State Spending Growth Benchmarks & Hospital Revenue

Health care spending is the fastest growing component of state budgets as well as of employer sponsored health benefits. As hospital charges and health insurer payments grow faster than wages and state tax revenues, the resulting pressures can have significant consequences for patients, for employers and their workers, and for states supporting Medicaid and other health programs for the poor.

Limits of Voluntary Restraint

In recent years, states have increasingly looked to establish spending growth benchmarks for health care spending in certain populations. The idea behind setting benchmarks is straightforward enough: the state sets a target for the rate of spending growth for a given population, and health care systems then attempt to ensure that spending for that population does grow at or below that rate. Policy evaluations of these various spending growth benchmarks, however, have for the most part produced evidence that the extent of subsequent spending growth has far exceeded targets set by policymakers in each state. Indeed, in a number of cases, including those of Connecticut and Oregon, states have failed to bring spending growth within statistical significance of their targets for years after the implementation of a particular spending growth benchmark. What is more, as discussed below, growth in a number of key measures of health care spending have, on average, experienced no statistically significant change in states that have implemented a particular spending growth benchmark compared to a group of similar states that have not implemented a given spending growth benchmark. That is, while there have been a number of instances in which a given state has experienced significant decline in a particular measure of health care spending, findings regarding the efficacy of spending growth benchmarks are for the most part far more modest than this single instance might suggest. (For example, a study of 4,813 hospitals in 3,108 counties found that, as a group, hospitals did not experience a significant decline in net revenue per discharge after a spending growth benchmark was established for their state).

Why It Matters

In just a few short years, health care spending has become the single largest category of expenditure in the budgets of all 50 states and in the employer-sponsored health benefit plans of companies of every size. So long as the growth in charges by hospitals and in the cost of health insurance premiums far outstrips the growth in such fundamental measures as wages and state tax revenues, the adverse effects of health care spending will continue to affect patients, providers, payers, employers, and state governments.

Targets without Teeth

Benchmarks Offer Targets Without Teeth. Health care spending targets or benchmarks, or what have come to be called health care spending “goals” or even “rate setting,” are attractive to politicians and policymakers as a change in paper as opposed to changes in prices of health care services and products. That is, a promise rather than performance. We found little evidence of significant change in hospital inpatient or outpatient spending in our analysis of 4,813 hospitals and 3,108 counties over 12 years after the establishment by 9 states of benchmarks for health care spending growth since 2013. Overall change in hospital inpatient spending was found to be $839 less per hospital discharge over the years studied and in the case of hospital outpatient spending, we found there to be $439 in increased per visit spending. Thus, for the most part, overall change

But the margin in many markets are thin to start with, so spending less will in the end just transfer costs to other payers and have negative affects on systems, health care organizations, and health care providers in rural areas as well as in safety net systems. (If a program can in the end reduce health care spending for those in safety net systems, then the efforts will in the end be found to be more than worth it for all of the regulators as well as the public at large. But that is not the way that things typically work. Instead, in the end a host of efforts to reduce health care spending, through additional layers of health care administration for example, in the end are found to translate into more and more into just more of the same, with less and less of an impact in terms of reduced health care spending in the end.) This would be the case for example with a program that for example was found to have a statistically significant reduction of $55 per outpatient in the program states, for example, while at the same time having no affect (i.e. null results) in terms of reducing health care spending for the most part in all of the other measures examined.

Patients

Finally, there are better ways for states to address health care spending than investing staff and political capital in voluntary targets on spending growth. First, and most directly, states can set targets on the prices of individual services, and implement corresponding price controls as needed. Second, states can structure insurance benefit designs and create provider networks that will keep growth in health care spending to below inflation in the absence of any other factors influencing such growth. Third, states can implement programs to improve the efficiency and effectiveness of health care delivery for a variety of services and populations.

Who It Affects

The study also examines several additional implications for a number of market participants as hospital spending growth affects them.

Patients

Individuals and small groups purchasing insurance on the individual or in the small group market are the worst affected by rising premiums to health care. However, all individuals will be affected as increased health care spending translates into increased premiums for employer-sponsored health insurance thereby reducing the wages of workers. Higher Medicaid spending will lead to increased pressures on state budgets thereby leading to program changes that affect low-income individuals and families. For example, in the individual market in Washington, there were positive associations between the establishment of a benchmark and increases in premiums 3-4 years post-implementation of $34 per month per individual. Similarly, in the small group market in Oregon, there were positive associations between the establishment of a benchmark and increases in premiums 3-4 years post-implementation of $14 per month per person.

Clinicians and hospitals

The primary individuals impacted by hospital price growth are patients and families of patients. In addition to growing premium costs, patients and families are forced to absorb growing out-of- pocket costs for services such as hospital care, including large deductibles, co-payments and coinsurance. A host of tools are available to help policymakers design benchmarks that can have a positive impact on costs and improve the quality of care. However, the tools that are the ones that will change the way that hospitals do business, and, therefore, will be of greatest concern to hospital and health system leaders. The small, rural and safety-net hospitals are of greatest concern, because in many cases a single hospital in a market will account for a very large portion of spending. In these organizations the owners and top managers are also the chief executive officers and major shareholders. These individuals and organizations are operating on very thin margins, and are struggling to maintain the services currently offered to their customers. It would be unrealistic to expect these individuals and organizations to absorb the impact of any reductions in spending that are brought about by blunt cost control efforts.

Using data from the CMS Health Care Cost Report Information System, the study found that after hospitals’ prices were benchmarked for hospital inpatient services, net revenue per discharge did not decline significantly. The authors conclude that in the absence of cost-control measures, the financial models of hospitals will not change in response to benchmarks.

Payers and employers

In the short term, a benchmark based cost containment program would impact the individual and small group market premium in a state. In the long term, a failed cost containment program would have adverse affects on all consumers in all markets. As the healthcare spending in the Medicaid program continues to grow at a greater rate than the rest of the healthcare system, the increased spending for services for current enrollees could lead to program cuts for low-income residents in all states.

State policymakers and regulators

Implementing and monitoring benchmarks requires a large data system and great analytical capacity. A critical decision that states must make is whether to use the benchmark as an advisory target or to link the target to a plan to correct excessive behavior and to implement the plan with fines or not. As noted above, three of the 26 study states (Vermont, Oregon and California) had some form of enforcement during the study period. The experience of the state of Oregon, for example, is that having the power to fine is not enough, it must be used.

What Changes

Moving from Observation to Enforcement

An Analysis of the Implementation of Health Care Spending Benchmarks in Thirty Six States Concludes that the States are Moving from “Naming and Shaming” to Enforcement of their Benchmarks.

1. Strengthen Enforcement Mechanisms

From Observation to Enforcement

Twenty-five of the 28 states with hospital spending benchmarks allowed “acceptable reasons” for hospital spending growth above the benchmark. Thus, no penalties were imposed on the hospitals for their spending. Three states, however, did have some form of enforcement of their hospital spending benchmarks: Vermont, Oregon, and California. The author focuses on Oregon in this paper. In Oregon, the author finds that having the ability to fine hospitals for their high rates of spending did not translate into changing their behavior, as long as the fines were not levied.

States must develop clear and specific consequences for repeated noncompliance and should implement measures to enforce spending benchmarks on an on-going basis, without discretion.

1. Introduce Complementary Price-Focused Tools. Benchmarks are broad measures of spending while prices are a very specific measure of what providers are charging. Thus, a number of price-focused tools could be used in conjunction with benchmarks to influence what prices are charged. These could include: (1) targeted price caps on certain services; (2) all-payer or facility-level rate-setting; and (3) reference pricing on high-cost services. In each of these cases, the benchmark would serve as a trigger or a target, while the price-focused tool would serve as the mechanism for influencing prices. This would allow a state to use benchmarks to reduce spending overall, while at the same time using price-focused tools to reduce the amount of leverage that any single dominant provider has to charge very high prices. For example, a state could use benchmarks to track total spending for all services, and then use one or more of the price-focused tools on a subset of services, such as joint replacements or cardiac services. The following are examples that influence the outcomes of interest, by pairing benchmarks with tools that have clearer links to prices, such as:

Some examples for the four functions of health care cost control. 1. Payers and employers 2. State policymakers and regulators 3. Benchmarks 4. Containment of health care expenditures.

• Targeted Price Caps: Direct limits on how much providers can charge for specific services.
• All-Payer Rate-Setting: A more aggressive approach that standardizes what all insurers pay for the same services.
• Reference Pricing: Setting a standard payment rate for high-cost services, encouraging patients to seek higher-value care.

1. Invest in Data, Monitoring, and Capacity

States also need to develop the capacity to track a number of key data points on a regular and timely basis, including data on prices, utilization, and patient mix in comparable form for all payers. They will also need to develop tools to track price in various different market settings, and they will need to have the capacity to analyze data in meaningful ways in order to present their findings to a variety of stakeholders, including employers. States will also need to develop a robust data system in order to track costs and quality, and to track for cost-shifting (e.g. a hospital may lower price in one service area in order to increase price in another in order to make up for the difference). This data system would be used in order to inform the state’s benchmarks as well as to monitor the costs and quality of care over time. Developing an All-Payer Claims Database (APCD) in the commercial market would be an extremely useful investment for a state that includes the small group and individual markets in its database.

With better data the state can even track cost-shifting by a hospital, i.e. a hospital’s charges for treatment in one service area are decreased while charges for similar treatment in other service areas are increased in order to keep overall revenues of the hospital constant.

1. Protect Access and Equity While Pursuing Savings. While transitioning from observation to enforcement, states must ensure that their efforts to contain health care spending do not undermine access to care for vulnerable populations. Designing interventions to contain health care spending to protect access to care for individuals and families with high medical needs, for safety-net providers and for rural hospitals is critical. Interventions designed to promote greater efficiency in health care delivery should include transition funds, acceptable reasons for excess growth that are difficult to achieve for such providers, or even investments in the workforce and in telehealth to maintain access to care in other settings.

This is not to say, however, that the study did not attempt to account for the issues of rural hospitals and those that are critical access hospitals (CAHs). The study controlled for the rural-urban status of the hospitals, as well as for whether or not the hospital was a CAH. However, as policymakers implement cost-containment measures in the commercial market, they will need to design policies that will prevent similar downward pressure on the services of these types of hospitals in other markets. The study authors may have accounted for the thin margins that these hospitals are currently operating on in their data and analyses, but that will not necessarily be the case as policymakers move down this path.

Our results are intended to serve as a wake-up call for the voluntary or weakly enforced spending targets currently employed by states to attempt to bend the health care cost curve. These targets, generally set as percentage growth targets for all payers, should not be used as the end goal of health care spending policy; instead, they should serve as triggers for more direct and enforceable measures that impact the rates that hospitals charge and the resulting insurance premiums.

Reference

1. Eibner C, Chase EC, Kerber R, Liu JL. State Spending Growth Benchmarks and Hospital Revenue, Hospital Prices, and Premiums. JAMA Netw Open. 2026;9(2):e2558283. Published 2026 Feb 2. doi:10.1001/jamanetworkopen.2025.58283