Health Cost Containment: State Initiatives & Federal Health Reform

Updated April 2014

NCSL's State Health Cost Containment Project has researched and disseminated a series of briefing papers that analyze the evidence of what states can do that works to contain health costs, while improving the effectiveness and efficiency of their health programs and systems. The information published in brief form is contained in 16 NCSL briefs, distributed in a series - linked below.              

NCSL is making the information accessible on its Web site. It also has been presented at NCSL meetings nationally and in individual states as requested.

State Legislatures Magazine - A 2012 Health Cost Series was published in the June and the July-August issues.  The articles include summaries of five additional cost containment topics. An online Health Cost Containment supplement provides more detail and sources for the two articles, Health Costs: Improving the Bottom Line and Health Costs: Great Ideas for Cutting Costs.

Health spending report for 2012 includes ACA impacts. On Jan. 6, 2014, Health Affairs journal published the latest report on health care spending in the United States, as compiled by the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS). They report that this spending grew at a rate of 3.7 percent in 2012 to $2.8 trillion. The level of annual growth is similar to spending growth rates since 2009, which increased between 3.6 percent and 3.8 percent annually. This means that growth during all four years has occurred at the slowest rates ever recorded in the fifty-three-year history of the National Health Expenditure Accounts. Total health care spending in 2012 grew more slowly than did the gross domestic product (GDP), which means that the share of the economy devoted to health care fell slightly from its 2011 level of 17.3 percent to 17.2 percent in 2012.
    ACA Impact: "Although the Affordable Care Act had a minimal impact on aggregate health spending through 2012, several provisions continued to affect certain subcomponents of national health expenditures, such as:

  • increased Medicaid rebates for prescription drugs,
  • the Medicare drug coverage gap ("donut hole") discount program,
  • coverage for dependents under age twenty-six, and the
  • minimum medical loss ratio provision (which requires insurers to spend a minimum percentage of premium revenue on medical claims and health care quality improvements)."

Cost Containment - NCSL masthead





Cost Containment Sections in Federal Health Reform

The table below lists 1) published cost containment briefs including links to the full publication, 2) a summary of the strategy description, and 3) a description of applicable federal health reform provisions.  This includes statute citations and effective dates where applicable.


Series Brief Titles                                             

Strategy Description

Federal Health Reform Provisions (excerpts from full NCSL Brief)

Administrative Simplification in the Health System  -  PDF FilePDF logo

Streamlining administrative functions in the current health system (e.g., standardized forms and processes, streamlined claims processing, reduced and/or coordinated government regulations, etc.).

The law contains several administrative streamlining provisions. Examples include...

  1. adopting a single set of operating  rules for eligibility verification and claims status (effective Jan. 1, 2013);
  2. electronic funds transfer and health care payment and remittances (effective Jan. 1, 2014); and
  3. health claims processing, enrollment and disenrollment, premium payments, and referral certification and authorization (effective Jan. 1, 2016).

Global Payments to Health Providers - PDF File PDF logo

A fixed prepayment made to a group of providers or health care system (as opposed to a health care plan) for all care for all conditions for a population of patients.


The law requires the secretary of Health and Human Services to establish the Medical Global Payment System  Demonstration Project in up to five states, effective 2010 (ACA section 2705). Under the project, participating states must use global capitation rather than fee-for-service to pay large safety net hospital systems. The pilot program period is FY 2010 through FY 2012.

The law also authorizes tests of innovative Medicare and Medicaid payment and service delivery models “to reduce program expenditures while preserving or enhancing patient quality of care, effective Jan. 1, 2011” (ACA section 3021). The secretary can select several models for testing, including direct contracting with groups of providers using “risk-based comprehensive payments” (i.e., global payments).

Episode-of-Care Payments

PDF logo- PDF File

A single payment for all care to treat a patient with a specific illness, condition or medical event, as opposed to fee-for-service.

The law authorizes new Medicaid demonstration projects to test episode-of-care payments in up to eight states (section 2704). The payments are for integrated care for an episode of illness and must include a hospitalization. The effective date for the demonstration projects is Jan. 1, 2012, through Dec. 31,2016.

Under this initiative, as of April 1, 2012 CMMI has received (and continues to receive) applications from eligible participants for four broadly defined bundled payment models that will combine payments for multiple services (depending on the model) during an episode of care. Among the  goals of the BPCI are fostering quality improvement while decreasing the cost of an episode of care, giving providers flexibility to redesign care to meet the needs of their community, and removing barriers and provide opportunity for partnerships among providers and other stakeholders.  See the report, Bundled Payment in Medicare: Promise, Peril, and Practice (2012, NHPF)

The new legislation also establishes a national Medicare pilot program to develop and evaluate bundled payments for an episode of care that begins three days prior to a hospitalization and spans 30 days following discharge (section 3023). The Medicare pilot program has an effective date of Jan. 1, 2013.

Collecting Health Data: All-Payer Claims Databases- PDF FilePDF logo

A statewide repository of health insurance claims information from all health care payers, including health insurers, government programs, and self-insured employer plans.

 No provision

Accountable Care Organizations
PDF FilePDF logo

A local entity comprised of a wide range of collaborating providers that is accountable to health care payers for the overall cost and quality of care for a defined population.

The law authorizes Medicaid and Medicare ACO pilot programs.   The Medicaid program allows pediatric medical providers  organized as ACOs to share in cost savings, effective Jan. 1, 2012, through Dec. 31, 2016 (section 2706). The Medicare pilot program authorizes Medicare providers organized as qualifying  ACOs that voluntarily meet quality goals to share the cost savings they achieve with the program, beginning Jan. 1, 2012 (ACA section 3022).
Also see: ACO Health Policy Brief published by Health Affairs, 2012.

Pay-for-Performance Health Care Provider Payments- PDF FilePDF logo

Payments to providers for meeting pre-established health status, efficiency and/or quality benchmarks for a panel of patients.

The law directs the secretary of Health and Human Services to develop a “payment modifier” to allow for differential Medicare fee-for-service payments based on quality and efficiency measures. (ACA section 3007).

It also establishes pay-for-performance pilot programs for psychiatric, rehabilitation, long-term care and cancer hospitals and hospice programs that treat Medicare enrollees (ACA section 10326). [See Resources: Pay for Performance, below]

Equalizing Health Provider Rates: All Payer Rate Setting- PDF FilePDF logo

Payment rates that are the same for all patients receiving the same service or treatment from the same provider. Rates can be set by a state authority or by providers themselves.


The law creates a Center for Medicare and Medicaid Innovation (CMI). The act directs CMI to test innovative payment and service delivery models to reduce program expenditures while preserving or enhancing quality of care. It allows states to test and evaluate systems of all-payer payment reform for the medical care of residents of the state, including individuals who are eligible for both Medicare and Medicaid. In selecting models to test, the Secretary of Health and Human Services must give preference to models that improve the coordination, quality, and efficiency of health services.

Use of Generic Prescription Drugs and Brand Name Discounts- PDF FilePDF logo

Buying more generic prescription drugs instead of their brand-name equivalents and purchasing brand-name drugs with discounts can significantly reduce overall prescription drug expenditures.


The law significantly increases the federal Medicaid drug rebate on brand-name drugs by 8 percent, from 15.1 percent to 23.1 percent and the generic drug rebate by 2 percent, from 11 percent to 13 percent. The new rebates apply only to the federally paid portion of Medicaid, not the state portion. The law also extends the prescription drug rebate to Medicaid managed care plans, payable to Medicaid programs retroactively, effective Jan. 1, 2010. The Congressional Budget Office calculated that this change would save a total of $420 million in 2011, $710 million in 2012 and $790 million in 2013.17 Brand drug manufacturers will be responsible for $2.8 billion in added federal excise taxes annually for the 10-year period between 2010 and 2019.

Early Rx Use Results in ACA Exchanges, by Express Scripts, April 2014

Prescription Drug Agreements and Volume Purchasing- PDF File   PDF logo

States use combinations of approaches to control the costs of prescription drugs including:

  • Preferred drug lists,
  • Extra manufacturer price rebates,
  • Multistate purchasing and negotiations, and scientific
    studies on comparative effectiveness.
The law includes significant financial changes to Medicaid prescription drug rebate policy. As a result, every state will need to recalculate costs, savings and purchasing arrangements for current and upcoming fiscal years. The new law:
  • Increases by 8 percent (to a total of 23.1 percent of average manufacturer price [AMP]) only the federal portion of manufacturer rebates for brand-name covered outpatient drugs in Medicaid.
  • For brand drugs approved exclusively for pediatric use or for clotting factors, minimum rebates increase to 17.1 percent of AMP.
  • Manufacturers of generic drugs used by outpatients are subject to a 2 percent increase (to a total of 13.1 percent of AMP) in required rebates.
  • Also, for the first time, the federal law extends the prescription drug rebates to outpatient drugs dispensed to enrollees of Medicaid managed care organizations (Sections 1206 and 2501).

The changes, retroactive to Jan. 1, 2010, will generate more revenue for Medicaid nationwide. The Congressional Budget Office calculated that requiring rebates on drugs used in managed care settings would save a total of $420 million in 2011, $710 million in 2012 and $790 million in 20135 With about 33 million (or 71 percent) of the overall Medicaid population enrolled in managed care arrangements, the new application of manufacturer rebates required to be paid to each Medicaid program for their managed care population will be a significant net savings or cost reduction for most states. However, the state Medicaid share of revenue from existing state-negotiated supplemental rebates will be reduced; exact amounts have not yet been determined and are subject to future negotiations with manufacturers.

Comparative Effectiveness Review (CER). While the Drug Effectiveness Review Project (DERP) has operated under state jurisdiction since 2003, federal health reform included a new provision titled “Patient-Centered Outcomes Research.” It includes are variety of medical practices beyond pharmaceuticals and emphasizes that informing patients and clinicians is an important focus of CER. Furthermore the legislation stipulates that findings from CER cannot, by themselves, determine Medicare coverage policy. Controversy still exists about the role of federally-funded research findings and expert conclusions in narrowing patient care options. These future federal efforts are beyond the scope of the information in this report.

Pooling Public Employee Health Benefit Programs- PDF FilePDF logo

Programs that pool or combine health insurance purchasers across or beyond traditional jurisdictions or associations, including public employee health coverage pools and private sector health purchasing alliances.


The law includes several new federal insurance rules that take effect starting in October 2010, or later, at the start of the plan year (commonly January 1 each year).

  • The rules include prohibiting insurers from imposing lifetime limits on benefits or from rescinding coverage and restrictions on the use of annual limits.
  • All health insurance plans will be required to cover recommended preventive services and immunizations with no copayments.

  • Unmarried children will be able to remain on their parents’ health plan until they reach age 26.

  • The creation of health exchanges by 2014 may have a substantial impact on public employee health plans, depending on decisions made at the state level.

Combatting Fraud and Abuse in Health-
PDF FilePDF logo

Health care fraud and abuse control programs are designed to prevent, identify and prosecute unlawful billings by health care providers, patients and insurers.

The law includes several anti-fraud and -abuse provisions that apply to Medicaid and Medicare (sections 6001-6003, 6401, 6409 and 1304 (enhanced fraud and abuse program funding)). The act strengthens the federal False Claims Act (e.g., by allowing broader sources of information to bring a whistleblower suit) and the Anti-Kickback Statute (e.g., by making it easier to establish that a provider violated the statute). It includes new requirements regarding return of overpayments, additional federal funding and enforcement powers to fight fraud and abuse, and increased criminal and civil penalties.

Medical Homes- PDF FilePDF logo

“Medical home” describes a way of organizing and delivering health care that is coordinated, comprehensive, efficient and personalized.  Health care practices and clinics that meet medical home criteria manage all aspects of a patient’s care. The main purpose of medical homes is to improve the quality of care.

The law includes several medical home provisions. The act defines patient-centered medical homes (section 3502) and authorizes tests of innovative Medicaid and Medicare service delivery models in federal fiscal years 2010 to 2019, “to reduce program expenditures while preserving or enhancing patient quality of care” (section 3021). Innovative models include patient-centered medical homes for high-need patients and medical homes that address women’s unique health care needs. The act also makes available state grants to establish community based interdisciplinary teams to support medical homes (section 3502) and help primary care providers implement them in federal fiscal years 2011 and 2012 (section 5405).

Employer-Sponsored Health Promotion Programs- PDF FilePDF logo

Employer-sponsored health promotion programs—also known as worksite or workplace wellness programs—help employees become healthier by encouraging regular physical activity, stress management, healthy eating and not smoking. Providing ways to change behaviors associated with a higher incidence of chronic disease and disability— known as modifiable health risk factors—can lead to healthier employees, lower health care and health insurance costs, reduce absenteeism and increase productivity.

The law includes several worksite wellness program provisions. It specifies allowable wellness incentives and limits the size of health insurance-related rewards for meeting a risk reduction standard to 30 percent of the cost of employee-only coverage (2705(j)). The act establishes a five-year grant program to encourage and help small employers sponsor comprehensive wellness programs (section 10408). It directs the U.S. secretary of Health and Human Services to report, by 2013, on the effectiveness of wellness programs in promoting health and preventing disease; the effects of wellness programs on access to care and affordability of coverage for participants and nonparticipants; the effect of premium-based and cost sharing incentives on participant behavior; and the effectiveness of various rewards (ACA section 2705(m)).

Public Health and Cost Savings- PDF FilePDF logo

Public health programs —also known as population health—protect and improve the health of communities by preventing disease and injury, reducing health hazards, preparing for disasters, and promoting healthy lifestyles—the focus of this brief. Healthy lifestyles include good nutrition, regular physical activity, not smoking and other behaviors to improve or restore health that can be promoted through healthy community environments.

The Patient Protection and Affordable Care Act of 2010 includes several public health provisions. Among other things, the act establishes a Prevention and Public Health Fund for expanded national investment in public initiatives, health screenings and prevention research (section 4002). Public health initiatives include competitive Community Transformation Grants, a preventive benefits education and outreach campaign, and immunization programs. States can apply for Community Transformation Grants to reduce chronic disease rates, prevent development of secondary conditions, address health disparities, and develop a stronger prevention programming evidence base. The act appropriates $500 million to the Prevention and Public Health Fund for FY 2010. Appropriations increase by $250 million per year to $2 billion for FY 2015 and each year thereafter.

The act authorizes a demonstration program to award grants to states to improve immunization rates in high-risk populations (ACA section 4204) and a five-year national oral health prevention and public education campaign (ACA section 4102). It provides $50 million for five-year pilot program awards to state or local health departments and Indian tribes for public health community interventions, screenings and, where necessary, clinical referrals for people between the ages of 55 and 64 (ACA section 202).

Health Care Provider Patient Safety- PDF File PDF logo

Patient safety refers to rules, practices and systems to prevent patient harm or injury, including efforts to prevent medical errors. These errors, also known as adverse events, are occurrences of unintended harm from medical care. The main categories of medical errors are treatment errors, failure to complete indicated tests, and avoidable delays in treatment. Patient safety also includes efforts to reduce health care-associated infections that result from treatment
in a hospital or other medical care setting. The goal of patient safety initiatives is to reduce pain, suffering and deaths associated with preventable, unintended harm to a patient.

The Patient Protection and Affordable Care Act, signed March 23, 2010, includes several patient safety provisions. It authorizes state demonstration project grants to develop, implement and evaluate alternatives to tort litigation over injuries allegedly caused by health providers, including mediation and arbitration (ACA section 10607). Demonstration projects must encourage disclosure of health care errors and enhance patient safety by detecting, analyzing and helping reduce medical errors. States are eligible for demonstration planning grants of up to $500,000 per state. The act also establishes a Patient Safety Research Center and a Physician Compare Internet Web site to provide physician performance information, including assessments of patient safety and effectiveness and timeliness of care (ACA section 10331). A similar Hospital Compare Web site ( already exists.


Medical Malpractice Reform- PDF FilePDF logo Medical malpractice reform, also known as tort reform, includes strategies to limit medical malpractice costs, deter medical errors and ensure that patients who are injured by medical negligence are fairly compensated. Tort reform has the potential to reduce health care expenditures by reducing the number of malpractice claims, the average size of malpractice awards and tort liability system administrative costs. It also may lead to fewer instances of defensive medicine where physicians order tests and procedures not primarily to ensure the health of the patient but as a safeguard against possible medical malpractice liability.

The Patient Protection and Affordable Care Act authorizes state demonstration projects to explore alternatives to current tort litigation to resolve malpractice claims (section 10607). The act authorizes $50 million (up to $500,000 per state) to be appropriated over five years, beginning in FY 2011, for state demonstration grants to develop, implement and evaluate alternatives. The president’s 2012 budget proposal included $250 million for the U.S. Justice Department to help states overhaul their medical malpractice laws. It should be noted, however, that as of Oct. 1, 2011, the final 2012 budget had not been enacted.

Additional Resources.

  • Analysis Reveals First Look at Medication Utilization Trends Among Public Health Insurance Exchange Enrollees

    Express Scripts: Early Data Shows Greater Use of Specialty Medications in Exchange Plans vs. Commercial Health Plans.[Excerpt]
    In total spend, six of the top 10 costliest medications used by Exchange enrollees have been specialty drugs. In commercial health plans, only four of the top 10 costliest medications were specialty. Approximately 1.1 percent of total prescriptions in Exchange plans were for specialty medications, compared to 0.75 percent in commercial health plans.  Increased volume for higher cost specialty drugs can have a significant impact on the cost burden for both plan sponsors and patients. Despite comprising less than one percent of all U.S. prescriptions, specialty medications now account for more than a quarter of the country's total pharmacy spend. 

    The analysis, presented today at the Express Scripts Outcomes Symposium in Orlando, is based on a national sample of more than 650,000 de-identified pharmacy claims from January 1, 2014 through February 28, 2014 for patients enrolled in a Public Health Insurance Exchange plan with pharmacy benefit coverage administered by Express Scripts. The analysis compared these pharmacy claims to those from commercial health plans, with pharmacy coverage administered by Express Scripts, during the same time period.

    Key Insights. More than six in every 1,000 prescriptions in the Exchange plans were for a medication to treat HIV. This proportion is nearly four times higher in Exchange plans than in commercial health plans.  The top 10 therapy classes by claims volume for Exchange enrollees and those in a commercial health plan were largely similar, with a few notable exceptions:

    • The proportion of pain medication was 35 percent higher in Exchange plans.
    • The proportion of anti-seizure medications was 27 percent higher in Exchange plans.
    • The proportion of antidepressants was 14 percent higher in Exchange plans.
    • The proportion of contraceptives was 31 percent lower in Exchange plans.
    Approximately 43 percent of Exchange enrollees were previously enrolled in a plan with Express Scripts in 2013. The remaining 57 percent could have been uninsured or previously enrolled in a plan with pharmacy coverage administered by another organization.  Patients in Exchange plans in the first two months paid a greater percentage of their pharmacy costs compared to those enrolled in commercial plans. As a result, health insurers' per-member pharmacy costs so far this year are nearly 35 percent higher for their commercial plans vs. their Exchange plans. 
  •  What Are the Provisions in the New Law for Containing Costs and How Effective Will They Be? Published by Health Policy Center of the Urban Institute, August 2010.  [link added Jan. 2013]
  • Pay for Performance, Policy Brief by Health Affairs, October 2012. -- [Brief excerpt reproduced below, (c) Health Affairs]

The Affordable Care Act includes a number of provisions designed to encourage improvements in the quality of care. Some are not, strictly speaking, pay-for-performance programs. For example, Medicare's Hospital Readmissions Reduction Program, which took effect on October 1, 2012, can reduce payments by 1 percent to hospitals that have excessively high rates of avoidable readmissions for patients experiencing heart attacks, heart failure, or pneumonia.

Perhaps the best known of the programs under the law that will pay for performance are accountable care organizations (ACOs)--groups of providers that agree to coordinate care and to be held accountable for the quality and costs of the services they provide. (See the Health Policy Brief published on January 31, 2012, for more information on Medicare ACO demonstration projects.) Three other programs are described below.

Value-based purchasing. The Affordable Care Act also expands pay-for-performance efforts in hospitals by establishing a Hospital Value-Based Purchasing Program. Starting October 1, 2012, hospitals will be rewarded for how well they perform on a set of quality measures as well as on how much they improve in performance relative to a baseline. The better a hospital does on its quality measures, the greater the reward it will receive. The law also requires CMS to develop value-based purchasing programs for home health agencies; skilled nursing facilities; ambulatory surgical centers; specialty hospitals, such as long-term care facilities; and hospice programs.

Physician quality reporting. The health care law also extends through 2014 the Medicare Physician Quality Reporting System that provides financial incentives to physicians for reporting quality data to CMS. Beginning in 2015 the incentive payments will be eliminated, and physicians who do not satisfactorily report quality data will see their payments from Medicare reduced. (See the Health Policy Brief published on March 8, 2012, for more information on public reporting of quality and costs.)

Medicare Advantage plan bonuses. The Affordable Care Act also provides for bonus payments to Medicare Advantage plans that achieve at least a four-star rating on a five-star quality rating scale, beginning in 2012. In November 2010 CMS announced that it would replace this provision with a demonstration project in which bonus payments would be awarded to Medicare Advantage plans that have at least an average of three stars and would increase the size of bonuses for plans with four or more stars.

About this NCSL project

NCSL’s Health Cost Containment and Efficiency Series will describe two dozen alternative policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is is led by Richard Cauchi (Program Director) and Martha King (Group Director) with Barbara Yondorf as lead researcher.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.