HEALTH CARE DIVISION PRESENTATION TO PROVIDER PRICE REFORM COMMISSION:

1. HEALTH CARE DIVISION PRESENTATION TO PROVIDER PRICE REFORM COMMISSION: FINDINGS FROM ATTORNEY GENERAL’S EXAMINATIONS OF HEALTH CARE COST TRENDS AND COST DRIVERS PURSUANT TO G.L. c. 118G, § 6½(b) OFFICE OF ATTORNEY GENERAL MARTHA COAKLEY ONE ASHBURTON PLACE • BOSTON, MA 02108 July 13, 2011

2. VARIATION IN PROVIDER PRICES • What type of variation exists in the commercial prices paid by insurers to providers? • Are those variations adequately explained by value-based differences in the services provided? • How are variations in prices paid related to overall health care costs? • How are variations in prices related to payment methodology?

3. MEASURING HEALTH CARE COSTS • TOTAL MEDICAL EXPENSES (TME): The total cost of all the care that a patient receives, including the payments by the health plan for the care of the patient, and any copayment or deductible for which the patient is responsible. TME reflects both price of services and volume of services. • PRICE: The contractually negotiated amount that an insurance company pays a health care provider for providing health care services; we reviewed relative price information, which shows the prices paid by health plans to providers for all services in aggregate as compared to other providers in the health plan network.

4. RELATIVE PRICE vs. RELATIVE PAYMENT • RELATIVE PAYMENT: Payments made by insurers to providers in their network, as compared to the network-wide average; relative payments reflect the volume, product mix, service mix, and/or other factors particular to a provider’s payment history. • RELATIVE PRICE: Prices set between insurers and providers in their network, as compared to the prices paid to other providers for the same comprehensive bundle of services; relative prices do not reflect the insurance product mix, service mix, or other factors that are particular to an individual providers’ payment history. 4

5. THERE IS WIDE VARIATION IN PRICES IN EACH MAJOR INSURER’S NETWORK

6. HIGHER PRICES ARE NOT ADEQUATELY EXPLAINED BY DIFFERENCES IN QUALITY PERFORMANCE 6

7. HIGHER PRICES ARE NOT ADEQUATELY EXPLAINED BY TEACHING STATUS OR COMPLEXITY OF SERVICES

8. HIGHER PRICES ARE NOT EXPLAINED BY PROPORTION OF GOVERNMENT PATIENTS

9. HIGHER PRICES ARE NOT ADEQUATELY EXPLAINED BY UNDERLYING COSTS: HIGHER-PAID PROVIDERS REPORT HIGHER COSTS TO DELIVER COMPARABLE SERVICES “[U]nusually high hospital margins on private-payor patients can lead to more construction, higher hospital cost, and lower Medicare margins. The data suggest that when non-Medicare margins are high, hospitals face less pressure to constrain costs, costs rise, and Medicare margins tend to be low.” - MedPAC, Report to Congress, March 2009, page xiv.

10. HIGHER PRICES ARE EXPLAINED BY MARKET LEVERAGE

11. PRICE INCREASES CAUSED THE MAJORITY OF THE INCREASES IN HEALTH CARE COSTS IN THE LAST SIX YEARS

12. TOTAL MEDICAL SPENDING IS HIGHER FOR THE CARE OF PATIENTS FROM HIGHER-INCOME COMMUNITIES

13. WIDE VARIATIONS IN PRICES PAID TO PROVIDERS COULD TAKE YEARS TO CORRECT • For illustration purposes only, examples of the number of years to rate convergence in one health plan’s network assuming the lower paid provider receives a 3% a year increase greater than the higher paid provider.

14. VARIATIONS IN PRICES PAID TO PROVIDERS EXIST IN GLOBAL RISK BUDGETS AS WELL AS IN FEE-FOR-SERVICE ARRANGEMENTS • We found wide variations in the health status adjusted global payments made by health plans to at-risk providers. • For example, in one health plan’s network in 2009, one globally paid provider had a health status adjusted budget of approximately $428 per member, per month, while another had a health status adjusted budget of only $276 per member per month.

15. GLOBALLY PAID PROVIDERS DO NOT HAVE LOWER TOTAL MEDICAL EXPENSES

16. HEALTH CARE DIVISION PRESENTATION TO PROVIDER PRICE REFORM COMMISSION: FINDINGS FROM ATTORNEY GENERAL’S EXAMINATIONS OF HEALTH CARE COST TRENDS AND COST DRIVERS PURSUANT TO G.L. c. 118G, § 6½(b) OFFICE OF ATTORNEY GENERAL MARTHA COAKLEY ONE ASHBURTON PLACE • BOSTON, MA 02108 July 13, 2011