From Premium Shocks to Payment Reform

Over the past decade, Rhode Island has experienced six premium shocks—years in which commercial health insurance premiums increased at more than twice the rate of inflation. These premium shocks are reflected in the Medical Expenditure Panel Survey (MEPS), an annual survey of employers in Rhode Island. More troubling, the 10-year trend shows that these shocks are becoming increasingly severe. The most recent 2026 and requested 2027 premium increases are therefore not isolated events. They are the most visible symptoms of a healthcare system that is increasingly unaffordable.

The consequences extend well beyond the price of health insurance. Rising healthcare costs affect access to care, erode household income growth, increase the cost of doing business, and make it more difficult for Rhode Island to attract and retain employers and jobs. Healthcare affordability is not simply a healthcare issue; it is an economic issue for the state.

To better understand the forces driving healthcare costs and affordability, the Rhode Island Business Group on Health (RIBGH) has created databases using publicly available information on hospitals, health insurers, employer premium costs, and Rhode Island's commercial health insurance markets.

If Rhode Island is serious about changing this trajectory, these data provide an important direction. RIBGH's analysis of National Association of Insurance Commissioners (NAIC) SERFF data shows that hospitals have been the largest contributor to the growth in commercial healthcare costs. The latest data show that hospitals account for 50 percent or more of the year-over-year increase in medical spending. Any meaningful strategy to improve affordability must therefore address the rate of growth in hospital spending.

But addressing hospital spending does not simply mean paying hospitals less. It means creating a payment system that provides incentives for delivering the care patients need before their conditions deteriorate to the point that they require an emergency room visit or hospital admission.

This is particularly important for people with chronic illnesses. Much of what drives hospital utilization involves patients with conditions such as congestive heart failure, chronic obstructive lung disease, and complicated diabetes. We already know that many of these patients can be cared for successfully outside the hospital. Programs in Rhode Island and across the country have demonstrated that identifying problems early and intervening before they become crises can reduce unnecessary emergency room visits and hospitalizations while producing good clinical outcomes, cost savings, and high patient satisfaction.

The model is not complicated in concept, although it requires significant changes in how care is organized. Patients need strong primary care connected to specialists and multidisciplinary care teams. Information technology and remote patient monitoring can identify early signs that a patient's condition is worsening. Care teams can then intervene in the patient's home or, when necessary, provide treatment in an outpatient or community setting before the condition becomes serious enough to require hospitalization.

Yet this is not how much of our healthcare system operates today. Patients with chronic illnesses continue to arrive in crowded emergency rooms, wait for scarce hospital beds, spend days in the hospital, and too often return again after discharge. At the same time, hospitals continue to seek additional funding without sufficient attention to redesigning care in ways that could reduce avoidable hospital utilization.

This raises an obvious question: If we know how to provide this care differently, why aren't we doing it on a much larger scale?

The answer lies, at least in part, in the incentives created by the way we pay for healthcare. Under a fee-for-service system, hospitals and other providers are generally paid when services are delivered. More admissions, procedures, tests, and other billable services generate more revenue. Investments that prevent an emergency room visit or hospital admission may be clinically beneficial and save money for the healthcare system, but they can also reduce revenue for the organization making those investments.

That fundamental misalignment matters. We cannot expect hospitals and other providers to consistently redesign care around prevention, early intervention, and lower-cost settings while maintaining a payment system that financially rewards greater utilization.

If Rhode Island wants different results, it must begin by changing the incentives.

That is the opportunity presented by Rhode Island's participation in the federal Achieving Healthcare Efficiency through Accountable Design (AHEAD) Model. At the heart of AHEAD is a fundamentally different approach to paying hospitals: hospital global budgets. Instead of depending on increasing the volume of billable services to generate additional revenue, participating hospitals operate under a prospective budget designed to support the care of the population they serve.

This changes the financial equation. Under fee-for-service, preventing an avoidable hospitalization can mean losing revenue. Under a properly designed global budget, avoiding that hospitalization can instead create an opportunity to use resources differently. Hospitals and health systems have a financial reason to work with primary care providers, specialists, community organizations, and others to keep people healthier and provide care in less costly settings when clinically appropriate.

AHEAD also recognizes that changing hospital payment alone is not enough. A stronger primary care infrastructure is necessary to identify patients at risk, manage chronic diseases, coordinate specialty care, monitor patients between visits, and intervene before a manageable condition becomes a medical crisis.

AHEAD also offers hospitals greater financial stability at a time of federal funding uncertainty. Hospital global budgets can provide more predictable revenue as reductions in Medicaid funding and Marketplace subsidies place additional pressure on hospital finances.

The significance of AHEAD, therefore, extends beyond another attempt to constrain hospital prices. For years, insurers, regulators, employers, and government have tried to control healthcare costs while leaving the underlying fee-for-service incentives largely intact. Pressure may be applied from outside the healthcare delivery system, but providers still operate within a payment system that generally rewards additional volume.

AHEAD offers Rhode Island an opportunity to change that equation from within. By changing how hospitals are paid and strengthening primary and community-based care, the state can begin aligning the financial interests of hospitals and other providers with the interests of patients, employers, taxpayers, and the broader Rhode Island economy.

Rhode Island does not lack examples of how to provide better care for people with chronic illnesses. Nor do we lack evidence that our current trajectory is financially unsustainable. What has been missing is a payment system that gives healthcare organizations a compelling financial reason to redesign care around prevention, early intervention, coordination, and affordability.

The premium shocks are the warning. The SERFF data tell us where much of the cost growth is occurring. Our clinical experience tells us that care can be delivered differently.

Payment reform gives us the opportunity to do something about it.