Cost-growth Benchmark

Cost-growth Benchmark

When using a cost-growth benchmark or cost-growth target, a state sets a maximum target for the rate at which total health care expenditures increase in a year. Typically states set cost-growth benchmarks based on increases in economic growth (potential gross state product, PGSP) and/or wages or median income.

Massachusetts established the first cost-growth benchmark in 2012. Since that time, six more states have set cost-growth benchmarks and two more – California and New Jersey – are actively implementing one. The states with a cost-growth benchmark in 2022 set them between 3.0% in Delaware and 3.4% in Oregon. Typically states include a phase-in period where cost-growth targets are set and then ratched down over a few years.

In a few states (Massachusetts, Oregon, and California), the agency overseeing the cost-growth benchmark has the authority to impose penalties on individual provider organizations that exceed the cost-growth benchmark, but the primary way that cost-growth benchmarks constrain costs is probably through voluntary commitments and public accountability (i.e. naming and shaming). For example, Massachusetts did not impose any performance improvement plans for nearly a decade, yet annual growth in commercial spending in Massachusetts was at or below the national average for seven years, savings patients and employers an estimated $7.2 billion over what they would have paid if spending growth in Massachusetts had matched the national average. Determining how much of this savings is due to the cost-growth benchmark is difficult to assess, as the slowdown in health care spending increases Massachusetts began before the cost-growth benchmark was implemented. The effectiveness of cost-growth benchmarks in other states is difficult to assess as they have only been in place for a couple of years and the covid-19 pandemic complicates efforts to assess the growth in total cost of care in a state.

Three states – Massachusetts, Oregon, and California – authorize a state agency to impose performance improvement plans (PIPs) on payers and providers with spending growth that exceed the benchmark.  These states also allow that agency to impose financial penalties if the PIPs fail to constrain the excessive spending growth. However, none of these states has yet imposed financial penalties. 

In January 2022, after nearly a decade of implementing a cost growth benchmark, the Massachusetts HPC voted to require their first PIP for Mass General Brigham (MGB). As of September 2022, the HPC has not yet voted to approve MGB’s proposed PIP. In their notice to require a PIP from MGB, the HPC noted that the increase in MGB’s total medical expenses resulted in “greater cumulative commercial spending growth in excess of the benchmark from 2014-2019 than any other provider, totaling $293 million. MGB acknowledged that this spending growth was not driven by a worsening of the health status of its primary care population.” In its proposal, MGB says it will reduce healthcare spending by $127.8 million per year on or before March 31, 2024.  This amount exceeds the $60 million that MGB estimates it exceeded the benchmark per year (a $293 million cumulative excess over the 5-year period from 2014-2019 is approximately $60 million per year). Nonetheless, the ability of the HPC to enforce compliance with a PIP is limited. Massachusetts law limits any fine to a maximum of $500,000 (Mass. Gen. Laws Ch. 6D § 10). This fine would be less than 0.2% of the amount the HPC estimated that MGB’s cost increases exceeded the benchmark.

Recognizing this limitation, when Oregon and California passed laws establishing cost-growth benchmarks, they gave their oversight agencies the authority to impose meaningful financial penalties. Specifically, the implementation committee in Oregon, recommended that PIPs be the first accountability mechanism for payers or provider organizations who exceed the cost growth target with statistical certainty and without a reasonable basis, and that “meaningful financial penalties” be imposed any provider or payer that exceeds the cost-growth target with statistical confidence without reasonable cause in three out of five calendar years or for two consecutive years. Regulations implementing the cost-growth benchmark in California are not yet established, but the statute allows for enforcement actions that include “administrative penalties in amounts initially commensurate with the failure to meet the targets, and in escalating amounts for repeated or continuing failure to meet the targets.” (emphasis added)  Cal. Health & Saf. Code § 127502.5(2) It remains unknown whether claims and other price data can be analyzed at a sufficient level of certainty to attribute cost increases to individual providers and establish commensurate penalties. The experience of policymakers in Oregon and California will inform efforts in other states to use cost-growth benchmarks to control costs and not just provide transparency about cost drivers in the state.

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