://lawfilesext.leg.wa.gov/biennium/2019-20/Pdf/Bills/Session percent20Laws/House/1607-S.SL.pdf?q=20200124073816.
 Conn. Gen. Stat. § 19a-486i, http://media.sourceonhealthcare.org/Conn_Gen_Stat_19a-486i.pdf.
 Mass. Gen. Laws ch. 6D, § 13, https://malegislature.gov/Laws/GeneralLaws/PartI/TitleII/Chapter6D/Section13.
 S.B. 977, 2019-2020 Reg. Sess., § 1190.10(a) (Cal. 2020) (as amended June 19, 2020), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200SB977.
 Cal. S.B. 977, § 1190.10(f).
 King et al., supra note 21, at 14-26.
 King et al., supra note 21, at 20. (“Substantive transaction reviews, such as a CMIR or HCIS, may require access to trade secrets or other propriety information. To ensure the state has access to all information necessary to conduct a thorough review, state legislatures should grant the AG and other state entities the authority to compel information during the review process and for subsequent investigations following the review.”). The report by King et al. details state examples from California, Connecticut, Rhode Island, and Massachusetts, authorizing state officials to compel the parties to produce information to assist in review. Id. at Appendix F.
 King, et al., supra note 21, at 16. As an alternative to legislative review criteria, at least one state (Pennsylvania) has created a sub-regulatory process and criteria for the AG to review health care transactions involving nonprofit entities. See Review Protocol for Fundamental Change Transactions Affecting Health Care Nonprofits, Office of the Attorney Genereal, Commonwealth of Pennsylvania, https://www.attorneygeneral.gov/protect-yourself/charitable-giving/review-protocol-for-fundamental-change-transactions-affecting-health-care-nonprofits/.
 See, e.g., MASS. GEN. LAWS ch. 6D § 13, https://malegislature.gov/Laws/GeneralLaws/PartI/TitleII/Chapter6D/Section13 (requiring the Health Policy Commission to conduct a cost and market impact review of proposed transactions that will have a significant impact on the state’s ability to meet its cost-growth benchmark or on the competitive market); CONN. GEN. STAT. § 19a-639f, https://www.cga.ct.gov/current/pub/chap_368z.htm#sec_19a-639f (requiring the Health Systems Planning Unit of the Office of Health Strategy—the state’s CON authority—to conduct a cost and market impact review of proposed transactions requiring a CON including the retainer of independent consultants to conduct the economic analysis).
 King et al., supra note 21, at 18-20.
 King et al., supra note 21, at 23-26.
 King et al., supra note 20, at 26-28.
 Brent D. Fulton, Health Care Market Concentration Trends in the United States: Evidence and Policy Responses, 36 Health Aff. 1530–38 (2017).
 Berenson et al., supra note 16, at 33-34.
 Id. At 34-35 (describing these anticompetitive contract terms in more detail and providing examples).
 United States v. Charlotte-Mecklenburg Hosp. Auth., 248 F. Supp. 3d 720 (W.D.N.C. 2017).
 Final Judgement, United States of America and the state of North Carolina v. the Charlotte-Mecklenburg Hospital Authority d/b/a Carolinas Healthcare System, No. 3:16-cv-00311-RJC-DCK (W.D. NC Apr. 24, 2019). https://www.justice.gov/atr/case-document/file/1157461/download.
 Becerra Complaint, People of the State of California ex rel Xavier Becerra v. Sutter Health., CGC 18-565398 (Cal. Super. Ct. S.F. City and Cnty. 2019).
 Jenny Gold, Citing COVID, Sutter pushes to revisit $575M antitrust settlement, Modern Healthcare (June 17, 2020), https://www.modernhealthcare.com/providers/citing-COVID-sutter-pushes-revisit-575m-antitrust-settlement.
 Cal. S.B. 977, § 1191(a).
 Washington State Office of Attorney General, Press Release: CHI Franciscan Will Pay Up to $2.5 Million Over Anti-Competitive Kitsap Deals, https://www.atg.wa.gov/news/news-releases/attorney-general-ferguson-chi-franciscan-will-pay-25-million-over-anti.
 Complaint, State of Washington v. Franciscan Health System, No. 3:17-cv-05690 (W.D. WA Aug. 31, 2017).
 Consent Decree, Complaint, State of Washington v. Franciscan Health System, No. 3:17-cv-05690 (W.D. WA May 13, 2019), https://agportal-s3bucket.s3.amazonaws.com/uploadedfiles/Another/News/Press_Releases/ConsentDecree_1.pdf.
 Berenson et al., supra note 16, at 37-39 (discussing the tradeoffs between litigation and legislative approaches to combat anticompetitive practices by health care entities).
 Berenson et al., supra note 16, at 49-53. In 2020, Washington passed H.B. 2457, creating the Health Care Transparency Board and authorizing it to establish a health care cost growth benchmark, http://lawfilesext.leg.wa.gov/biennium/2019-20/Pdf/Bills/Session percent20Laws/House/2457-S2.SL.pdf#page=1.
 Conn. Gen. Stat. § 19a-754a.
 Office of the Rhode Island Health Insurance Commissioner, RI Health Care Cost Trends Project, http://www.ohic.ri.gov/ohic-reformandpolicy-costtrends.php.
 See, e.g., “What Is the Delaware Health Care Commission?” Delaware.gov, https://dhss.delaware.gov/dhcc/about.html; “What is the Pennsylvania Health Care Cost Containment Council?” http://www.phc4.org/council/mission.htm.
 For example, the Massachusetts Health Policy Commission performs analysis of the market impact of proposed health care transactions and makes findings and recommendations to the Attorney General. Act of 2012, ch. 224, 2012 Mass. Laws, https://malegislature.gov/Laws/SessionLaws/Acts/2012/Chapter224; Massachusetts Health Policy Commission, “Market Oversight,” https://www.mass.gov/market-oversight.
 Milbank Memorial Fund, Health Care Cost Growth Benchmarks By State, Accessed July 21, 2020, https://www.milbank.org/focus-areas/total-cost-of-care/health-care-cost-growth-benchmarks-by-state/ (noting that Massachusetts, Oregon, and Washington’s cost growth benchmarks were established legislatively, while Connecticut, Delaware, and Rhode Island’s were established by Executive Order); Elsa Pearson & Austin Frakt, Health Care Cost Growth Benchmarks in 5 States, JAMA Forum (June 4, 2020), https://jamanetwork.com/channels/health-forum/fullarticle/2767017.
 Lisa Waugh & Douglas McCarthy, How the Massachusetts Health Policy Commission Is Fostering a Statewide Commitment to Contain Health Care Spending Growth, Commonwealth Fund (Mar. 5, 2020), https://www.commonwealthfund.org/publications/case-study/2020/mar/massachusetts-health-policy-commission-spending-growth; Joel Ario, Kevin McAvey, Kyla Ellis, Implementing a Statewide Healthcare Cost Benchmark: How Oregon and Other States Can Build on the Massachusetts Model, Manatt Health (December 2019), https://www.manatt.com/Manatt/media/Documents/Articles/RWJ-Phase-5-Report-Cost-Benchmarking-Paper-December-2019_FOR-WEB.PDF.
 Berenson et al., supra note 16, at 53; Waugh & McCarthy, supra note 51.
 NASHP staff internal analysis suggests that the following states require CON review of certain health care transactions: Arkansas (only for specified facilities), Connecticut (CON required for transfer of a facility of a large practice group), Delaware (CON for acquisition of a non-profit healthcare facility), Hawaii (administrative review only), Illinois (exemption required), Kentucky, Maine, Massachusetts, Michigan (CON required for acquisition of an existing facility), Mississippi (CON required for change in ownership of existing health care facilities, major medical equipment, or a health service), Missouri (CON required for change of owner, operator to an existing CON approved project not yet complete), New Jersey (for general hospitals only), New York (CON required for change in ownership, consolidations, or creation of parent entities), Oklahoma (only long-term care, psychiatric, and chemical dependency treatment facilities),Washington (sale, lease, or purchase of an existing hospital).
 Conn. Gen. Stat. § 19a-638 (“A certificate of need issued by the unit shall be required for [. . .] [a] transfer of ownership of a health care facility [or] [. . .] [a] transfer of ownership of a large group practice to any entity” except as specified”).
 Conn. Gen. Stat. § 19a-639.
 Wash. Rev. Code § 70.01.040, http://media.sourceonhealthcare.org/WA_70.01.040.pdf. Minn. Stat Ann. §62J.824 (2018) https://www.revisor.mn.gov/statutes/cite/62J.824
 Conn. Gen. Stat. §19a-508c, http://media.sourceonhealthcare.org/Conn_Gen_Stat_19a-508c.pdf.
 Acts 2019, 86th Leg., R.S., Ch. 1062 (H.B. 1112) (2019),https://statutes.capitol.texas.gov/Docs/HS/htm/HS.254.htm.
 Medicare Payment Advisory Commission, Report To the Congress: Medicare Payment Policy 75 (2014), http://www.medpac.gov/docs/default-source/reports/mar14_entirereport.pdf. In 2015, Congress passed the Bipartisan Budget Act requiring Medicare to implement site-neutral payment for outpatient services (other than emergency department services) furnished at any new, off-campus hospital outpatient departments, meaning these services will be reimbursed at the same, lower rates as freestanding physicians’ offices. This Medicare site-neutral payment policy went into effect in 2017 for outpatient locations acquired or built after 2015. In 2018, CMS has expanded the policy to cover E&M office visits at sites previously exempted under the 2015 law. CMS’s expansion of site-neutral payment was challenged in court and upheld on appeal before the D.C. Circuit in 2020. Litigation is ongoing. Am. Hosp. Assn. v. Azar , D.C. Cir. App., No. 19-5352.
 In 2019, Massachusetts Governor Charlie Baker proposed a comprehensive health care cost containment package that included both site-specific and service-specific limits on facility fees. H. 4134, 191st Gen. Ct., 2019-2020 Sess. (Mass. 2019), https://malegislature.gov/Bills/191/H4134.
 Conn. Gen. Stat. § 19a-508c(k).
 Arielle Levin Becker, House nearing deal on massive health care bill, CT Mirror, May 29, 2015, http://ctmirror.org/2015/05/29/house-nearing-deal-on-massive-health-care-bill/.
 Conn. Gen. Stat. §19a-508c(k).
 Conn. Gen. Stat. § 20-7f.
 Zack Cooper, Fiona Scott Morton, Nathan Shekita, Surprise! Out-of-Network Billing for Emergency Care in the United States, (Feb. 2020 preprint) https://www.journals.uchicago.edu/doi/pdfplus/10.1086/708819; Zack Cooper, Hao Nguyen, Nathan Shekita, and Fiona Scott Morton, Out-Of-Network Billing And Negotiated Payments For Hospital-Based Physicians, 29 Health Aff. 24 (2020), https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2019.00507.
 NASHP, Comprehensive State Laws Enacted to Address Surprise Balance Billing (updated March 14, 2019), https://www.nashp.org/wp-content/uploads/2019/03/Surprise-Billing-Laws-Chart-final-for-pdf-3.14.19.pdf; Manaasa Kona, State Balance-Billing Protections, Commonwealth Fund (updated July 20, 2020), https://www.commonwealthfund.org/publications/maps-and-interactives/2020/jul/state-balance-billing-protections.
 See, e.g., Cal. S.B. 977 (2020), which would specifically apply AG approval and oversight to health care transactions involving private equity or hedge funds.
 Centers for Medicare and Medicaid Services, Maryland All-Payer Model, Accessed July 23, 2020, https://innovation.cms.gov/innovation-models/maryland-all-payer-model.
 One study found that Maryland’s all-payer global budget system reduced total spending compared to out-of-state controls. Susan Haber et al., Evaluation of the Maryland All-Payer Model: Second Annual Report, Prepared by RTI International for CMS (Aug. 2017), https://innovation.cms.gov/files/reports/md-all-payer-secondannrpt.pdf. However, another study found no changes in utilization, so the savings were likely attributed to lower hospital prices. Eric T. Roberts, et al., Changes in Health Care Use Associated with the Introduction of Hospital Global Budgets in Maryland, 178 JAMA Internal Med. 260-268 (2018), available at: https://www.commonwealthfund.org/publications/journal-article/2018/jan/changes-health-care-use-associated-introduction-hospital.
 Centers for Medicare and Medicaid Services, Innovation Center, Maryland Total Cost of Care Model, Accessed July 22, 2020, https://innovation.cms.gov/innovation-models/md-tccm.
 Centers for Medicare and Medicaid Services, Innovation Center, Vermont All-Payer ACO Model, Accessed July 22, 2020, https://innovation.cms.gov/innovation-models/vermont-all-payer-aco-model.
 State of Vermont, Green Mountain Care Board, “ACO Oversight,” Accessed July 22, 2020, https://gmcboard.vermont.gov/aco-certification-and-budget-review.
 State of Vermont, Green Mountain Care Board, “Hospital Budget Review,” Accessed July 22, 2020, https://gmcboard.vermont.gov/hospital-budget.
 Pennsylvania Rural Health Model, Accessed July 22, 2020, https://www.health.pa.gov/topics/Health-Innovation/Pages/Rural-Health.aspx.
 Pennsylvania Rural Health Redesign Center Authority Act, Pub. L. 742, No. 108 (2019 Pa. Acts), https://www.legis.state.pa.us/cfdocs/legis/li/uconsCheck.cfm?yr=2019&sessInd=0&act=108.
*Erin C. Fuse Brown, JD, MPH, is associate professor of law and director of the Center for Law, Health and Society at Georgia State University College of Law. This work was performed in her capacity as a consultant to National Academy for State Health Policy.
Acknowledgements: The National Academy for State Health Policy (NASHP) wishes to thank Arnold Ventures for its generous support of NASHP’s Center for Health System Costs, for which this paper was commissioned.
Year after year, hospitals account for the largest expenditure of US health care dollars, followed by physician and clinical services, of which over half are owned by a hospital or a hospital-affiliated health system. To address rising health care costs, state policymakers and the public need detailed hospital financial information to understand a hospital’s assets as well as its expenses and liabilities.
The National Academy for State Health Policy’s (NASHP) hospital financial transparency model legislation identifies what data must be collected, which hospital documents should be used to obtain the information, and underscores that a state agency or office must be responsible for analyzing the data. NASHP also provides a reporting template to help states implement the law and collect the information needed to evaluate the vitality of a state’s hospitals.
Model Legislation: Model Act to Ensure Financial Transparency in [Name of State]’s Hospitals and Health Care Systems, August 2020.
Model Template: Hospital Financial Transparency Report Template, August 2020. Download this reporting template to use or adapt to implement the hospital financial transparency law. The template is designed to capture the data required by NASHP’s model legislation.
The Access Project: A Community Leader’s Guide to Hospital Finance, 2020. This report, prepared by Sarah Gunther Lane, MS, Elizabeth Longstreth, BA, Victoria Nixon, MS, and Nancy Kane, DBA, provides an overview of the key questions policymakers can ask to understand hospital financial performance, including background on hospital revenues and expenses, sources of financial information, and evaluations of financial health.
What is hospital financial transparency?
Hospital financial transparency describes when hospitals/health systems disclose data so the public and state regulators can understand its assets – including income from a variety of sources, such as payment for services rendered, grants, capital, and other investments – as well as its expenses and liabilities. To date, most state hospital transparency requirements have been designed to provide information about medical service pricing to consumers rather than a hospital/health system’s assets, which could better inform state health system cost-containment policies. To address and stem rising health care costs, states need specific information from hospitals and providers.
Why should states require hospital/health system financial reporting?
Year after year, hospitals account for the largest expenditure of US health care dollars, followed by physician and clinical services, of which over half are owned by a hospital or a hospital-affiliated health system. While hospitals/health systems are critically important to their communities, access to quality hospital care must be balanced with affordability. A growing number of state leaders are seeking to implement various cost-containment strategies, from payment reforms to total cost-of-care caps that aim to reduce the rapidly rising health care cost trajectory affecting everyone – employers, including states, and consumers. Understanding the relative financial position of a state’s hospitals can help policymakers analyze the vitality of the health care system and better target cost containment efforts.
How to determine if a hospital/health system is financially sound or in trouble?
By evaluating the financial health of hospitals/health systems in their states, policymakers will be better positioned to answer questions about hospitals’ ability to continue to meet debt obligations, pay their employees and vendors, and continue to provide quality care to patients. Unfortunately, developing this analysis isn’t always simple or straight forward. To gain insight into how hospitals are doing financially, policymakers need access to financial information provided in a standardized manner that is consistent across hospitals and over time. This allows for benchmarking across systems and hospitals at similar points in time and following changes in financial health over time. The National Academy for State Health Policy’s (NASHP) model law, An Act to Ensure Financial Transparency in Hospitals and Health Care Systems, and its accompanying financial reporting template can be used to collect the comprehensive data needed to help meet that challenge. Over time, financial information can be used to monitor the vitality of hospitals/health systems and evaluate the impact that policy changes or economic shifts have on them. And, it can help with planning the future of the health care system across a state.
What does the model act and accompanying reporting template do?
In most states, legislative authority would be necessary to require the collection of meaningful, comprehensive data from hospitals/health systems to evaluate their overall financial health. The model act specifies what data that should be collected, notes which hospital documents should be used to obtain the reporting information, and underscores that a state agency or office must be responsible for analyzing the data. Although not specifically written into the model act, NASHP has developed a reporting template that will help states implement the law because it is designed to collect the information needed to perform a financial health evaluation.
As a result of increased consolidation, most hospitals/health systems are now a part of bigger systems, therefore, to fully understand a hospital’s finances, data must be collected from parent system. Individual hospitals, or a consolidated health system, or component entities within a health system such as affiliated physician practices or a health plan are ordinarily included in the financial statements of the “reporting entity.” Collecting data at the system level does two things. First, it assigns responsibility to the entity that has the greatest capacity for completing and submitting the template without undue burden. Second, the reporting entity or system is responsible for all of the individual hospitals and affiliated providers that are part and parcel of the system as a whole. It is that entity that has the ability to transfer funds between affiliates to ensure viability. If the system is healthy, individual affiliates should also be healthy.
Alternatively, policymakers may wish to have access to the most granular data possible, which would require collecting data at the individual hospital level as well as at the level of the system. The data collection template can be modified easily to use at the individual hospital level. Similarly, the language included in the model act can be modified to reference the requirement that data be collected at the individual hospital level, the system level or at both levels.
The reporting template also requests data that will help policymakers measure and compare financial performance on key measures of financial health, such as:
- Liquidity – the ability to meet short term obligations, including payroll;
- Profitability – the ability to cover operating expenses and generate enough profit to cover capital and debt service needs;
- Solvency – the ability to repay long term debt; and
- Capital adequacy – the ability to invest in a competitive level of capital assets, such as digital imaging capability (X-ray, magnetic resonance imaging (MRI), or mammography equipment).
Why can’t hospitals simply provide audited financial statements?
Unfortunately, not all of the data related to a health care system or an individual hospital’s finances are readily available to the public through an audited financial statement. It can be a challenge to access current audited financial statements, even for nonprofit hospitals/hospital systems when they are available, and the structure of those statements can be difficult analyze. Also, individual audited statements may not be comparable across all hospitals/health systems, reducing their utility to state policymakers who are charged with protecting/ensuring access to quality, affordable care throughout the state. Even with expected variations in profitability for hospitals/health systems across a state, there is value in tracking financial health of these facilities using standardized metrics that utilize the same format for all hospitals/health systems in the state. For example, if a state implements a cost-containment strategy that adversely affects a particular hospital, the data will help identify the impact and policymakers can change the strategy.
The reporting templates must be completed by the providers themselves, who must also provide an attestation that the data submitted to the state is true and accurate. Hospitals may claim that sharing financial statements is burdensome, intrusive, or threatens its competitive positioning. But hospitals prepare financial statements as a matter of course, so reporting of its data – even when required on a standardized template – should not be so burdensome as to override the public interest in monitoring the financial health of these extraordinarily important resources.
Which state agency/office should be the identified lead for receiving and analyzing the data?
Data submissions will need to be directed to a responsible public agency. In states that have an all-payer-claims database, the agency housing that function would be a good candidate, as it is likely to already have the resources required to analyze and report on the data. States with health authorities that oversee system spending can opt to “house” the financial data repository as they are likely already collecting similar information. An alternative is the unit within the state’s Medicaid agency that is responsible for auditing hospitals’ Medicare Cost Reports, which will have resident expertise to assess financial data. State health planning offices are also worth considering, as the information collected via financial reporting will inform their work. The resources required would not be expected to require an additional appropriation or addition of staff.
Some states may lack the expertise to work with the data collected. In those cases, the state may wish to consider partnering with its public university system which will likely have the ability to support policymakers in their analysis of the financial data collected.
The model act includes a requirement that the state agency collecting the data report out to the Legislature each year on the financial status of the state’s hospitals. The proposed language directs data to be reported out on an aggregate rather than on an individual hospital basis. That language is purposeful as the release of specific data can open the door to litigation by hospitals charging the legislation could lead to collusion. By collecting data at a granular level, however, decisionmakers will have access to data to support the development of sound policies, while releasing the data only in an aggregated form protects the integrity of the transparency initiative.
What can state officials immediately learn from data submitted by hospitals/health systems?
The financial template is designed to automatically calculate a number of standard key financial ratios that are important for a high-level understanding of a system’s financial condition, including profitability, liquidity, and solvency. These data points will help answer the following questions:
- What is the hospital/health system’s snapshot of all financial activities for a given period of time?
- What has the hospital/health system earned and lost in providing patient care services during that period?
- Can the hospital/health system pay its current financial obligations with its existing liquid assets, such as on-hand cash versus funds it has in investments?
- What is the hospital/health system’s “days of cash on-hand,” which indicates how many days the entity can continue to pay its operating expenses using its liquid assets like cash?
- How many days can a hospital/health system continue to pay its operating expenses given cash on-hand and other liquid resources, taking into account its board of directors-designated and undesignated investments?
- What is the average number of days patient accounts are in a collection period? The longer it takes to get patient care payments “in the door,” the less cash is available to meet operation costs.
- What are total net assets compared to total assets, which reflects the ability to take on more debt? A lower value indicates that the reporting hospital/health system has a substantial amount of financed debt that it has used to underwrite the acquisition of assets and is highly leveraged.
- Is the hospital/health system able to cover its debt with the yearly cash flow from its operations? The higher this ratio, the better able the entity is to handle its debt load.
- How old are the physical buildings and assets of hospital/health system? Generally, the older the average age, there will be a greater need in the short-term for the hospital/health system to invest in capital resources, including X-ray, MRI, etc.
- What is the portion of total patient service revenues that were charged out as charity care?
- What is the proportion of the hospital/health system’s bad debt or the patient service charges that are not expected to be collected?
Are there resources available to understand and assess hospital financing?
This model law and accompanying resources includes a helpful publication – A Community Leader’s Guide to Hospital Finance– that provides a high-level overview of important aspects of hospital finance. This guide was recently updated and is useful to policymakers who want to understand the health system landscapes in their states so they are better positioned to understand the viability of their states’ health care infrastructures. It will also help them assess options to address the rising costs of care and to responsibly appropriate scarce state resources.