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The process of setting a target represents an opportunity to educate, engage with stakeholders, and develop buy-in among payers and providers whose performance will be measured against the target.
States should strive to be clear and transparent about why the target is needed and the factors to consider in setting the target methodology and value. This section describes key steps in this activity.
The methodology used to determine the target value is critical in helping stakeholders, including the public, understand the policy and reasoning behind the target. For the most part, states have tied their targets to measures of the larger economy, so future health care cost growth does not exceed overall state economic growth, and to a measure of household finances such as income growth.
States have considered indicators that fall into three general categories:
If a state chooses an economic indicator as its target methodology, it must then calculate the growth rate of that indicator to derive an initial target value. This can be done using historical or forecasted growth. While using historical growth reflects actual experience, it can be volatile from year to year. Alternatively, long- term forecasted growth is estimated using historical experience but smooths out significant swings caused by short-lived economic booms or busts, which are poor predictors of future trends.
Before finalizing the target value, states should consider short- and long-term historical cost growth to ensure the target is reasonable and set at a level that would put appropriate downward pressure on cost growth. Some of the resources available to states to understand historical spending include the following:
If not previously determined through executive order or legislation, the state must decide how long to keep the target in place. States have set targets for periods ranging from four to 15 years. Four years is the minimum recommended length for the target policy because 10 to 14 months are needed after the end of a performance year to assess and publish performance against the target and to make changes in contracts or payment policies that could change cost growth trends.
States can also opt to adjust the target value, or the target methodology, when setting targets over multiple years. By adjusting the value, states can help providers and payers adjust to a target over time and accelerate the drive to reduce health care cost growth. For example, New Jersey based its target methodology on 25% potential gross state product (PGSP) and 75% median income, resulting in a target of 3.2%. New Jersey then used “add-on factors” to adjust the value to ease the transition for stakeholders. Nevada took a slightly different approach, which yielded similar results. Rather than adjusting the value of the target, Nevada adjusted the methodology itself over the course of five years. Nevada used a changing blend of forecasted median wage and PGSP, with increasing weight placed on forecasted median wage in future years. The aim was to signal that affordability is a state priority and that, over time, health care cost growth should more closely reflect individuals and families’ ability to purchase goods and services.
States should view the target as a long-term policy. However, recognizing that the landscape and economic circumstances of a state may change significantly in ways that are difficult to predict (e.g., the COVID-19 public health emergency), states may opt to revisit the target methodology at intervals or in response to external circumstances. For example, Washington developed a provision that would allow it to consider changes to its target or target methodology in the event of extraordinary circumstances, including highly significant changes in the economy or health care system. Delaware, on the other hand, annually reviews the methodology. The sharp rise in inflation in late 2021 that persisted through 2022 led some states to review their target values and methodologies. States can consider several options when deciding whether and how to update target methodologies and values based on such circumstances:
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