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How hospitals are paid: witnesses outline payment systems and warn of risks in reference‑based pricing bill
Summary
Hospital and insurer witnesses told a Vermont legislative committee that hospitals get paid differently by commercial insurers, Medicaid and Medicare and urged more analysis before adopting a bill that would peg commercial hospital payments to Medicare-based reference prices.
Devin Green, representing the Vermont Association of Hospitals and Health Systems, told a legislative committee that hospitals in Vermont receive payments from three main sources—commercial insurers, Medicaid and Medicare—and that each payer uses different methods.
Green said hospitals “start out with one chargemaster” and that commercial insurers “negotiate hospital payments through contracts” that can include fee‑for‑service discounts, capitated payments or bundled/episode payments. He added, “I want to put a disclaimer right up front that I am, just like Jessa, not a doctor, I am not a finance person.”
Why it matters: lawmakers are weighing a bill that would use reference‑based pricing (RBP) tied to Medicare as a benchmark for what commercial payers must pay hospitals. Witnesses warned that Vermont’s Medicare reimbursements differ from other states and that pegging commercial rates to a low Medicare baseline could materially change hospital revenue.
Green and others told the committee Medicaid in Vermont has operated under an all‑payer model that provides prospective payments and other targeted funds such as disproportionate share hospital (DISH) payments; Green said Vermont receives about $23,000,000 in DISH funding versus $213,000,000 in neighboring New Hampshire and noted Vermont’s DISH cap is $44,000,000. He also summarized Medicare payment differences: critical access hospitals (eight in Vermont) receive cost‑based reimbursement (recently reduced from roughly 101% to about 99% of allowable costs), while prospective payment system (PPS) hospitals (five in Vermont) are typically paid per discharge using diagnosis‑related groups (DRGs) adjusted for local wage indices and other factors.
Green cautioned that “it’s possible that there are differences” in Medicare payments across states and that reference‑based pricing could have different effects depending on which Medicare rates are used as the benchmark. He noted data submitted by Southwestern Vermont Medical Center suggesting Vermont hospitals receive lower Medicare revenue per case than hospitals in reference‑pricing states such as Montana and Oregon and said that fact requires further analysis.
Sarah Teachout, with Blue Cross and Blue Shield of Vermont, told the committee reference‑based pricing “may be a useful rate setting tool for the Green Mountain Care Board” but recommended giving the Board flexibility to implement RBP within existing hospital budget and rate‑setting processes. Teachout warned the bill’s language was internally inconsistent in places (for example, whether the statute sets insurer payments or hospital prices) and urged the statute to account for Medicare’s existing adjustments for acuity, site of care and geographic factors.
Both hospital and insurer witnesses urged a careful implementation process. Testimony pointed to possible implementation approaches including phased pilots (by service line or by hospital), stakeholder working groups, and detailed case‑mix and Medicare‑comparison analyses before setting a statewide benchmark. Committee members and witnesses discussed specific options such as pegging commercial payments to a multiple of Medicare (examples cited during the hearing included 200% and 250% of Medicare) but witnesses repeatedly recommended more data work before picking a percentage.
No formal action or vote was recorded during the session; committee members asked staff and the Green Mountain Care Board to supply more analysis about how Medicare reimbursements in Vermont compare to those in states that use RBP and what the downstream effects on hospital budgets and premiums might be.
The hearing also surfaced administrative details for lawmakers to consider: the chargemaster contains thousands of line items and commercial contracts typically apply negotiated discounts to those chargemaster prices; Medicare and Medicaid include separate disproportionate share payment streams; and changes to Medicare‑based benchmarks would interact with existing hospital budget caps administered by the Green Mountain Care Board.
