State and local government budgets across the country are under enormous financial pressure due to runaway government employee healthcare costs. These spiraling healthcare expenditures are 1) crowding out government spending on vital social services; 2) burdening state taxpayers with additional costs; 3) reducing government employee wage increases and take-home pay; and 4) reducing state economic vibrancy and quality of life.  

Montana was Exhibit A. In 2014, its State Health Plan lost nearly $29 million and was projected to be insolvent by 2017. Its $60 million of reserves were expected to fall to a deficit of $9 million. Yet the plan reversed its trajectory, boosting its reserves by $121 million. Rather than being depleted, State Health Plan reserves roughly doubled. (See Figure 1.)  

How did Montana accomplish this remarkable turnaround? By moving to a reference-based pricing model,  which ties the prices paid for healthcare services to a multiple of what Medicare pays for the same care.  

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In 2014, Montana's State Health Plan, which covers approximately 30,000 state government employees and their families, received an urgent directive from state legislators to get its costs under control or else state employee wage increases were in jeopardy. That same year the plan hired Marilyn Bartlett, a seasoned forensic accountant, to reverse its dire fiscal outlook.  

Montana's plan is self-funded, and Bartlett demanded historical claims data from its third-party administrator,  Cigna, to identify significant cost drivers. Yet Cigna refused to turn over this price information. So Bartlett fired  Cigna and brought in an independent administrator to manage the plan, support provider contracting, and process its claims.  

When Bartlett finally got her hands on the plan's claims data, she discovered that hospitals in the state were routinely charging it up to six times more than the Medicare rate for the same care. She also determined that the so-called "discounts" that Cigna secured from hospitals were meaningless due to massive price fluctuations for the same treatments. For instance, one Montana hospital offered a 7 percent discount on a $25,000  standard knee replacement while another offered a 10 percent discount for the same procedure yet charged $115,000.

Fig 1: Montana State Health Plan Reserves. 

To overcome this hospital price gouging that was bankrupting the State Health Plan, Bartlett implemented a  reference-based pricing model that would make it impossible for hospitals to overcharge. Bartlett's analysis concluded that the plan could afford to pay hospitals an average of 234 percent of the Medicare rate for inpatient and outpatient services – a benchmark that also allowed state hospitals to make a fair profit. Such a  common billing reference controls for wide hospital price variations and prevents hospital upcoding, erroneous charges, and billing fraud. It also helps control future price trends, as the rate paid is limited to annual Medicare rate increases. 

Given that the State Health Plan is the largest self-funded employer plan in the state, Bartlett had significant negotiating leverage over hospitals that didn't want to lose their consumers to competitors. Through tough negotiating, Bartlett overcame fierce industry lobbying and, with the support of government employee labor unions, succeeded in signing up all hospitals in the state to the plan.  

In three years after implementing this reference-based pricing model, the health plan saved $30 million in inpatient costs and $17 million in outpatient costs. On a per per-month per month basis, the plan saved $60 in inpatient costs and $32 in outpatient costs compared to what it would have paid absent reform. (See Figures 2 &  3).  

These savings came with no difference in employee healthcare service or mix in health plan population. The savings had no material financial impact on state hospitals. And they came with no premium increases for plan employees (a stark contrast to the substantial premium increases ordinary employers and employees have experienced in recent years). An independent actuarial review confirmed these financial accomplishments.  

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In 2017, the Montana State Legislature, which had issued a stern financial warning to the State Health Plan just a  few years earlier, received $25 million from the plan’s surplus revenues. Remarkably, the plan's reserves exceeded those in the state's general fund. Reference-based pricing transformed Montana's State Health Plan from a money pit to a revenue generator, saving taxpayers money and strengthening state social services.  

Other state governments and employers struggling with runaway healthcare costs can follow Montana's reference-based pricing lead and put their health plans on sound financial footing for generations to come.