The Indiana General Assembly has now codified a Faustian bargain, sacrificing quality and consumer choice at the altar of a “benchmark” price.
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How Hospital Price Caps Confirm the Narrow Network Fallacy 

H.L. Mencken famously noted that “democracy is the theory that the common people know what they want, and deserve to get it good and hard.”
 

On May 6, 2025, Indiana’s Governor and General Assembly said, “Hold my beer,” implementing a new chapter in the Indiana Code as follows:

“SECTION 46. IC27-1-46.5 IS ADDED TO THE INDIANA CODE AS A NEW CHAPTER TO READ AS FOLLOWS [EFFECTIVE UPON PASSAGE]:
  

Chapter 46.5. Direct to Employer Health Care Arrangements 

Sec. 1. As used in this chapter, ‘direct to employer health care arrangement’ means an arrangement between:  

(1) a hospital; 

(2) a hospital system;  

(3) an Indiana nonprofit hospital system; or  

(4) a narrow network of hospitals;  

and an employer that provides health care benefits for covered services under an employee benefits plan.  

 

Sec. 2. As used in this chapter, ‘full Medicare’ refers to the amount the Medicare program pays for a covered service, including all hospital-specific Medicare adjustments.  

Sec. 3. (a) As used in this chapter and except as provided in subsection (b), ‘hospital’ means an acute care hospital licensed under IC 16-21…  

Sec. 4. As used in this chapter, ‘hospital system’ means one (1) or more hospitals, all of which are related by direct or indirect common control or ownership.  

Sec. 5. As used in this chapter, ‘Indiana nonprofit hospital system’ means a hospital system that: 

 

(1) is organized as a nonprofit corporation or a charitable trust under Indiana law or the laws of any other state or country and that is: (A) eligible for tax exempt bond financing; or (B) exempt from state or local taxes;  

 

(2) filed jointly one (1) audited financial statement with the Indiana department of health in the preceding calendar year; and  

 

(3) has an annual net patient service revenue derived in Indiana of at least two billion dollars ($2,000,000,000), based on the hospital system's most recently submitted audited financial statement filed with the Indiana department of health…  

 

Sec. 6. As used in this chapter, ‘narrow network’ means an arrangement that limits the hospitals that a covered individual may use to obtain covered services under an employee benefit plan.  

 

Sec. 7. As used in this chapter, 'prices’ means the amounts that are paid for patient care services.  

 

Sec. 8. As used in this chapter, ‘third party administrator’ means an individual or entity that performs administrative services for a direct to employer health care arrangement.  

 

Sec. 9. (a) Beginning September 1, 2025, an Indiana nonprofit hospital system shall offer a direct to employer health care arrangement that is at or below a benchmark of two hundred sixty percent (260%) of full Medicare.

  

(b) The benchmark described in subsection (a) shall be calculated by taking the sum of:  

(1) hospital inpatient facility prices; and  

(2) hospital outpatient facility prices; expressed as a percentage of full Medicare.  

(c) An Indiana nonprofit hospital system meets the requirements of subsection (a) by doing any of the following:  

(1) Offering a direct to employer health care arrangement that is at or below a benchmark of two hundred sixty percent (260%) of full Medicare at each individual hospital within the Indiana nonprofit hospital system. 

(2) Offering a direct to employer health care arrangement that is at or below a benchmark of two hundred sixty percent (260%) of full Medicare as an Indiana nonprofit hospital system.  

(3) Participating in a narrow network of hospitals to offer a direct to employer healthcare arrangement that is at or below a benchmark of two hundred sixty percent (260%) of full Medicare... 

Sec. 10. (a) Beginning September 1, 2026, a hospital that is not a part of an Indiana nonprofit hospital system shall offer a direct to employer health care arrangement that is at or below a benchmark of two hundred sixty percent (260%) of full Medicare.”1

Putting aside the numerous issues implicated by a legislative body forcing a commercial enterprise to deliver products and services that their customers may not want or need, Chapter 46.5 is a reminder that the road to hell is paved with good intentions.

Instead of being bewitched by the mythical Greek creature singing with beautiful voices, the Indiana General Assembly has been beguiled by the siren songs of Arnold Ventures and RAND Corporation, whose most alluring refrain is this:

“In 2022, across all hospital inpatient and outpatient services (including both facility and related professional claims), employers and private insurers paid, on average, 254 percent of what Medicare would have paid for the same services at the same facilities.”2

  
With the possible exception of “directionally correct,” there is no phrase that better reflects the imprecise thinking of health economy stakeholders than “percent of Medicare,” but until the passage of Chapter 46.5, the use of “percent of Medicare” as a lazy heuristic was just that. Given how few health economy stakeholders seem to understand the true meaning of the phrase, the members of the Indiana General Assembly are presumably unaware that the proper response to the phrase “percent of Medicare” is this: “Whose base rate?” 

 

CMS helpfully explains: 

 

“Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. This payment system is referred to as the inpatient prospective payment system (IPPS). Under the IPPS, each case is categorized into a diagnosis-related group (DRG). Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG. 

The base payment rate is divided into a labor-related and nonlabor share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located, and if the hospital is located in Alaska or Hawaii, the nonlabor share is adjusted by a cost of living adjustment factor. This base payment rate is multiplied by the DRG relative weight.”3 

IPPS for Fiscal Year 2025: Adjustments for Geographic Factors

Applying this formula reveals that there is an 11.8% difference in the “same” Medicare base rate for Indiana hospitals.

Average Medicare Base Rate vs. "260% of Full Medicare" Benchmark for Selection Indiana Hospitals

Viewed solely on that fact, RAND Corporation’s oft-cited analysis is “directionally correct,” which is distinctly different from being precisely accurate. As a result, the best-case scenario is that the Indiana General Assembly’s “benchmark” results in an approximate 12% price difference among Indiana hospitals for the same DRG.

Of course, that best-case scenario is completely ethereal given that Chapter 46.5’s definition of “full Medicare” logically and correctly focuses on “the amount the Medicare program pays for a covered service, including all hospital-specific Medicare adjustments.” CMS makes quite a few of those:

IPPS for Fiscal Year 2025: All Adjustments

Because the “adjusted base payment rate” accounts for the DRG relative weight, a proxy for the complexity of the service that is rendered, the actual dollar amount of “260% of full Medicare” is materially different among hospitals, which is best exemplified by the reimbursement for DRG 003 - Extracorporeal Membrane Oxygenation. 

Average Medicare Base Rate vs. "260% of Full Medicare" Benchmark for Selection Indiana Hospitals

Chapter 46.5 exemplifies the frequent chasm between the theories that underpin government policy and the realities of the cold, hard facts of life. In theory, because value for money in healthcare exists at the intersection of quality and reimbursement, price caps would force providers to compete on quality, convenience and access. In reality, price caps reveal that quality in healthcare is as random as throwing dice in a Las Vegas casino.  

The following four charts measure value for money among a select group of Indiana hospitals by comparing the reimbursement for common DRGs at the “260% of full Medicare” benchmark with the most common CMS quality measure for each DRG. 

Reimbursement Rate at 260% of Medicare vs. 30-Day Mortality for DRG 280 (AMI) at Select Indiana Hospitals
DRG 193-1
Reimbursement Rate at 260% of Medicare vs. 30-Day Mortality for DRG 061 (Stroke) at Select Indiana Hospitals
Reimbursement Rate at 260% of Medicare vs. Rate of Complications for DRG 470 (Major Hip and Knee Joint Replacement) at Select Indiana Hospitals

Similarly, the chart below measures value for money among a select group of Indiana hospitals by comparing the “260% of Medicare benchmark” base rate for each hospital with its composite Patient Safety Indicators score. 

Reimbursement Rate at 260% of Medicare vs. PSI Composite for Select Indiana Hospitals

This quality variance occurs within the same health system and even within the same hospital. 

Reimbursement Rate at 260% of Medicare vs. 30-Day Mortality for Select DRGs  at Franciscan Health Hospitals

These data are proof that the Indiana General Assembly has now codified what is effectively a Faustian bargain, sacrificing quality and consumer choice at the altar of a “benchmark” price.

“Good and hard,” indeed, recalling these lyrics by Hoosier native John Mellencamp:   


“They like to get you in a compromising position 
Well, they like to get you there and smile in your face 
Yeah, they think they're so cute when they got you in that condition 
But I think it's a total disgrace”4 

 

At its core, Chapter 46.5 is an ill-conceived solution for a misdiagnosed problem. Upton Sinclair famously noted that “it is difficult to get a man to understand something, when his salary depends on his not understanding it.” There is no better example in healthcare than the concept of narrow networks, a fallacy relentlessly promoted for decades by benefits consultants and policy wonks to constrain healthcare costs, even if the real purpose was risk reallocation instead of absolute cost reduction.  

Until the advent of price transparency, those benefits consultants and policy wonks might have been forgiven for believing the narrow network fallacy, even though a moment’s thought, which all of them are ostensibly paid to do, would reveal a simple truth:  

Narrow networks based on a system or group affiliation do not deliver maximum value for money because they cannot. 

Why? For the obvious reason that no hospital is excellent, much less the best, at everything. Likewise, there is a discernible range of quality in every large physician group. If you don’t believe me, then ask a nurse.

It should be self-evident, even to a politician, and especially to an “expert” benefits consultant, that the correct order of operations in developing a high value network is first to establish a minimum threshold of provider quality and then to compare that subset of providers based on reimbursement rate, if not total cost of care. Instead, Chapter 46.5 first codifies a maximum benchmark rate and then dictates network development based on tax ID, a solution that is conveniently simple and predictably sophomoric.  

The only network strategy that could possibly deliver maximal value for money is one that creates narrow networks at the service line level, beginning with provider quality, and irrespective of network affiliation. Such a network strategy recalls Regina Herzlinger’s Market-Driven Health Care and her concept of “focused factories.” Notably, only one company has succeeded in developing a “focused factory” provider network: Bind Healthcare, now known as Surest Health after being acquired by United Healthcare. Even so, the “focused factory” logic in urban and suburban markets is straightforward: if every hospital focused exclusively on the two or three service lines for which it delivered high value care, the absolute volume of services in a market would not change materially, even if the location – and quality – of those services did.  

Besides being distinctly un-American, price caps don’t work, as articulated by Milton Friedman and demonstrated by the impact of President Nixon’s price controls in 1971 and New York City’s decades-long love affair with rent control, which are in stark contrast to deregulation of the transportation and energy markets. Although the Congressional Budget Office believes that price caps are the only thing that can bend the healthcare cost curve, U.S. economic history suggests that another solution – a true consumer market – might be superior to price caps. 

The political problem with Chapter 46.5 is the attempt by the Indiana General Assembly to remedy a mistake of the Federal government. While exit polling reveals that the cost of healthcare was a key concern of voters on November 5, 2024, I doubt that many Indiana voters envisioned the solution was a state-mandated direct-to-employer network that would restrict their access to high-value healthcare.

 

Joseph Schumpter is said to have noted that “history is a record of ‘effects’ the vast majority of which nobody intended to produce.”5 In perhaps the costliest example in U.S. history, the War Labor Board sowed the seeds of the disaster that is employer-sponsored health insurance.


“One of the most important spurs to growth of employment-based health benefits was—like many other innovations—an unintended outgrowth of actions taken for other reasons during World War II (Somers and Somers, 1961; Munts, 1967; Starr, 1982; Weir et al., 1988). In 1943 the War Labor Board, which had one year earlier introduced wage and price controls, ruled that contributions to insurance and pension funds did not count as wages. In a war economy with labor shortages, employer contributions for employee health benefits became a means of maneuvering around wage controls. By the end of the war, health coverage had tripled (Weir et al., 1988).”6 

 

Congress codified the War Labor Board’s decision in the Internal Revenue Code of 1954, which made employer contributions for health benefits tax deductible as a business expense and excluded from employees’ taxable income. As I have previously written, Congress exacerbated this mistake with the implementation of medical loss ratios in the Affordable Care Act, codifying cost-plus insurance. In summary, the Federal government got us into this mess, and only the Federal government can get us out.  

One way out is considered politically untenable, which is perhaps the best recommendation for it: the elimination of the tax deduction for employer-sponsored health insurance. Federal tax policy has long been utilized to incentivize “desirable” societal behaviors, like marriage, home ownership, charitable giving…and health insurance benefits.  

Employers, however, don’t want any government-mandated solutions that force their employees to choose between a hospital that delivers above-average value for money in cardiology but below-average value for money in oncology and another that offers the opposite. In fact, employers don’t even want to provide health insurance, and many of them would gladly trade the tax benefit in exchange for being relieved of the numerous burdens of being the financier of and distribution mechanism for health insurance for half of the U.S. population.  

Instead of even more government interference with and distortion of the largest sector of the U.S. economy, Congress should consider how a true consumer market – Americans using their own money to make their own choices about their healthcare, the most personal financial decision they make – could provide the transformation that America’s health economy desperately needs. And, Congress should also question the motives of every entity that would oppose such a transformational change. 

Hal Andrews Signature

Hal Andrews, President & CEO, Trilliant Health

Group 817

By the Numbers

A common misconception in healthcare is that monopoly market power results in higher reimbursement rates while competitive markets have lower reimbursement rates.  

However, our 2024 Trends Shaping the Health Economy Report found that the negotiated rate for healthcare services is often lower in monopoly markets than in the three most competitive U.S. markets – Los Angeles, New York and Chicago. 

Negotiated Rate Distribution for Select MS-DRGs: Monopoly vs. Highly Competitive CBSAs, 2024

two dots connected by a black line

Connecting Dots

🌪️ In March, I wrote that a Category 5 hurricane was forming in the Indiana state legislature in the form of price caps on hospitals. My warning to health economy stakeholders at the time was, “If you do not understand how you would be impacted by a proliferation of similar statutes throughout the U.S., then you should do so right about now. What starts with hospitals will not end there.” Indiana has now codified price caps into law. It’s significant that it happened in Indiana first – a “red” state for federal and state elections. For a Republican governor and Republican legislature to decide that price caps are the answer to relentless increases in healthcare costs is a warning sign for every hospital in every state. More in my interview with Healthcare Financial Management Association. 

Two dots connected by a black line

Points To Ponder

→ Results from the CHALLENGE trial suggest that exercise significantly improves outcomes for colon cancer survivors. From 2009 through 2024, 889 patients who had completed adjuvant chemotherapy were randomized to either a 3-year supervised exercise program or a health-education control group. After a median follow-up of 7.9 years, patients in the exercise group saw a 28% reduction in the risk of disease recurrence or death, with 5-year disease-free survival reaching 80.3% versus 73.9% in the control group. Overall survival also favored the exercise group, with an 8-year survival rate of 90.3% compared to 83.2% (The New England Journal of Medicine). Although the results of the trial are largely positive, Dr. John Mandrola argues that there are numerous reasons to be cautious of the conclusion (Sensible Medicine), while Dr. Blase Polite believes the findings are robust despite challenges related to adherence and scalability (Sensible Medicine).

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