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Maryland's state-regulated health care strategy could be model for rest of the nation

Imagine a place where all patients pay hospitals the same price for their services, regardless of what insurance they do or do not have.

Imagine a place where all patients pay hospitals the same price for their services, regardless of what insurance they do or do not have.

That place already exists within the U.S. Since the 1970s, Maryland state regulators have been setting the prices that hospitals charge patients – whether they have private insurance, government insurance or no insurance at all. Maryland's approach means that hospitals don't dicker with insurers over prices, and researchers say patients have saved $45 billion over the four decades that the price-setting program has been in place.

Those savings explain why Maryland's approach has become a test case for other states.

"I know that we're being watched by other states, and I think that if we show success, it's possible that you could see other states interested," said Steve Ports, deputy director of policy and operations for the Maryland Health Services Cost Review Commission.

The program is now set to expand. In January, Maryland was granted a waiver by the Centers for Medicare and Medicaid Services that allows it to not only set prices, but also cap total hospital spending. The cap will prevent a hospital from circumventing the per-unit price limits simply by prescribing more units.

A cap on total hospital spending is a more dramatic method of reining in health costs. But will it work?

"I think if it can work anywhere, it can work in Maryland. Maryland has a history of payers working together, the state representing all the payers and the hospitals," said Deborah Chollet, senior fellow at Mathematica Policy Research, a Princeton, N.J., think tank. "I think that basis for conversation is essential for this model."

The new experiment, set to last five years, will limit hospital spending growth to 3.58 percent annually. A hard cap could provide the state's 46 hospitals greater incentive to keep patients out of the hospital, focusing on preventive health. The old price-setting system pushed hospitals to treat patients on a volume basis rather than focusing on population health, Chollet said. And it's why Maryland's inpatient growth exceeded the rest of the nation's.

"At the end of the day, it was a fee-for-service system," she said. "If a hospital delivered more care, it got paid more, without any safeguards on whether the care was necessary or the quality of care."

At least 80 percent of the state's hospitals will slowly transition into global payment models, which means they will be given a budget to treat patients. The revenue cap is based on the hospital's income from the prior year, according to Karoline Mortensen, an assistant professor in the University of Maryland's Department of Health Services Administration.

Each hospital will be responsible for a specific service area's population health. Under this model, each time a patient doesn't come in, the hospital will be saving money. Without an emphasis on per-case profit, hospitals are pushed to invest in services that lower readmission rates and improve care coordination, including good discharge planning and outpatient clinics.

"Before, hospitals had every incentive to bring patients in. Now it's going to be more focused on vaccinations, healthy choices and behavioral choices," Mortensen said. "Maryland residents will see big changes and easier access to primary care."

While it may seem like hospitals are being encouraged to neglect patients to keep costs down, the state measures hospital quality and places the rankings online, Mortensen said.

Because prices are the same everywhere, hospitals rely on their quality, rather than pricing, to bring people in.

The agreement also outlines quality targets: One target seeks to decrease Maryland's high Medicare readmissions rate to below the national average. Another aims for a 30 percent reduction in preventable conditions over five years.

"I would be very optimistic about this kind of process improving quality of care," Chollet said. "In order to deal with cost and quality, you need to get your hand around the whole system and do something coherent. This process is about addressing the whole problem comprehensively and recognizing up front that both need to be addressed at the same time."

One effect of these benchmarks will be better care transition, according to Ports, of the Maryland Health Services Cost Review Commission. Hospitals will work more closely with organizations like nursing homes in order to keep the residents healthy outside of the hospital.

"Hospitals now are incented to work with the nursing home (before patients) end up coming into the hospital," Ports said. "This is good for the hospital now because it reduces their costs and helps them under their global budget. It's good for the patient because you don't want them bouncing from the nursing home to the hospital."

Ten rural hospitals in Maryland are already employing the "Total Patient Revenue System," a global budgeting system established by the Health Services Cost Review Commission. Most of the hospitals started in the system in 2011.

In the first few years of the change, there didn't seem to be much of an effect, but now there is some evidence that these hospitals have begun to see a big drop in readmission rates, Mortensen said.

A major provision of the January waiver is the ceiling on total hospital spending. The 3.58 percent cap on revenue growth is tied the state's gross domestic product growth over the past 10 years.

"The idea is the growth in health care has outstripped the GDP over many years," Ports said. "One way to start to get that back in line is to look at the per capita growth and try to bring costs back down to something reasonable."

Maryland must also have a per-patient Medicare spending rate lower than the rest of the nation. If that happens, it could result in $330 million in Medicare savings over the five-year period.

"It's achievable, but it's not easy," Ports said. "This is going to be a challenge and it's going to take time. This is one of the largest population health strategies being employed around the nation."

When it comes to the states that could benefit from such a model, Chollet puts Pennsylvania at the top of the list.

"An important piece of the discussion is in Western Pennsylvania in particular. There has been a lot of attention to the quality of care in hospitals," she said. "There has been discussion that could be built on."

But for reasons political and practical, other states have yet to embrace a state-operated model. And payments for the same service can vary by a 12-1 ratio, depending on who is paying and who is administering the care, according to Chollet. Historically, hospitals want to get the best deal possible prices from insurers, while insurers want to be able to use their customer base as leverage to get better prices for their members.

That's why Maryland's approach to hospital payments is so radical – it removes free-market factors from the health care equation and it raises the philosophical question of whether the government ought to set rates in this or any sphere, according to Bradley Herring, associate professor in the John Hopkins University Bloomberg School of Public Health.

"For the majority of people who have coverage, the prices that a hospital receives are part of a market transaction," he said. "That in turn winds up being influenced by a lot of market dynamics, including the market power of hospitals and insurers."

Others are concerned that capping hospital spending will push hospitals to provide less care than they should – rationing care, in other words.

When hospitals are given a budget, they are able to save money by withholding services whether they are inappropriate or needed. It's the same argument made of most managed care and capitation models.

"The challenge is trying to make sure hospitals don't overcompensate by providing too little care," Herring said. "There's a little bit of a leap of faith in terms of thinking that there are safeguards in place to ensure that hospitals aren't skimping."


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