Maryland’s Tough New Hospital Spending Proposal Seen As 'Nationally Significant'

KHN Staff Writer

Mar 31, 2013 - Kaiser Health News

This KHN story was produced in collaboration with Washington Post

Maryland officials have proposed what analysts call the most ambitious initiative in the country to control soaring medical spending, a plan that would bring relief to employers and consumers footing the bill while bluntly challenging the state’s powerful hospital industry.

The blueprint, which needs the Obama administration’s approval, would use Maryland's unique rate-setting system to keep hospital spending from growing no faster than the overall economy — roughly half its recent rate of increase.

While some see Massachusetts as pushing boundaries by trying to establish health-spending ceilings, "Maryland has set hospital prices for more than 30 years" for insurance companies and Medicare alike, state health secretary Joshua Sharfstein said in an interview. "There are tools to accomplish this in Maryland that do not exist in other states."

The plan also discusses sweeping measures to coordinate treatment and reward caregivers for efficiency instead of doing procedures.

"This is a really exciting proposal," said John McDonough, a Harvard University professor and former state legislator who helped design Massachusetts’ health-care overhaul. "It's nationally significant."

The earliest the measure could take effect is January, but it is far from being adopted as written. Hospitals reacted coolly and state legislators complained about how it was developed.

The proposal is a "tectonic change" and "the single most important event that's affected Maryland hospitals in the last 40 years," Maryland Hospital Association CEO Carmela Coyle said at a General Assembly hearing last week. "The only thing that's certain at this point in the application is the [spending] cap. We don't know about the mechanisms that will actually get us there."

Even the CEO of Maryland's biggest private health insurer, who has reason to welcome measures to restrain hospital spending, said the plan is short on details and long on risks for hospitals.

"It would be wonderful if they [costs] could be slowed down," said Chet Burrell, CEO of CareFirst BlueCross BlueShield. "But then you have to turn to another question. And that is, what is the method by which they would decrease? How do you turn the system on a dime? That's where our concerns with the proposal are greatest."

The plan leaves many of these details to Maryland’s rate-setting Health Services Cost Review Commission. Two of the commission’s seven members are hospital executives, including chairman John Colmers, a top vice president at Johns Hopkins Medicine in Baltimore.

As a counterforce to industry skeptics, the proposal may have the backing of Obama administration officials who see Maryland’s tradition of rate control as a promising model, said Joseph Antos, a health economist at the American Enterprise Institute who sat on the commission for several years.

"People who favor rate-setting only have Maryland as the example," Antos said. "The Obama administration believes that [such an approach] is an important strategy. I think this is the way they would want states to go in the future."

The Department of Health and Human Services, which must sign off on the part of the plan that affects Medicare, declined to make officials available for interviews.

"We've received the proposal from Maryland and we look forward to reviewing it and working with the state," said HHS spokesman Alper Ozinal.

While much of the blueprint focuses on hospital spending, it leaves the door open for a second phase after four years in which "our focus will broaden to all costs" in health care, according to the application, submitted to HHS on Tuesday.

For doctors and others outside the hospital systems, the second phase would create cost-control incentives such as shared savings among providers rather than direct rate-setting, Sharfstein said.

Maryland has set hospital rates since the 1970s, keeping spending per admission below national trends.

The rate commission's "all payer" approach fixes hospital prices for everybody — commercial insurers, government programs and people paying cash — avoiding the cost-shifting from one payer to another that occurs elsewhere. The system also builds expenses for indigent care into statewide rates, ensuring that hospitals with high levels of uncompensated treatment stay in business.

Hospital costs have risen in recent years, however, threatening to break an HHS agreement that waives normal practice and allows Maryland to set Medicare prices. Maryland hospitals do especially poorly in the category of expensive readmissions of recently discharged patients.

The proposal submitted last week is part of Maryland's attempt to renegotiate the waiver and create savings for Medicare.

Despite their reservations, hospitals have a potent incentive to maintain the waiver and approve some kind of new cost-control system. Although the state has kept growth in Medicare spending on hospital admissions below the national rate, what Medicare pays per Maryland case is still far higher than what it spends in other states.

Losing the waiver would mean foregoing roughly $1 billion in annual hospital revenue. But approving the new plan — cutting hospital cost growth to less than that of the long-term expansion of the state economy — would also shock a system accustomed to adding jobs, buildings and revenue for years, supporting Maryland’s economy as other industries declined.

"When you all of the sudden jam on the brake and say you're only growing at state GDP, it's like a two-by-four in the face of the health system," said Uwe Reinhardt, a health economist at Princeton University. "And it causes a lot of stress."

Over the past decade, Maryland hospitals have added jobs at nearly five times the rate of the state as whole, according to Labor Department statistics. Hospital revenue per Maryland resident — the proposed new benchmark in the state’s HHS proposal — has grown nearly twice as fast as the economy over the same period, according to the cost commission.

A spokeswoman for the University of Maryland Medical System, one of the state's health care heavyweights, declined to comment. Johns Hopkins Medicine, which also would be hurt by stricter spending limits, said it was still evaluating the proposal.

The existing waiver caps the growth in Maryland hospital costs per inpatient case. The new test would track spending growth for both inpatient and outpatient care — but per Maryland resident rather than per case.

At the same time, the proposal would decrease incentives for hospitals to perform more procedures and direct the cost commission to adjust rates according to the state’s economic growth.

The proposal would also expand Maryland initiatives to reduce hospital readmissions, coordinate care among providers and share the proceeds of cost savings with caregivers.

Maryland Senate Minority Leader E.J. Pipkin, a Republican and frequent critic of the administration of Gov. Martin O'Malley, a Democrat, complained that the proposal should have been drafted with more outside advice.

Sharfstein and other state officials seem to "regard themselves as the sole possessors of the requisite knowledge to decree what changes must occur to hospital reimbursement in order to keep Maryland's … waiver," he said in a prepared statement. "I hope they do -- because they are imposing the most significant change in four decades on Maryland’s $15 billion health care industry and largest [private] employer."

Reinhardt, who has written favorably of Maryland’s rate-setting board, suggested that Sharfstein may indeed have something that looks like the answer.

"Intellectually, the Maryland health care leaders are way ahead of the health care leaders in the rest of the country," he said. "It's probably the most ambitious such thing I've seen."