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W.Va., Md. rate-setting has likely kept down health costs

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WASHINGTON – West Virginia’s program to rein in the growth of health care costs may be working, says a group of experts — from hospital executives to health policy analysts.

West Virginia and Maryland are the only two states that continue to directly set hospital rates. West Virginia first initiated the program in 1985, revising it significantly in 1992.

Brandon Merritt, a health policy analyst with the West Virginia Center on Budget and Policy, said available data tends to suggest rate setting has kept the costs of health care in the state growing at a slower rate than in the rest of the country.

“There is some data to suggest – and this is a correlation, it is not necessarily causation – that hospital-related costs have grown at a slower rate in West Virginia compared to the rest of the nation,” Merritt said. “Costs in West Virginia have grown at a slower rate than in the rest of the country, so there could be a more indirect impact of keeping costs down in general.”

From 2002 to 2011, the median total cost for a patient admitted to and discharged from a West Virginia hospital grew by about 74 percent, Merritt said While that sort of cost inflation represents a major increased financial burden on patients, it is far less than the national average of 100.7 percent cost growth.

Chris Knight, the CFO of West Virginia University Hospitals, agreed that rate setting has likely kept health care inflation lower than in the rest of the nation.

Rate setting, as Knight explained, is performed by the West Virginia Health Care Authority. The HCA sets the rates that the state’s hospitals can charge after a yearly review of hospital costs, and allows the rates to increase by a small amount each year.

If a hospital exceeds the rate targets set by the HCA, Knight said, it is penalized with a smaller rate increase the following year.

He says he sees the policy as positive for hospitals overall, however.

“There are other attributes that are on the positive side,” Knight said. “There are elements of rate setting that are positive in nature, where they control competition a little bit. So those things outweigh anything on the downside of rate-setting.”

The HCA requires prospective hospitals to obtain Certificates of Need or CONs – findings that new hospital capacity is needed by the community – in order to build new hospitals or undertake large expansions of existing facilities. Knight maintains this process also keeps rates down.

“In other markets you see duplication and overbuilding, where in West Virginia it tends to limit it by the CON laws in coordination with rate-setting,” he said. “If you can’t raise your prices to make certain you are profitable, then you will be more selective with your growth strategy.”

A 2012 study by the National Institute for Health Care Reform, however, found that the policy had a more mixed track record.

“Costs increased at a faster rate in West Virginia than in the nation as a whole from 1985, when mandatory hospital budget review was implemented, until 1992, when the law was amended to use actual hospital costs as the basis of rate updates rather than setting limits based on hospital revenue. After that, costs increased at a slower rate than the nation.”

That study concluded that rate-setting policies could be effective in controlling cost growth, depending on the specific policies used.

Other sectors of the state health care system are also subject to federal or state cost controls since they receive a large proportion of their revenue from Medicare or Medicaid.

The state’s nursing homes, for example, received about 88 percent of their revenue from Medicare, Medicaid or other state programs, according to the HCA’s most recent annual report.

 

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