Strategies
A hospital price cap strategy, also referred to as “reference-based pricing,” limits hospital payments to a specified level. Price caps are usually pegged to a percentage of the Medicare rate for the same service but may also use another price benchmark.
Price caps can be applied narrowly or broadly. A narrow application leverages the state’s purchasing authority to implement hospital price caps for the state employee health plan. Most states can pursue this approach without additional regulatory authority, though such authority may be necessary if a state wants to strengthen price caps with complementary measures, such as capping out-of-network rates.
Broader applications use state regulatory and taxing authority in the following ways:
Price caps directly address a primary driver of health care spending and spending growth, making them one of the most effective tools for controlling hospital prices. The strategy’s impact primarily depends on two factors: the cap level and how broadly the cap is applied. Facing persistent premium increases driven by high hospital prices, states across the political spectrum are increasingly turning to price caps to improve health care affordability for their residents.
| Question | Answers |
|---|---|
| How should the state apply a hospital price cap? | Price caps can be applied to specific market segments only – such as within a state employee health plan or public option program – or across the fully insured commercial market. In addition, where states have or can obtain appropriate authority, caps can be applied directly to hospital charges, which impacts both the fully insured and self-insured commercial markets. |
| What authority is needed to establish a price cap? | States seeking to bring down costs in their public employee benefit programs may be able to leverage purchasing authority to achieve lower provider prices via price caps. However, states planning to go beyond this narrower application will need statutory authority to implement caps. |
| Which services should be subject to the cap? | Price caps are typically applied to inpatient and outpatient hospital services but can be applied to a narrower (e.g., select high-priced services) or more comprehensive (e.g., including hospital-employed professionals’ services) set of services based on state policy goals. |
| Which hospitals should be accountable? | States must decide whether to apply price caps universally or exempt certain hospital categories, weighing administrative simplicity and comprehensive savings against targeted relief for certain providers. States could comprehensively apply the caps to all hospitals or could exempt certain hospitals based on designation (e.g., rural, critical access, sole community), financial metrics (e.g., operating margins and days cash on hand below certain thresholds), or service mission (e.g., safety-net facilities serving a high proportion of Medicaid enrolled or uninsured individuals). States could conduct hospital financial analyses to understand hospitals’ financial health and help determine if an exemption or transition period may be needed for certain hospitals, recognizing that some hospitals are financially robust, while others are not. In addition, the level of the price cap will also dictate which hospitals will be impacted based on current price levels. Finally, states could consider implementing a price floor for financially distressed hospitals. Additional considerations for any exemptions or variations include the precedent it creates for hospitals and providers to lobby for special treatment, the associated complexity involved with evaluating exemption requests, and the overall complexity with administering a policy with multiple accommodations. |
| At what value should the hospital price cap be set? | States should analyze information about current prices by hospital and by service category (e.g., hospital inpatient and outpatient) to inform an appropriate cap level that addresses excessive prices and generates savings. In addition, states may conduct hospital financial analyses to understand hospitals’ financial health and ensure that caps are set at a level that will not jeopardize hospital financial stability. |
| How can the state mitigate potential risks, such as hospitals seeking to leave insurer networks to avoid the cap, or moving prices up to the cap? | States implementing a hospital price cap within their state employee health plan and/or within the fully insured market can set out-of-network hospital reimbursement rates below the in-network price cap to incentivize continued network participation. However, states must ensure robust protections are in place to prevent hospitals from balance billing patients for the difference between the capped payment and their billed charges. Note that applying price caps directly to hospital charges impacts both in-network and out-of-network payments, thereby removing the potential for associated network disruption and balance billing concerns. States can prevent hospitals from seeking to quickly increase their prices up to the cap by combining a price cap with a price growth cap, which restricts how much providers can increase prices in any given year. Alternatively, states can achieve similar results through a “lesser of” provision that caps the paid amount at the previous year’s rate plus a specified percentage increase. |
State and School-Based Employee Health Plan Price Cap
In 2017, Oregon passed legislation to institute hospital payment caps for the State’s public employee plans. This policy went into effect for the Oregon Educators Benefit Board (OEBB) in October 2019, and the Public Employees’ Benefit Board (PEBB) in January 2020. Under this policy, OEBB and PEBB’s contracted insurers and third-party administrators must limit payments for inpatient and outpatient services to no more than 200% of the Medicare rate for in-network hospitals, and no more than 185% of Medicare rates for out-of-network hospitals. During the first 27 months of implementation, the policy yielded $107.5 million in savings for the State – equivalent to 4% of total plan spending. An independent evaluation also found that individuals in high cost-sharing plans experienced a 9.5% reduction in out-of-pocket spending per outpatient procedure as a result of the price cap.
State and School-Based Employee Health Plan Price Cap
In 2025, Washington enacted legislation capping Public Employees Benefits Board (PEBB) and School Employees Benefits Board (SEBB) plans’ payments at 200% of the Medicare reimbursement rate for hospital inpatient and outpatient services, effective January 1, 2027. The legislation establishes modified caps for children’s hospitals, and sets minimum payment levels of 150% of Medicare rates for primary care and behavioral health services delivered in community settings. The Washington Health Care Authority developed a dedicated webpage to the “Public Employee Access and Affordability program,” which contains a compliance guide with parameters for compliance measurement, and a comprehensive FAQ and fact sheet detailing the policy’s requirements and projected impacts.
Public Option Price Cap
Washington’s public option plan, Cascade Select, establishes a maximum statewide aggregate reimbursement ceiling of 160% of Medicare rates for provider and facility services, with separate targets for critical access hospitals, sole community hospitals, and primary care services. While the statute does not explicitly outline an enforcement mechanism, the Washington State Health Care Authority (HCA) can hold insurers accountable for affordability, quality, and value targets through its contracts with public option insurers. Claims data from 2021 and 2022 submitted to HCA’s actuarial consultant demonstrated that public option provider reimbursement targets were generally met.
State Employee Health Plan Price Cap
New Mexico passed legislation in 2025 authorizing hospital price caps in the state employee health plan, with savings designated to offset enhanced financial support for state employees facing high health care costs. The New Mexico Health Care Authority issued guidance establishing that, effective July 1, 2025, reimbursement would be capped at 200% of Medicare rates for urban in-network hospitals, and 175% for out-of-network hospitals. The limits apply only to urban hospitals located in counties with populations of 125,000 or more. Additional legislation passed in 2026 expands the policy to health insurance plans for public educators.
Commercial Market Price Cap
In 2025, Indiana enacted legislation establishing two hospital price cap policies. The first requires the state to set a hospital price cap in 2026 based on statewide average payment rates for inpatient and outpatient services. The five largest nonprofit hospital systems must reduce their aggregate average inpatient and outpatient prices to below the statewide average by June 2029. Nonprofit hospitals that fail to meet this requirement forfeit their tax-exempt status until they lower prices below the average. The second provision requires the state’s five largest nonprofit hospitals to offer direct-to-employer contracting arrangements with price caps at or below 260% of Medicare’s reimbursement rates starting September 2025, with the same requirement applying to for-profit hospitals beginning September 2026.
Commercial Market Price Cap
Vermont passed legislation in 2025 directing the Green Mountain Care Board (GMCB) – an independent board responsible for regulating and evaluating the state’s health care system – to implement reference-based pricing for Vermont hospitals, which will be phased in over several years starting in October 2026. The legislation uses the GMCB’s provider rate-setting authority to implement this requirement across the fully and self-insured commercial market, and directs the agency to establish price caps for hospital services at a percentage of Medicare rates. The law also requires the GMCB to ensure that the savings are passed along to rate payers through lower insurance premiums and to report on this requirement annually. The GMCB’s Hospital Reference-Based Pricing website contains additional details, including analyses that will inform program design and other resources.
State Employee Health Plan Price Cap
From 2016-2022, Montana’s state employee health plan applied Medicare reference-based pricing, using its negotiating leverage to cap hospital payments at 220-225% of Medicare rates for inpatient services and 230-250% for outpatient services. The program ended in 2023 when the State selected a different third-party administrator for the state employee health plan. This policy generated an estimated $47.8 million in state savings over three years.