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Agency that spends $2b a year wants to cap payments to hospitals

The state agency that spends more than $2 billion a year to provide health coverage to 436,000 public employees, retirees, and their families is pushing changes that would allow it to slash what it pays the most expensive hospitals, a drastic move to try to rein in health care costs.

The Group Insurance Commission voted unanimously last week to support capping its payments to health care providers at 160 percent of the rates paid by Medicare, the federal government’s insurance program for seniors.

Administration officials said Monday that they plan to include the measure in Governor Charlie Baker’s annual budget proposal, which is due Wednesday.

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The budget, covering the fiscal year beginning July 1, is subject to change as it works its way through the Legislature. Still, the proposed change is already rattling the hospital industry, which opposes government rate-setting. Some of Massachusetts’ highest-priced and most prestigious teaching hospitals would see a pay cut.

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Other hospitals that are paid close to or below average would see little or no change.

The measure targets a longstanding phenomenon in Massachusetts health care: Some hospitals — those that tend to have significant market power — are paid more than others for providing the same services.

“Despite valiant efforts, prices in Massachusetts continue to grow at an unsustainable rate, and the gap between providers has widened,” said Dr. Roberta Herman, executive director of the Group Insurance Commission, or GIC. “Something is required to mitigate that.”

Funded by taxpayers, the GIC is the biggest purchaser of health insurance in the state and has been a leader in trying to contain medical inflation.

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If unchecked, the agency’s costs could climb 10.2 percent in the next fiscal year, Herman said.

The goal, she said, is to implement changes such as higher deductibles and new plan designs to keep spending increases to 3.6 percent, in line with a state target for controlling medical costs.

The proposed caps on hospital payments are expected to save $50 million to $100 million a year. The limits would hit a “really small number of providers who are at the high end” of the pay scale, such as Partners HealthCare, UMass Memorial Health Care, Dana-Farber Cancer Institute, and others, Herman said.

“We feel that with so much taxpayer money involved — the GIC does cover all state employees and many thousands of municipal employees — it would be appropriate for some intervention with prices,” said Melvin Kleckner, Brookline’s town administrator and a member of the GIC board.

The proposal comes days after the governor also recommended limiting payments to certain hospitals. But Baker’s plan is aimed at curbing the rate at which hospital payments grow, while the GIC is proposing a more aggressive cutting of payments.

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Lynn Nicholas, president of the Massachusetts Health & Hospital Association, said proposals like the GIC’s would hurt struggling hospitals and could result in job cuts.

“On principle, we have opposed setting rates and rate regulation,” Nicholas said. “This is a form of setting rates artificially. On that basis, without hearing any other details, we think there could be better approaches to achieve the goals that we all share.”

UMass Memorial spokesman Tony Berry, in an e-mail, warned that the proposal “may negatively impact access to services for GIC members, as many providers will likely choose not to accept GIC.”

The pay cuts would especially hurt hospitals like UMass Memorial’s flagship medical center in Worcester, Berry said, which already struggle to cover the costs of providing care to large numbers of poor patients.

A Dana-Farber spokeswoman said it was too soon to comment. Partners HealthCare, which owns Brigham and Women’s and Massachusetts General hospitals, did not comment, either.

Medicare already pays hospitals differently, depending on a variety of factors, including whether they train new doctors and whether they’re located in expensive labor markets.

Eileen McAnneny, president of the Massachusetts Taxpayers Foundation and a member of the GIC board, acknowledged she has some reservations about setting rates. But current efforts to control costs, including a 2012 state law, have not been enough, she said.

“We are trying to think longer term,” she said.

“The caps will begin to address the provider price variation as somewhat of a blunt instrument.

“I do think five years after Massachusetts enacted reforms targeting health care cost containment, we haven’t made significant progress.”

Priyanka Dayal McCluskey can be reached at priyanka.mccluskey@globe.com. Follow her on Twitter @priyanka_dayal.