Tired of watching its employers struggle to afford the cost of healthcare, Republican-controlled Indiana is trying a traditionally liberal tactic to control costs: setting government price controls on hospitals.

Under a law enacted last year, five of Indiana’s largest nonprofit hospital systems cannot charge patients covered by job-based health plans more than an established price cap. Hospitals that fail to keep prices below the threshold by 2029 risk losing their tax-exempt status — which would mean owing millions of dollars in state taxes.

Even before that penalty kicks in, the law requires these hospitals, which control nearly half the state’s hospital market, to offer direct-to-employer contracts — bypassing insurers — and stay within limits set by the state. Hospitals that don’t comply face a $10,000-a-day penalty.

Many other Indiana hospitals must comply with this provision beginning in September.

Indiana’s law comes amid growing frustration with rising insurance costs and hospital prices, the biggest driver of growing healthcare costs.

Government price controls, of course, are nothing new in healthcare. Since the mid-1960s, the federal government has set prices it pays hospitals for treating Medicare enrollees, as states do for Medicaid patients. Those two government programs cover more than 135 million people nationwide.

But hospitals face no such government limit on what they charge for the more than 165 million Americans covered by employer-paid insurance.

Indiana isn’t the only state targeting hospital prices. Vermont also limits how much hospitals can charge for people covered by employer plans.

Washington and Oregon have made similar attempts, on a smaller scale, targeting state employee health plans. Oregon’s hospitals cannot charge the state employee plan more than two times the Medicare rate for services. This caps the state payment for a service at $200 if Medicare pays $100. Within the first two years, the plan saved more than $100 million.

Legislation has been proposed in Colorado and New York to enact similar price controls.

Hospital leaders and other opponents of price controls argue that the strategy doesn’t address the root causes of high hospital prices, such as rising labor, drug, and technology costs, and that the caps will force hospitals to cut services. Another challenge is that few employers contract directly with hospitals.

On most policy issues, Indiana and Vermont likely agree on very little, “except for this is one area where they both see that hospital prices are high,” said Brown University economist Christopher Whaley.

Wielding state power to control prices is a strategy typically led by Democrats. But Mike Braun, the Republican governor who helped muscle through the changes over the objections of the Indiana hospital industry, said the healthcare system is too broken to leave alone.

“Government has to intervene, because healthcare is run like an unregulated utility,” he told KFF Health News.

The five Indiana nonprofit hospital systems involved are Ascension St. Vincent, Community Health Network, Franciscan Health, Indiana University Health, and Parkview Health.

The price cap will be based on the statewide average for inpatient and outpatient hospital prices. Indiana will use Medicare as a yardstick by which to measure commercial prices, a comparison commonly used by researchers. This will show how much higher commercial prices are than the government program’s.

By June 30, the state is expected to issue a report showing average hospital prices in the state and where individual hospitals fall on the spectrum.

For years, studies by research group Rand Corp. have found that Indiana hospital prices are some of the highest in the nation.

The latest state report measuring hospital prices, produced in November, found three of the five nonprofit hospital systems exceeded a voluntary benchmark when excluding practitioner services, such as doctor fees.

However, all five hospital systems were below the voluntary benchmark when doctor services were wrapped into the overall score. This finding illustrates how prices for doctor visits may obscure overall hospital prices by bringing down the average, researchers and lobbyists for employers told KFF Health News.

Rand researchers found that while Indiana is home to some of the highest-paid hospitals, its doctors are among the lowest paid in the nation. That’s partly because the doctors don’t have the same negotiating leverage as the handful of large health systems.

This disparity has sparked a debate over which prices should be used to calculate the upcoming cap. Including doctor services would likely allow hospitals to keep prices high because they would be offset by low doctor prices, said Whaley, who has co-authored Rand’s pricing reports. This would let hospitals off the hook from doing the work to “move the needle” on lowering prices, he said.

Indiana Hospital Association President Scott Tittle said it’s unfair to exclude doctor services.

Hospitals often acquire physician practices to help drive admissions, research has found. But Tittle said it also helps keep doctor offices open and preserves access for residents. That comes at a cost, he said.

“We know it is absolutely part of the complete cost of care,” Tittle said.

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Despite the hospital lobby’s efforts, Tittle said, the state will exclude doctor services from the cap.

Regardless, Tittle said it’s unnecessary to put price caps in state law. “Hospitals can and have done the hard work to reduce their pricing,” he said.

For employers, rising healthcare costs are a headache. They’re unpredictable and make it difficult to budget each year.

Doug Bawel, chairman of Jasper Holdings, an automotive parts company based in Jasper, Indiana, has tried various strategies to wrestle high healthcare costs. For his workers, he’s purchased diabetes drugs from New Zealand and housed on-site health clinics.

Under the law enacted last year, Indiana hospitals must offer direct contracts to employers for a variety of procedures priced at or below 260% of what Medicare pays for hospital care. That’s setting a ceiling at slightly more than 2.5 times what Medicare pays.

Bawel expects the state’s price controls on direct deals to significantly strengthen his negotiating leverage with hospitals. He belongs to a consortium of southern Indiana employers that buy services directly from area hospitals.

This move represents a departure from the status quo for the business lobby. Ashton Eller, a healthcare lobbyist for the Indiana Manufacturers Association, said the group generally opposes government price controls. But it believes this is a step in the right direction, he said.

“Is this a silver bullet that will bring down prices overnight? We don’t pretend it is,” he said.

No matter what happens in the Hoosier State, Indiana’s experiment with price controls has attracted attention.

“As employers and states are dealing with double-digit premium increases, there is tremendous interest in healthcare affordability, and what happens in Indiana is being closely watched by many states and Washington, D.C.,” Whaley said.

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF — the independent source for health policy research, polling, and journalism.

Indiana Capital Chronicle is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Indiana Capital Chronicle maintains editorial independence. Contact Editor Niki Kelly for questions: info@indianacapitalchronicle.com.